"Beware Germans bearing gifts." That was the sarcastic remark of one reader of The Irish Times website on November 14 last when the Government announced it would leave its EU-IMF programme without a financial rescue net.

Speaking in the Dáil, Taoiseach Enda Kenny announced something else entirely: Ireland’s cash-starved small- and medium-sized enterprises (SMEs) could look forward to a windfall of German-backed low-interest loans.

Mr Kenny had secured a political commitment from German chancellor Angela Merkel for Germany's state-owned development bank, the KfW, to deliver "swiftly" on a loan to Ireland, with "concrete results" promised "as soon as possible".

When German finance minister Wolfgang Schäuble arrives in Dublin today to sign off on the deal, in conjunction with the European Investment Bank (EIB), the KfW is ready to discuss for the first time the origins of the programme and why it is offering Ireland a €150 million loan.

The idea of a KfW-backed loan to Ireland began circulating in Dublin in the spring of 2013 with first political talks in Berlin in June between John Moran, then secretary general at the department of finance, and Germany's deputy finance minister, Steffen Kampeter.

Mr Moran had worked to build up contacts with the bank over the previous three years and, when the political deal was announced in November, German sources say key details had already been nailed down – the chancellery and Berlin's finance ministry fixed the size of the Irish loan at €150 million – as had questions of guarantee and the purpose of the individual loans.

From November 14th, KfW officials took the driving seat for technical talks with Irish officials in the Department of Finance. These took place in early December in Berlin and shortly thereafter in Frankfurt. Once they got into the detail, the KfW side realised quickly how pressing a need there was in Ireland for SME funding.

“The Irish side provided data to us which made clear there was a credit squeeze in Ireland for SMEs,” said Christian Krämer, first vice-president of the KfW, who was involved in the talks. “Companies clearly had difficulties securing working capital and money for investment, thus had difficulties securing jobs.”

Major surprise

Given the far-reaching reputation, some would say notoriety, of Ireland’s financial services sector, the KfW negotiators were surprised to learn that SMEs were as crucial to the Irish economy as they are in Germany. Considering the key role of SMEs, then, they said they were troubled when they saw little expertise at Irish banks that reflected this.

“We often had the impression that Irish banks are very professional in the property sector,” said Mr Krämer, “but when it comes to pure company financing, analysing company risk and pricing that into an interest rate, some banks didn’t have the same level of professionalism.”

Even before the technical talks began, Berlin politicians were anxious to exclude from the final deal a branch of Ireland’s economy as notorious in Germany as Ireland’s financial sector. “From the beginning providing loans to companies in the property sector was ruled out, that was the only no-go,” said Mr Krämer.

For this, the Irish side say they have the option of using other funding into the Strategic Banking Corporation of Ireland (SBCI), such as from the national pension reserve fund or finance from the European Investment Bank.

So how will the German loans to Ireland help an Irish business owner to whom banks have either refused loans or offered them at prohibitive interest rates?

The KfW has agreed to use its AAA-rating to raise €150 million at competitive rates on financial markets and pass this global loan on to Ireland’s strategic banking corporation. This funding will be made available to Irish commercial banks on condition that they pass on the competitive interest rates in the final loans.

“Our agreement obliges the SBCI to pass on this refinancing advantage to the bank which, in turn, is forced to pass on to the company,” said Mr Krämer. “We want to support Irish SMEs, not Irish banks. This is not about banks creaming off something for themselves; the advantage has to reach the end customer.”

Every Irish bank that draws down KfW-originated funds will be allowed add a small risk margin on top, but they will be obliged to prove it was moderate and document how the German loans were used.

This creates some additional work for the banks but, the KfW says, it didn’t hinder lending in similar loans in other countries.

The template for the Irish talks was the KfW’s loan to Spain announced in July 2013. This saw €800 million raised by the KfW passed on to the Spanish development bank ICO which, in turn, would provide to local banks to provide low-interest loans to their customers.

So just how favourable will the KfW loans be? Mr Krämer declines to talk numbers but says that if Ireland follows Spain’s example the positive difference can be “considerable”. “We are talking about several percentage points,” he said.

Complicating the KfW’s engagement in Ireland was the lack of an equivalent of Spain’s ICO to co-ordinate with the KfW. Enter the SBCI, to manage the €150 million package from Germany, €150 million from the EIB and funds from the Strategic Investment Fund, derived from the pension reserve fund.

The KfW says its engagement with Ireland is limited to 10 years with a four-year grace period. It hasn’t ruled out a longer co-operation, but that will depend on the wishes of its political owners in Berlin, and whether the Irish Government decides to transform the SBCI from its present fund structure into a KfW-style lender.

Mr Krämer admits that KfW financial engagement in Ireland doesn’t fill his bank with enthusiasm. The bank doesn’t see loans to Ireland, or any other of Germany’s EU partners, as part of its core business (see panel below).

But when its government owner in Berlin calls, the Frankfurt lender is resigned to answering and realises it is now a player in Berlin’s post-crisis strategy. So is the KfW programme in Ireland a political co-operation?

“As far as the financial participation is concerned, yes, as far as the know-how transfer is concerned, no,” he said.

Bailout exit politics

The politics of Ireland’s bailout exit were clear last year. Berlin officials made no secret that they favoured Dublin making a clean break. Precautionary funding could have been politically awkward, Berlin worried, raising questions about the sustainability of Ireland’s finances and, by extension, the efficacy of Germany’s crisis strategy. No precautionary credit application meant no awkward questions and no Bundestag debate about Ireland. In the end such a debate happened anyway in early October over Dublin’s request to restructure IMF loans.

But was a KfW loan the price Berlin paid to encourage Dublin’s clean break with its programme, without a safety net? Government officials in both countries decline to be drawn, though many agree there was a certain symmetry in the two decisions. The KfW, however, is more explicit about the link.

“Yes, you can see it that way,” said Mr Krämer, though he said it was less a direct quid pro quo and more part of a wider strategic shift taking place in Berlin’s thinking.

After piling pressure on programme countries to implement deep reforms, he says, Germany now sees the need to put wind in the sails of successful programme countries. The offer of KfW financing, he says, is one way of helping them move from a strict austerity-reform phase to a mix of austerity and stimulus.

“German politics has recognised that saving alone is not the best way and that you have to look as well at how to get countries growing,” said Mr Krämer. Political self-interest played a role, too, in Germany’s decision.

“As an exporting country we’d have a problem if we are surrounded by markets which are suffering from economic problems,” he said.

Seen this way, therefore, he says the KfW deal is not simply about nudging Dublin onto the EU-IMF exit ramp of greatest political expediency for Berlin.

He dismisses claims that did the rounds in Dublin last year that the KfW offer was Berlin’s consolation prize after Ireland was refused permission in the euro crisis to burn bond-holders.

However, the KfW vice-president concedes a striking coincidence that Germany, one of Ireland’s toughest crisis taskmasters, is the only country offering bilateral assistance now. Other countries were approached to make a contribution to the SBCI, he says, but nobody came on board.

The danger with such funding is of raising red flags in Brussels. KfW officials say that the Irish side has responsibility for ensuring the German loan doesn’t breach state aid rules by, in EU eyes, distorting the free operation of the banking sector.

Irish officials say they held discussions with the Directorate General for Competition in the European Commission (DG Comp) but that they were very positive about the deal. Irish officials say it is clear that contacts with Brussels will be ongoing about the SBCI and its business.

In the case of Spain, the KfW loan was viewed as unproblematic because it did not unfairly target one lender or one sector of the economy.

Instead it was spread across the entire financial sector and spread throughout the economy in individual loans of less than €50,000, falling below general state aid thresholds.

So when Wolfgang Schäuble arrives this morning at Farmleigh, what is the appropriate response to a €150 million from his state development bank: Danke schön?

Officials on both sides insist the KfW deal is a loan, to be repaid with interest that cover the cost of the German involvement, not an instance of Germans bearing gifts.

More than that, however, they say the deal is a significant vote of confidence in an EU crisis case turned reform model. Post-war rebuilding: Origins of KfW The KfW's official name, the Kreditanstalt für Wiederaufbau (Reconstruction Loan Corporation), gives an indication of its origins: reconstructing war-ravaged Germany as a conduit for Marshall Plan aid from the US.

In almost seven decades since its foundation, the KfW has provided over €1.3 trillion in loans and today has three main pillars. At home it provides financing for small- and medium-sized businesses, as well as individuals, to encourage needed investment in areas neglected by private sector banks, in particular areas of political priority such as energy efficiency.

Over the years its foreign pillars have grown in importance: export and project financing as well as financing for developing countries. Its balance sheet total of €476.4 billion makes the KfW one of Germany’s largest banks. Though a respected lender in Germany, the bank achieved some notoriety at the start of the financial crisis.

Hours before Lehman Brothers collapsed in September 2008, despite the buzzards circling over the Wall Street bank, the KfW transferred €300 million to the bankrupt bank. After Bild dubbed the KfW “Germany’s dumbest bank”, the institution – in particular its risk management department – was given a thorough overhaul.

The federal government in Berlin owns 80 per cent of the bank, with the remainder held by Germany’s federal states. Its public ownership means that, when politicians come calling, the KfW listens.