State will save close to €450m a year as it redeems a €10.6bn bond

The National Treasury Management Agency will pay out over €11 billion on Monday in its biggest bond redemption since at least before the last financial crisis, shaving hundreds of million of euro off its annual interest bill at a time when it is preparing to borrow heavily to deal with Covid-19.

The Government’s debt management agency was due to redeem a €10.6 billion bond carrying a 4.7 per cent coupon, or interest rate, on April 18th, in addition to a final interest payment of €477 million. However, as the date fell on Saturday, the transaction will take place on Monday.

The rate attached to the bond, which was first issued in 2004, was more than 11 times the 0.4 per cent coupon on €4 billion of 15-year securities sold in January this year under the agency’s routine issue of debt. It was almost 20 times the rate attached to €6 billion of seven-year debt sold earlier this month as the State accumulated funds to deal with the coronavirus crisis.

While the Government was paying over €498 million a year in interest in the bond being redeemed on Monday, it would be paying €42.4 million on an equivalent sum at the bond market rates prevailing when it sold 15-year debt in January.

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The Government has abandoned original forecasts of posting a budget surplus this year as it deals with the soaring healthcare and economic costs resulting from the spread of the virus.

Borrowing could rise "the order to 8 per cent of national income" in 2020, the Department of Public Expenditure and Reform's secretary general, Robert Watt, said last week.

Minister for Finance Paschal Donohoe is set to publish and send its latest updated economic forecasts to the EU by the end of this month in its latest Stability Programme Update.

Already income supports, additional health spending and liquidity supports equivalent to around 4 per cent of national income had been committed, he said, and more will be needed on loan schemes for businesses.

The European Central Bank moved last month to rein in diverging borrowing costs across the euro zone by announcing a €750 billion pandemic emergency programme of buying member states bonds. Governments across Europe face having to resort to the debt markets in the coming months to borrow hundreds of billions of euro to fight Covid-19's assault on their health systems and economies.

Debt levels

"Funding a deficit will not be a constraint" for Ireland, Davy economists said in a report on Friday, noting that the NTMA ended the first quarter with €22 billion in cash balances and had already raised €11 billion in 2020.

Ireland’s debt metrics are flattered by the presence of the multinational sector, with debt-to-gross domestic product falling from over 120 per cent in 2013 to below 60 per cent last year.

However, debt-to-GNI*, or gross national income excluding multinational sector profits, was still 97 per cent in 2019 and a Central Bank scenario for Government borrowings amid the Covid-19 pandemic implies this ratio will rise to 112 per cent this year, according to Davy.

“These debt levels still urge caution and we would expect the Government will plan in the October budget for 2021 to close the deficit over the next two years – especially if the impact of the Covid-19 outbreak is seen to be dissipating,” the report said.