THE INTEREST rate being charged for Irish debt increased again yesterday ahead of an auction of up to €1.5 billion of Government debt today by the National Treasury Management Agency.
The yield on Irish 10-year bonds closed at 6.45 per cent yesterday having broken through 6.5 per cent earlier in the day, a record high since Ireland joined the euro.
The move came as Central Bank governor Patrick Honohan indicated he believed tougher budgetary measures were needed to show Ireland’s determination to get its deficit into line. Prof Honohan said that, for a small, stressed economy such as Ireland, there was no question but that the best policy for economic growth was to continue on a convincing path towards reducing the deficit.
In a speech to a forum for banking experts in Dublin he said Ireland needed to “reprogramme” its plans for reducing the debt over the coming years and to do so “soon”.
This was because of the cost of the banking crisis, the rates being charged for Government debt and trends in the economy, he said. Otherwise the State would find itself paying even more for the money it had to borrow.
His comments were echoed by EU economics commissioner Olli Rehn, who expressed confidence in the Government’s capacity to confront the financial challenge it faces. Mr Rehn dismissed any suggestion the fiscal pressure on Ireland or Greece would result in a restructuring of their debt.
Ciaran O’Hagan, head of rates research with Societé Generale in Paris, which is one of a number of “primary dealers” in Irish bonds, said he believed today’s auction would go very well and Irish bond yields would come down immediately afterwards. There was no question over Ireland’s credit rating in the short term as the country “is a very safe investment”.
However, in the longer term Ireland’s reliability needed to be re-enforced through tighter budgetary policy. Ireland was “lucky” to have a Central Bank governor of the calibre of Prof Honohan.
Ireland holds monthly bond auctions although it has enough cash to keep the exchequer in funds until mid-2011. Most of the auctions have been significantly over-subscribed.
The rate Ireland pays for its debt is decided on the day bonds are sold and it is not affected by daily changes in the “secondary bond market”, where investors trade in Irish debt.
Danny McCoy, head of the employers’ body Ibec, said he believed growth in the economy could be stimulated if the State outlined what impact the coming tax changes could have on a per household basis. The Government needed to reassure its citizens as well as international markets, he said. If people were less frightened, they would spend more. He was not in favour of a budget cuts package of more than the previously indicated €3 billion.
Minister for Finance Brian Lenihan said he would be outlining a “credible” medium-term budgetary strategy in October. While others warn of the dangers of taking more money out of the economy than is envisaged, Prof Honohan appeared not to agree. “National growth is best served by ensuring that the public finances are convincingly on a convergent path: the impact on funding costs and confidence surely more than offsets any short-term adverse impact on domestic demand from lower net public spending.”