Tuesday 12 December 2017

Max Doyle: Short View

IT is true that low interest rates are helping Ireland to find a level of stability during this recession.

Courtesy of the ECB, this has been delivered mainly to the beleaguered doors of Irish middle classes, the principal beneficiaries of tracker mortgages.

Thankfully, there is a real prospect of low ECB rates for another 18 months. However, Irish government debt is pegged to a different long-term interest rate set by the markets which bizarrely is three times more expensive than a typical ECB tracker rate. So can we expect Ireland's borrowing rate to improve?

We got some clues last week when, against the backdrop of a Euroland sovereign meltdown, the Spanish government managed to raise €3bn of debt, some with a 30-year maturity. This is encouraging even if the brave investors demanded a spread of 2.5 per cent over equivalent German bunds. The Irish government also raised €1.5bn -- but finding out exactly who invested in Irish gilts is difficult and there is a suspicion that they ended up in the local banking system.

If this were the case, it would confirm that international investors are avoiding financing Ireland.

Also last week by contrast, significant amounts of European money moved out of the safety of German bunds and back into the stock market. This process of moving into risky assets initially leads to increased interest rates as bond prices fall. A sustained move out of bunds will make it even more expensive for the Irish Government to borrow unless foreign investors start buying our debt in their droves.

So, if real investors showed up last week as they did in Spain, then we can expect better financing terms and lower interest payments in the future. If not, then we will see more of our tax receipts going to service interest.

Max Doyle is a principal of Prime Focus Management, an Irish firm specialising in investment and turnaround of SMEs

Sunday Independent

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