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Ireland's strengthening debt profile offers route out of the current crisis

Conor O'Kelly


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Ireland's stock of debt is still high, but the risk it presents to our economy is considerably lower than it was five years ago. Stock image

Ireland's stock of debt is still high, but the risk it presents to our economy is considerably lower than it was five years ago. Stock image

Ireland's stock of debt is still high, but the risk it presents to our economy is considerably lower than it was five years ago. Stock image

For global economies and markets to function as they are designed, two things need to flow freely: money and people. In 2008, money stopped flowing and that led to the great financial crisis. Today, people have stopped flowing and the economic impact is potentially even more severe.

In the last crisis, monetary policy was the tool of choice to address and fix the problems associated with money and credit not flowing freely.

Central banks around the world took the concept of monetary easing to new levels, as quantitative-easing programmes were introduced, and enormous amounts of sovereign and other bonds were bought directly from the market to provide liquidity.

This preparedness to purchase large quantities of sovereign bonds, which European Central Bank (ecb) president Christine Lagarde suggested recently has no limits, will be a vital anchor in providing an ultimate solution to the economic fallout from Covid-19.

Today, however, economists and policymakers agree that monetary policy can only do so much, and that targeted fiscal policy is the key to dealing with this crisis.

This time, the problem is on Main Street, not on Wall Street. Just as the Central Bank is the lender of last resort so, too, is the Government the borrower of last resort. In recent days, the Government has announced significant increases in expenditure to support the urgent and critical work of our health service, and to aid individuals and businesses affected by the sudden economic fallout.

This short-term increase in expenditure and the longer-term implications for the Government accounts will require a significant rise in our borrowing requirements in the months and perhaps years ahead.

Fortunately, Ireland is in a strong position to provide this funding. Ireland's debt profile has improved significantly over the past five years; economic policies pursued over the period have resulted in an improvement in our finances and our sovereign credit rating.

The low interest rate environment created by ECB policy provided a favourable background for the NTMA to reprofile its obligations. The State's debt sustainability has benefited and this is evident in a range of metrics that investors use when evaluating Ireland's creditworthiness, and deciding on the terms at which they are prepared to lend to us.

For example, five years ago, the average cost of our debt was close to 4pc. Today, it is less than 2pc. Five years ago, our annual interest bill was over €7.5bn. Today, it is close to €4bn; a saving of €3.5bn annually.

As recently as 2014, Moody's still rated Ireland below investment grade (Ba1); a few months ago, Standard & Poor's upgraded Ireland's credit rating to AA-. Five years ago, we had significant refinancing of €70bn looming (the so-called chimneys) between 2017-20. All of these bonds falling due have been refinanced successfully.

In line with this strategy, at the end of February we had €26bn to fund this year's €19bn of redemptions.

We have a smooth maturity profile ahead and we have one of the longest average maturities in Europe.

We had strategically left 2021 as a gap funding year to provide insurance after the refinancing risk of 2017-20. This is fortuitous given the requirement for new borrowing. In fact, the period 2021-24 has total maturities of €27bn, in stark contrast to the €70bn we had to borrow over the past four years.

Ireland's stock of debt is still high, but the risk it presents to our economy is considerably lower than it was five years ago.

This is an unprecedented shock to the global economy. But it will eventually pass. The most important determinant of Ireland's ability to shoulder Government debt has not changed: the country's growth potential and its fiscal policy over the long run.

One of the critical components in assessing the risk presented by our stock of debt is the outlook for interest rates.

In this regard, we expect that borrowing rates for sovereigns will remain relatively low for the foreseeable future. Given the unprecedented nature of the economic shock and the fact that all European countries are affected, it's possible if not inevitable that a creative and radical solution will be found to deal with the required increase in European sovereign borrowings.

Unlike the last crisis, Ireland is no longer viewed as a peripheral European credit. In fact, institutional investors refer to Ireland as a semi-core credit, frequently comparing us with sovereigns such as France and Belgium.

The reprofiling of Ireland's debt and the lowering of the interest bill over the past five years mean we have created significant room to manoeuvre and this will enable us to meet the current challenge.

Improving Ireland's debt profile is not done for the benefit of bond investors. It is not done to satisfy some doctrine of fiscal rectitude.

It is done so that in the event of a future economic shock to the system, you have created room for policymakers and governments to pull hard on the fiscal lever if required.

While we have been preparing for the future, it is clear that future has now arrived. Thankfully, Ireland as a sovereign issuer is well-positioned for the challenges ahead.

Conor O'Kelly is chief executive of the National Treasury Management Agency

Sunday Independent