The interest rate on Irish government debt has risen sharply as bonds are hit in the latest wave of selling on international markets.
As governments across the world unveil plans to spend massively to combat the economic impact of coronavirus, the cost of these potential borrowings is rising, though for now it remains low.
Ireland’s 10-year interest rate rose to 0.5 per cent on Wednesday having been in negative territory just a few weeks ago. Investors normally buy the bonds of major countries such as the US and Germany in times of uncertainty, but many funds appear to be selling liquid assets such as bonds now to meet demands from investors for cash on other holdings.
Such is the level of uncertainty that there has been a massive sell-off in most asset classes as investors choose to move to cash. Stockmarkets continued to fall on Wednesday despite massive stimulus programmes announced in the US, UK and elsewhere in recent days.
As governments move to fund these programmes, investors anticipate a sharp rise in the issuance of government bonds in the months ahead. This is likely to increase the cost of borrowing, though these programmes will still be cheap to fund if rates stay anywhere near current levels .
Bond interest rates have been driven to historic lows by the low level of inflation worldwide and the massive programmes put in place by world central banks after the financial crash. Central banks are now increasing support for credit markets and will have a key role in the coronavirus response.
Just last week, the National Treasury Management Agency (NTMA) raised €1 billion of nine-year debt at a negative interest rate of minus 0.156 per cent. It has raised €5 billion so far this year of its target for 2020 of €10 billion to €14 billion. This target may change in the light of revised spending plans by the Government. It is due to raise some €500 million in short-term borrowings, or treasury bills, on Thursday, and the price of doing so is likely to be higher than recently.
The Government has so far promised €3 billion in extra spending due to the crisis, about 1 per cent of gross domestic product, but Taoiseach Leo Varadkar has indicated this is likely to increase significantly. The State has access to about €4 billion in funds due to return from the National Asset Management Agency (Nama), a €1.5 billion rainy day fund and other cash held in the NTMA – and had forecast that the budget would be in surplus this year.
A sizeable Irish budget deficit is now likely and a significant portion of the cash held in reserve may also be used. It is not clear yet what level of additional borrowing may be planned. Much will depend on the state of the markets. Borrowing at current rates remains cheap, despite the recent increases, but there is significant uncertainty about how the markets will look in the weeks and months ahead, or what additional supports might be available from Europe. Already a major expansion of European Investment Bank lending has been announced. Like so many other things,the arrival of the virus has turned the outlook for the public finances on its head.