Can Ireland just keep borrowing at negative interest rates?
Smart Money: Ireland sold €5.5bn debt this week at a negative rate. What does this mean for the State’s finances?
The National Treasury Management Agency (NTMA) sold a greater-than-expected €5.5 billion of 10-year bonds on Tuesday, covering a third of the minimum amount of borrowings the State plans to raise in 2021 to deal with the coronavirus crisis. Photograph: iStock
The ECB holds some €50 billion of Irish debt from its pandemic programme and earlier quantitative easing measures, and is likely to buy roughly another €15 billion this year. Photograph: AP Photo/Bernd Kammerer
The idea of borrowing money at negative interest rates is hard to get your head around. Yet Ireland again sold longer term debt this week at a negative rate, with the National Treasury Management Agency raising ¤5.5 billion at an interest rate of minus 0.257 per cent for a term of over 10 years. What does this mean for the State’s finances as we wrestle with the cost of the pandemic and face other longer-term bills in areas like housing, health, the environment and pensions? Here are seven questions.
1. How does it work when a State borrows at a negative interest rate?
The State has issued debt with a face value of €5.5 billion at a slight premium. To be exact, it will take in €5.654 billion, which it will receive from the investors on January 12th. In mid-October 2031, the NTMA will repay these investors at the face or par value, paying them €5.5 billion. The difference - just under €154.5 million – reflects the negative interest rate being accepted by the investors. They are getting back a little less than they lent.