Two proposals were adopted by the European Commission today, suggesting reduced interest rate margins and extended maturities for loans granted by the European Union (EU) to Ireland and Portugal. The loans are provided by the EU under the European Financial Stabilisation Mechanism (EFSM) as part of financial assistance packages to the two countries. The improved terms are expected to enhance liquidity and contribute to the sustainability of both countries in support of their strong economic and reform programmes.

The proposals are expected to be approved by the Council in the coming weeks. In line with the 21 July 2011 conclusions of the Heads of State and Governments, similar conditions are expected to be adopted for the lending that the European Financial Stability Facility (EFSF) is providing to Ireland and Portugal.

The Commission proposes to align the EFSM loan terms and conditions to those of the long standing the Balance of Payment Facility. Both countries should pay lending rates equal to the funding costs of the EFSM, i.e. reducing the current margins of 292.5 bps for Ireland and of 215 bps for Portugal to zero. The reduction in margin will apply to all instalments, i.e. both to future and to already disbursed tranches.

Furthermore, the maturity of individual future tranches to these countries will be extended from the current maximum of 15 years to up to 30 years. As a result the average maturity of the loans to these countries from EFSM would go up from the current 7.5 years to up to 12.5 years.

In addition to the substantial cash savings for Ireland and Portugal, the new financial terms will bring benefits such as enhanced sustainability and improved liquidity outlooks. Moreover, indirect confidence effects through the enhanced credibility of programme implementation should result in improved borrowing conditions for the sovereign as well as the private sector.

Ireland and Portugal are receiving loans as part of joint assistance packages from the EU (EFSM), EFSF and the International Monetary Fund. The EU and the EFSF, rated AAA/Aaa/AAA by the major rating agencies, fund their loans by issuing debt instruments in the capital markets. Tweet