Repaying most of the IMF loans early could have a number of benefits to Irish finances, according to the report
A report by Ireland’s Troika creditors says that the early repayment of most of this country’s International Monetary Fund loans would result in an interest saving of €2.1bn.
The report for the EU Economic and Finance Committee was jointly prepared by the European Commission, the IMF, the ECB and the euro zone’s bailout fund; the European Stability Mechanism.
The report said that given what are currently “very favourable market conditions”, early repayment of IMF could generate “significant savings” on the Government’s interest expenditure.
The amount saved would still remain significant even if the yield on Irish bonds increased by 50 basis points, the report adds.
“If Ireland were to repay €18.3bn between the end of 2014 and end of 2015 in three equal tranches and if the repayment was financed with new 10-year bullet-type bonds with an annual interest rate of 1.88%, the total (non-discounted) interest bill could decline by up to €2.1bn or 1.2% of 2013 GDP, of which 0.22% would materialise in 2015 and 0.34% and 0.28% in 2016 and 2017 respectively,” the report says.
The report says that if the savings were used in full to reduce the country’s deficit, Ireland’s debt to GDP ratio would fall to around 103% by 2020 – putting it 1% lower than it might otherwise be.
However it warns that using some or all of the savings to all for an increase in expenditure, or a reduction in taxes, “the improvement in debt sustainability would diminish”.
“At the same time, Ireland’s medium to long-term fiscal consolidation needs are little affected as the net savings from early repayment are negligible from 2021,” it adds.
Another benefit that would come from early repayment would be the extension of the average maturity of Government debt, according to the report.
“If the IMF credit were replaced with new 10-year bonds, the early repayment would lengthen the average maturity of the outstanding IMF loan from 3.9 years at end-2015, with no early repayment, to 7.5 years at end-2015 of the new bullet bonds maturing in 2024 and the remaining IMF loan”, it says.
“Longer average maturities are generally taken as adding stability to government debt management and reducing roll-over risks.”