European ministers reached Sunday an agreement over a bail-out for the Irish Republic worth about 85 billion Euros. The deal will see 35bn euros go towards propping up the Irish banking system with the remaining 50bn euros to help the government's day-to-day spending.
An average interest rate of 5.8% will be payable on the loans, above the 5.2% paid by Greece for its bail-out. Irish PM Brian Cowen said it was the best available deal for Ireland.
It provides vital time and space to successfully and conclusively address the problems we've been dealing with since the financial crisis began, the prime minister said.
Details of the 85bn euro plan include:
• an average interest rate on rescue loans of 5.83%
• the 35bn euros allocated to Irish banks is divided into 10bn euros for immediate recapitalisation measures and 25bn euros as a contingency fund
• the Irish Republic itself will contribute 17.5bn euros to the overall fund
• the EU will contribute 45bn euros, including direct bilateral loans from the UK, Sweden and Denmark
• the IMF will contribute 22.5bn euros
• allows the Irish Republic to delay by one year to 2015 its deadline for reducing its budget deficit to 3% of GDP.
The Irish government has also said that interest payments on all state debt will account for more than 20% of tax revenues in 2014. The deal does not require the Irish Republic to change its low 12.5% corporation tax.
The rescue package is the second to be approved in the Eurozone this year following Greece's bail-out in May. There had been much negotiating between European ministers over the interest rate the Irish Republic must pay on the loans.
The Irish government had believed it would pay 5%, and the agreed rate of 5.8% is still higher than many in Ireland had hoped for, especially as it is higher than the agreed rate for Greece. But Mr Cowen said the loans were necessary.
These loans will provide money that we had already planned to borrow on the international markets. That funding will now be available to Ireland at a cheaper interest rate than if we'd borrowed on those markets, he said.
Eurozone finance ministers' chairman Jean-Claude Juncker said ministers had unanimously endorsed the measures.
Ministers concur with the [European] Commission and the European Central Bank that providing a loan to Ireland is warranted to safeguard financial stability in the euro area and in the European Union as a whole, Mr Juncker said.
The crisis in the Irish Republic has been brought on by the global recession and the almost total collapse of the country's debt-ridden banks.
The rescue programme rests on the Irish Republic meeting three conditions.
Firstly, it must immediately strengthen and overhaul its banking system; secondly, it must implement an ambitious fiscal adjustment to reduce its excessive deficit by 2015 and finally it must introduce growth-enhancing reforms in particular on the labour market.
The EU also agreed the outline of a new European Stability Mechanism for resolving debt crises in the eurozone. The mechanism should force losses on private investors only on a case by case basis, and will replace an existing rescue fund which runs out in 2013.
The announcement on the permanent mechanism may have been rushed through to try to allay concerns about the debt crisis in Europe spreading.