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EU to extend loan repayments for Ireland, Portugal

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DON MELVIN and SHAWN POGATCHNIK | April 12, 2013 01:07 PM EST | AP

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DUBLIN — European Union finance ministers agreed Friday to grant Ireland and Portugal seven years more years to pay their bailout loans, easing the burden on their economies and paving the way for a quicker return to sustainable growth.

In their attempts to stabilize the economy of the 17 nations sharing the euro currency, the ministers, also approved a 10 billion euro ($13 billion) loan package to stop Cyprus from sliding into bankruptcy.

But the rescue comes at a heavy price for the Mediterranean island country. Cyprus, with an annual economic output of under 18 billion euros, must itself contribute 13 billion euros to turn its economy around.

However, there was only little progress made on the other plan EU officials have billed as vital in turning the tide in the EU's three-year debt crisis – setting up a full-fledged banking union.

The 17 Eurozone finance ministers endorsed the legal framework for a central authority for Europe's banks, which had been hammered out by government representatives and the European Parliament last month. It is set to take effect next year.

On the fundamental question of setting up a joint bank resolution mechanism and enabling Europe's bailout fund to directly recapitalize troubled banks, ministers reached no conclusion.

Olli Rehn, the EU's top economic official, said "the timeline for establishing a banking union should be as short as possible."

Jeroen Dijsselbloem, who chairs the meetings of the Eurogroup of finance ministers, said he expected the ministers to agree on the outstanding issues by June.

The decision to extend the loan repayment schedules for Ireland and Portugal was backed Friday afternoon by the finance ministers of all 27 EU countries. Irish Finance Minister Michael Noonan said the approval was "a very positive development and marks another significant step on Ireland's and Portugal's journey to a full and sustainable return to the markets."

Ireland holds the six-month rotating presidency of the European Union, and the ministers are meeting in historic Dublin Castle, once the seat of the country's English overlords and, later, of the Irish government itself.

The repayment extensions are intended to ease financial pressure on the countries, helping them resume long-term bond sales when their bailout loans run dry. Ireland's loans run out later this year; Portugal's in 2014.

The situation in Portugal was complicated last week when the country's constitutional court struck down parts of the austerity program the government agreed to in return for an 78 billion-euro bailout. The government will unveil new plans next week to meet its deficit reduction targets. Those measures will have to be assessed by the country's so-called troika of creditors – the European Central Bank, the European Commission and the International Monetary Fund – to see whether they plug the shortfalls.

Ireland in 2010 received a 67.5 billion euro loan package after having to bail out its banks, which had made risky bets that went wrong following the 2008-2009 global financial crisis.

The country resumed limited sales of long-term bonds at affordable rates this year and has recorded weak growth since 2011 despite five years of austerity, the longest stretch in the EU. This makes it the only EU bailout recipient to climb out of recession.

Ireland's government plans three more years of cutbacks and tax hikes to get the deficit back to the eurozone limit of 3 percent of gross domestic product; its deficit was more than 8 percent last year and this year's target is 7.5 percent.

Rehn welcomed the extensions, but stressed both countries needed to stick to their programs of fiscal consolidation and structural reforms.

"This is another very important step forward toward a sustained return to full market financing for both countries," Rehn said.

The loan package for Cyprus, in turn, still needs parliamentary approval in several eurozone member nations. Those votes are expected this month, with the first loan disbursement planned in May, Dijsselbloem said.

Cyprus requested a bailout after its outsized banking sector started tumbling amid heavy losses. The bailout program demands great effort by Cyprus to bring its finances in order. The restructuring of the banking sector and the austerity measures are expected to slash the country's GDP by about 13 percent over this and year and next.

The creditors predicts the island will return to growth in 2015, but Rehn acknowledged the projections involved a bit of guesswork, given the country's harsh adjustment measures.

"There is plenty of uncertainty about the exact trajectory of economic growth in Cyprus – it will depend on many things, starting with the effective implementation of all the program – and relating to the stabilization of the financial system, and the overall national economy," Rehn said.

"So at this stage we do our best, and have done it as thoroughly as we can," he said.

The meetings in Dublin will continue on Saturday.

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Associated Press writer Juergen Baetz in Brussels contributed reporting.

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Don Melvin can be reached at https://twitter.com/Don_Melvin

Juergen Baetz can be reached at http://twitter.com/jbaetz