Under proposals adopted by the European Commission today, reduced interest rate margins and extended loan maturities are to apply to funds provided by the EU under the European Financial Stabilisation Mechanism (EFSM) .

The EFSM is contributing around €22.5 billion to the €85 billion Irish bailout deal, with the IMF and European Financial Stability Facility (EFSF) also providing around €22.5 billion each. The remainder of the bailout fund is provided mainly through bilateral agreements.

The changes, which will be applied retrospectively, are separate to the interest rate reduction achieved in July which related to the EFSF loans, though changes to the EFSM rates had also been expected.

The proposals, which are expected to be approved by the council in the coming weeks, also apply to Portugal.

Under the proposal, the current margin of 2.925 per cent which applies to Ireland will be reduced to zero, while the maximum payback timeframe will double from 15 to 30 years.

In effect, this means that the EC will now only charge Ireland what it costs them to borrow the monies it uses to fund the loan. Both the EFSF and the EFSM, which have triple A ratings, fund their loans by issuing debt instruments in the capital markets.

The changes will apply to already-dispersed tranches as well as future tranches.

A spokeswoman for the European Commission said that the new financial terms will bring enhanced sustainability and improved liquidity outlooks to Ireland. It will also generate indirect confidence effects through the enhanced credibility of programme implementation which should result in improved borrowing conditions for the sovereign as well as the private sector, the commission added.

Eoin Treacy's view This is good news for Ireland and Portugal since they will have to pay back less and over a longer time for their respective bailouts. Ireland's partial sale of the state electricity company will also be welcomed by bond vigilantes. Friday's EcoFin meeting of European finance meetings will be attended by Secretary Geithner for the first time in a clear indication that the USA is pressuring the Europeans to come up with a solution.

The absence of Greece from the above relaxing of bailout terms is noteworthy. Greek 2-year yields hit a peak today or 84.5% before pulling back somewhat. However, at such levels bankruptcy is considerably more likely than not and one can't help but think that the EC is attempting to shore up Ireland and Portugal to help them avoid a similar fate to Greece in the event of a default.