Inflation-linked bonds load an extra €150m of debt on taxpayers

Final bill for €1bn in government borrowing is spiking but investors are insulated against price rises

Finance Minister Michael McGrath warned of debt risks to the economy. Photo: Gareth Chaney/Collins

Donal O'Donovan Twitter Email

February 07 2023 02:30 AM

Taxpayers are on the hook for an additional €150m-and-rising as the cost of inflation linked bonds issued by the National Treasury Management Agency (NTMA) balloons.

The figure is in addition to just over €1bn originally borrowed and the interest on the debt.

The State’s debt management agency, the NTMA, issued three inflation-linked bonds, known as linkers, including an initial deal in 2017 to borrow €609.5m, €300m in 2019 and €100m last year.

The debt was raised at a time when inflation was low and was issued in response to demand from investors in the pension industry who wanted to have an asset to match inflation-linked savings products they sell to customers.

The annual interest on the debt is very low, zero in the case of the two smaller deals and just 0.25pc for the larger.

However, crucially, the inflation-linked structure means the amount owed increases in line with inflation which has surged dramatically over the past two years.

The contracts tie the debt to the Harmonised Index of Consumer Prices (HICP), a standard measure of inflation used across the European Union but for technical reasons tweaked to exclude tobacco.

The HICP for Ireland increased by 8.2pc in the 12 months to December 2022. It rose by 5.7pc in 2021, making two consecutive years in which inflation has risen since the linkers were issued.

The NTMA inflation-linked bond contracts are effectively upward only, so even though official data recorded negative HICP inflation in 2020 the amounts owed were unchanged.

But the spike in prices over the past two years means the Government now owes more than it borrowed.

The aggregate balance of the three bonds, as of end-January 2023, is now €1.165bn, according to the NTMA.

That’s up from the sum of €1.095bn that the NTMA originally borrowed.

The bill is set to spike further this year and the compound debt contract means the higher numbers will continue to be felt even once inflation moderates.

The Central Bank of Ireland is forecasting that full-year inflation will fall to around 6pc this year, mainly due to falling energy costs as well as the impact of higher interest rates.

Ireland’s stock of inflation-linked debt is low and borrowing costs on the whole have fallen in recent years, as the NTMA took advantage of lower interest rates to refinance debt.

Still the debt pile is at a record high, Finance Minister Michael McGrath published a report last week that said public debt increased to €226bn at the end of 2022, up from €203bn just before the pandemic. It is among the highest per head in the world.

The Department of Finance’s sixth annual debt sustainability report warned the debt is still too high given risks in the Irish economy, although it found that a 1pc hike in interest rates by 2025 would not materially affect public debt in the short term, as it was borrowed at low rates over longer periods.