THE EU summit starting tomorrow is unlikely to deliver a deal to cut the interest rate on Irish bailout loans due to uncertainty over the rising cost of the banking rescue, a high-level European official said.
Well-placed official sources in Brussels said there was now a preference to deal together with the interest rate and the banks, even though there is still some discussion in Dublin over the merits of separating the two issues.
Amid anxiety in the euro zone that ongoing bank stress tests will reveal a drastic new requirement for capital, the sources said it would be better for the European authorities to examine the Irish case in the round when all essential information was to hand.
The sources said this could not be fully done at the summit, which continues on Friday, as the stress test results will not be delivered until the end of the month.
Although Ireland’s bailout potentially includes up to €35 billion for the banks, there is disquiet that money reserved for contingencies is likely to be tapped so quickly. Some sources believe more than €35 billion may be needed, but Minister for Finance Michael Noonan has rubbished “extravagant” figures being cited in European circles.
In Brussels on Monday night, Minister of State for Europe Lucinda Creighton raised the prospect that a deal might not be achieved at the summit by alluding to the possibility of an agreement “on Friday or potentially at a later date”.
While downplaying the prospect of an agreement at the summit, the senior EU official made the point that the Brussels authorities are convinced that there is a very clear case to cut the interest rate.
This would serve not only debt sustainability in Ireland, the official said. Enhancing the credibility of the Irish rescue programme with the markets was also in the interest of euro countries with triple-A credit ratings.
Warnings against expectation of a deal before the weekend come on the back of a growing acceptance in Brussels that Taoiseach Enda Kenny will not capitulate to Franco-German pressure to dilute Ireland’s corporate tax regime.
It was recognised that the policy had “totemic” and “symbolic” resonance, the senior official said of Dublin’s defence of the 12.5 per cent rate. “I think they will not give in on that,” the official said. “I am personally convinced.”
While saying it was legitimate for Ireland’s euro zone sponsors to seek reciprocal measures in return for lower loan costs, the official said the actions of “at least one member state” in the debate on the interest rate caused some personal disquiet at the summit table.
The EU official said senior European figures made the case to French president Nicolas Sarkozy at the last EU summit that “every country has their sacred cows” and that Ireland’s corporate tax fell into that category.
Nevertheless, France continues to exert pressure on the Government to increase the rate in return for lower bailout interest.
In certain other quarters, however, there are tentative indications that Germany may now be willing to accept something other than a manoeuvre on corporate tax as a quid pro quo.
High-level European officials still see potential for an interest rate deal in the draft text of an agreement which European Council president Herman Van Rompuy proposed at the last summit to Mr Kenny.
A source said the text in question cited a “vague commitment to discuss tax co-ordination” but this proved unacceptable to Mr Kenny. “He could have accepted that,” the source said of the text. “In fact, it was very close.”
The source said, however, that the ongoing scrutiny of the banks has assumed increasing importance in the present debate on Ireland. “We are following the situation very closely.”
The Government has already signalled its concern that the stress tests could lead to an “unsustainable” burden on the State when the increasing burden of bank debt is added to the mounting weight of Ireland’s own sovereign debt.
