THIS YEAR the Government plans to raise some €25 billion in debt to finance the yawning gap between government revenue and spending. With national economic activity forecast to decline by 9 per cent this year, tax receipts are well down and welfare spending has risen sharply as the rate of unemployment has soared.
Against that bleak economic background, the National Treasury Management Agency (NTMA), which manages the national debt and finances the budget deficit, has been faced with a formidable challenge. On Tuesday, as the NTMA raised €1 billion in loans from investors, Minister for Finance Brian Lenihan was in Frankfurt – as part of a European road show – where he was offering international investors much needed reassurance about Ireland’s creditworthiness.
For the NTMA, the latest auction of Government bonds produced an encouraging result. Demand by investors far exceeded the €1 billion of debt issued. This suggests a greater enthusiasm for Irish bonds and reflects a marked change in investor sentiment in less than three months. In March, the yield on 10-year Irish bonds was three percentage points higher than the German benchmark rate. And since then, the yield differential has narrowed to under two percentage points. A sizeable gap remains, however, between Irish and German rates, which reflects the perceived risk premium attaching to Irish Government borrowing. Investors have been concerned about the state of the public finances – with a budget deficit three times the European Union limit – worried about the domestic banking crisis, and apprehensive about the downgrading of Ireland’s credit rating. Mr Lenihan in his travels has helped to assuage some of those investor fears.
When the NTMA appeared before the Public Accounts Committee last week, chief executive Michael Somers pointed out that 85 per cent of Ireland’s debt is held abroad but that in recent bond sales, Irish banks were significant buyers of Government debt. And he thought the banks might well have used the bonds purchased as collateral to borrow from the European Central Bank. This was not, he said, “ a genuine end investor result”. Certainly, the whole matter requires clarification. The Government’s success in selling €1 billion in bonds in an offer that was over-subscribed is welcome. But how much did the latest bond auction success depend on investment by Irish banks which have already received some €7 billion from the Government to help secure their survival? The NTMA should ease investor concerns and set out the details.