Rise in eurozone debt 'will cancel out money saved by spending cuts'
Published 26/06/2010 | 05:00
Ireland's rising cost of borrowing is a threat to the belt- tightening steps taken by the Government, An Bord Snip author Dr Colm McCarthy said.
The interest rate on Irish bonds was 5.6pc yesterday, almost 3pc higher than German bonds. That higher rate adds to the cost of the State's borrowing every time the National Treasury Management Agency raises money.
Speaking to Reuters yesterday, Dr McCarthy said: "The big problem for Ireland right now is what's happening in the eurozone sovereign-debt market." He said if rates remained above 5pc "it makes things very challenging".
"On the ultimate exchequer cost of the banking collapse, we don't really know what it's going to be yet. It's clear it's going to be sizeable," Dr McCarthy said.
Meanwhile, the French government will abolish a further €3.5bn in corporate and personal tax breaks next year, as it increases efforts to reduce the budget deficit.
The €13.2bn that France plans to reap in extra tax revenues is more than German fiscal correction of around €11bn, and equivalent to the VAT increase announced in the UK budget.
Prime Minister Francois Fillon told reporters: "There are countries cutting civil-service pay, firing public workers, raising the value-added tax. We are trying to avoid austerity."
He did not mention the UK budget -- or that similar conditions are being imposed on Greece by eurozone states.
But Mr Fillon said further measures might follow if growth falls below forecasts. His government plans to cut France's public deficit by €40bn, to 6pc of GDP, next year.
The scale of budget correction in France and elsewhere is a measure of the seriousness of the eurozone debt crisis, which has seen financial markets shun the borrowing needs of the governments and banks of several countries, including Ireland.
Yesterday, the Bank of England said the sovereign debt crisis had increased the risk of instability in the UK financial system, and banks needed to raise capital to guard against shocks. While British banks have less exposure to the sovereign debt of Greece, Spain, Portugal and Ireland than other big nations, they have an indirect exposure through loans to German and French borrowers, it said.
Commercial real estate -- in which there has been major Irish investment -- is particularly exposed.