THE NATIONAL Treasury Management Agency (NTMA) has warned of difficult trading conditions in global bond markets in advance of a sharp escalation in Government borrowing this year which could push the national debt well above €70 billion.
Agency chief executive Michael Somersacknowledged at a briefing on New Year's Eve that new borrowing could increase the overall debt, now €50.7 billion, by as much as 50 per cent over the year. Such an increase would represent a doubling of the national debt since 2007, when it stood at €37 billion.
"We've never been faced with a borrowing of this size before," said Mr Somers, who circulated copies of a Financial Times article which pointed to the likelihood of the US and European governments seeking to raise as much as €2,000 billion in bond markets this year.
The level of investor demand for debt issues of that scale is in question, particularly in light of the failure of a German bond auction in November.
Asked what that meant for the agency as it prepared to significantly increase debt for the Government, he said: "It means it's going to be very difficult. But we won't be alone in this difficulty."
"We're in regular touch with people we know in the various international banks, I think for everybody it's kind of unknown territory given the quantum that's required."
While his aim was to try to raise funds "as long-dated as we can", the market was more interested in short-term bonds than long-term bonds at present.
"You can kind of see why because the bond yields are still very low; notwithstanding all the turmoil . . . our 10-year bond is trading at 4¼ per cent at the moment," he said.
"How many of us would even in these difficult days want long money for 10 years at 4¼ per cent? We kind of feel that at some stage along the future that rates would rise and that you wouldn't want to commit yourself for 10 years at that kind of rate. So there's going to be a huge amount of bonds for sale . . . The demand, we don't know what it's going to be like. But the price at which it's going to transact from a borrowers point of view still seems very attractive, you know, if you can get long-term money at 4 to 5 per cent. We come from the era where bond yields were well into double digits."
The NTMA said in its preliminary results for 2008 public borrowing that last year would come in at about €13 billion.
Due to weaker tax revenues this was much greater than the €5 billion mooted in the Budget. Estimates for 2009 provides for a borrowing requirement of €13.4 billion, bringing the debt issuance requirement to €18.4 billion because a €5 billion bond falls due for payment in April.
However, Mr Somers said such figures do not take into account any additional funding required as a result of the deterioration in the public finances. Neither did they reflect the €5.5 billion bank recapitalisation programme, under which the Government is to provide €1.5 billion alongside €4 billion from the National Pension Reserve Fund.
"The only thing we can say to you is that €18.4 [billion] is the floor and it's likely to be exceeded, by how much we don't know at this stage," he said.
With the Economic and Social Research Institute projecting that Government spending will require borrowing of €18.2 billion, he acknowledged that the bond repayment on top of that and €1.5 billion for bank recapitalisation could bring new borrowing to €25 billion.
"The ultimate risk in this area of course is that you end up borrowing short-term and that doesn't do anybody any good," said Mr Somers.
