The global rise in bond yields, in effect government borrowing costs, could push Ireland’s annual debt-servicing costs above €6 billion, the Economic and Social Research Institute (ESRI) has warned.
The interest payments on Ireland’s national debt are expected to rise from €3 billion last year to €6 billion by 2030 as lower-interest debt is redeemed and newer, higher-interest debt is added.
In its latest quarterly report, the ESRI warns that this prediction, which was made in April, could “understate the interest rate payments rise”.
Global bond yields, including Ireland’s, have rocketed in recent months as persistent inflation and ballooning government debt unnerves creditors.
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Expectations of further interest-rate hikes is also souring sentiment.
The 10-year yield on Irish Government debt, in effect the cost to the State of borrowing money, has risen from 3.2 per cent in April to 3.7 per cent now.
The yields on 10-year French, United States and United Kingdom debt have also surged to 4.7 per cent, 5.2 per cent and 5.4 per cent respectively, reflecting higher borrowing costs for governments generally.
“If recent rises in bond yields across countries becomes more entrenched and spreads to Irish yields, the projection [for Irish debt-servicing costs] might prove to be an even greater underestimate,” the ESRI said.
“The key issue is not one of debt sustainability and immediate financing pressures, but rather the gradual erosion of fiscal space as higher borrowing costs feed through over time.
“With the debt ratio on a downward path for some time (with the exception of the Covid period), this element of the public finances has received less attention in recent times, but past experience has shown how a positive debt position can be reversed quickly.”
Adding to the pressure on government bond yields is competition from corporate bonds being issued by tech companies racing to finance artificial intelligence (AI) investment.
Big companies such as Google and Meta are issuing tens of millions of US dollars in debt, vying for the same pool of bond buyers.
In its report, the ESRI said global spending on AI-related infrastructure was acting as a counterweight to downside impact of inflation.
ESRI research professor Alan Barrett said the US, the UK and France have had high persistent deficits that were now “snowballing” into significant debts.
“Ireland isn’t in that zone in the sense that we are running surpluses and the debt burden is quite manageable,” he said
“But even for Ireland you can see that increase in bond yields and hence the cost of Government borrowing nudging up.”
In its report, the ESRI forecasted economic growth, as measured by modified domestic demand (MDD), in 2026 and 2027 to remain positive at 2.6 per cent and 3.4 per cent respectively.
At the same time, inflation will remain elevated at 3.6 per cent this year and 3.3 per cent in 2027, keeping cost pressures on households.
“Given Ireland’s reliance on fossil fuels, we are very exposed to the pass through of international price pressures to domestic households and firms,” it said.
The damage to energy production infrastructure in the Middle East has led to a spike in gas and oil prices, it said.
But the think tank said that despite the current conflicts in Ukraine and the Middle East, and the greater deployment of protectionist policies, “the global economy has remained relatively resilient”.
