The Department of Finance was worried at the implications of comments by Tánaiste Simon Harris made in August about an EU initiative on defence spending.
The EU initiative, known as Security Action for Europe (Safe), allowed member states to tap €150 billion in long-term loans to increase their defence capabilities rapidly.
The department had read a report in The Irish Times saying that Ireland had not decided if it would seek such loans but that a decision was expected shortly.
Harris, then Minister for Defence, was quoted in the story saying he was looking forward to “exploring opportunities afforded by the regulation to enhance the capabilities of our Defence Forces”.
On the morning the article appeared, the Department of Finance told the Department of Defence that it expected that any decision to draw down debt through Safe would be taken at Government level, meaning the decision would be made by the Cabinet.
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It said any decision to borrow on behalf of the State was “quite substantial” and could not be taken unilaterally by an individual department.
A deadline set by the European Commission for member states to indicate their interest in accessing the new defence loans was looming and a decision on Ireland’s position was needed.
On August 6th the Department of Defence told the departments of Public Expenditure and Finance it was its “strong preference that we submit a positive response” to the commission’s request for expressions of interest regarding participating in the borrowing facility.
It said simply submitting an expression of interest did not impose any binding commitment on the State.
“The content of that positive response can be discussed in the context of maximum and minimum amounts, procurement methodology etc,” it said.
Further meetings were held in subsequent days.
On August 11th the Department of Public Expenditure in essence maintained that the newfound interest in the Safe loans stemmed from an instruction by the Tánaiste to his Department of Defence officials “to explore the option of submitting an expression of interest to avail of the loan mechanism”.
For the Department of Public Expenditure this represented a significant change in policy.
The department told defence officials that on June 26th it had advised that it “would only be using the common procurement aspects of the Safe regulation, and this would not involve any change to existing financing mechanisms or expenditure allocations”.
“Having previously engaged with [Department of] Finance and [Department of] Defence on the Safe instrument, our understanding is Safe loans do not function any differently from regular borrowing on the markets,” the Department of Public Expenditure said.
A fortnight later, on the evening of August 26th, the Department of Defence sent separate emails to the departments of Finance and Public Expenditure to say it understood from its Minister’s advisers that agreement had been reached for Ireland to submit an expression of interest to the European Commission for the loans.
The Department of Defence’s official business case for the loans – sent to ministerial advisers that day – suggested Ireland could seek up to €100 million.
The business case indicated the funding could be used for replacing the Air Corps’ fleet of turbo prop training aircraft or investing in light tactical armoured vehicles for the Army.
Loans could be repaid over a period of up to 45 years “and, in principle, may include a grace period of 10 years for principal repayments”, the department said.
It said a significant financial incentive under the Safe initiative was an exemption from VAT for defence material purchased under the programme.
“While it may be true that Ireland can achieve marginally more advantageous interest rates on the open market, the significant ancillary benefits that Safe loans can provide more than outweigh this benefit”, Defence said in its business case.
It also said the long-term financing arrangement meant funds would not be diverted from other Government priorities.
On August 26th the Department of Finance effectively killed the move. It told the Department of Defence it was not its understanding that an expression of interest would be submitted.
“We met the Minister [for Finance Paschal Donohoe] and he concluded we should not apply for the Safe loans,” the Department of Finance said.