THE SALE yesterday of €1.5 billion of government debt has proved a qualified success. The auction showed there was strong demand for Irish government bonds where two offerings by the National Treasury Management Agency (NTMA) were three and five times over-subscribed. But the price paid to secure those borrowings was expensive as investors sought a substantial risk premium. The 4.78 per cent yield – or interest rate – on four-year bonds was more than a percentage point higher than lenders received a month ago.
For the Government, any relief at the level of investor interest in the bond offering will be tempered by concern that the State’s borrowing costs now stand at a record and unsustainable high.
The Government did not need to return to the debt markets yesterday: it has already raised sufficient funds to finance this year’s budget and has prefunded a large part of its needs for 2011. However, a decision to withdraw from the regular monthly bond auction would have been ill-advised. It would have added to market uncertainty and adversely affected investor sentiment by bolstering suggestions that Ireland, like Greece, might need to rely on assistance from the euro zone’s rescue fund for its borrowing needs.
Nevertheless the large risk premium now sought by buyers of Irish sovereign debt is a concern the Government must address with much greater urgency. It reflects investor worries about the ultimate cost of recapitalising the banks and Anglo Irish Bank in particular. It also reflects increased investor doubts – expressed by the International Monetary Fund and others – that the Government can reduce the budget deficit to 3 per cent of GDP by 2014, as agreed with the European Union. And it is indicative of investor fears that the global economic recovery, which shows signs of faltering, may be insufficient to boost domestic growth and help stabilise the public finances. Bond markets price risk and, with investors more risk averse and more sceptical in recent months about the Government’s ability to meet its medium-term fiscal targets, the result has been a much higher cost of borrowing.
Central Bank governor Patrick Honohan, in stating on Monday that “some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon”, has indicated that budget savings greater than the promised €3 billion in the 2011 budget will be required to ensure that fiscal targets are met. In that way, he suggests, international lenders can be best reassured that budget discipline will be maintained.
The Government has four weeks before the next bond auction. In that time, it needs to provide greater clarity about its intentions in order to regain lost credibility. The Minister for Finance has said the December budget may involve greater savings than the projected €3 billion but he must be more explicit. By the end of this month, the Central Bank will provide an estimate of likely losses on non-Nama loans held by Anglo Irish Bank. And that too should help reassure financial markets. However, time is not on the Government’s side.