Business World

Monday 11 December 2017

Consumers will pay the price as pressure grows

Emmet Oliver

The pressure being applied to Ireland by the international markets is now so intense that record keepers are finding it hard to keep up.

Yesterday, the gap between German and Irish borrowing costs was so wide that all modern records were surpassed in just a few hours.

While Taoiseach Brian Cowen and some Irish stockbrokers tried to play down the impact of the higher bond yields, there is little doubt that Ireland is facing a serious -- if not imminent -- funding challenge. What this means for ordinary people, if the current trends continue, is ultimately tougher Budgets and a larger national debt in the long term.

It will also mean higher funding costs for Irish banks and they will seek to recover this, in time, from Irish customers, many of them mortgage borrowers. The borrowing costs of the Irish state are now directly linked to the borrowing costs of the Irish banking sector.

The real problem is that higher borrowing costs -- and 6pc in terms of recent history is a very high yield for Ireland -- means that interest payments on Ireland's debt will consume higher levels of our tax revenue, leaving less money for other purposes.

For example, the interest bill on Ireland's debt will eat up 14pc of government revenues next year, according to Standard & Poor's (S&P). The higher the yield, the more expensive each chunk of debt becomes.

But apart from the direct consideration of the debt burden, the rising bond yields also tell the Government something more fundamental -- the bond market is still not convinced by our banking or budgetary policies.

Or to be more precise, they are still not convinced either policy is going to work. While the Government has curbed spending in the way it promised and will do so again in December, its growth forecasts remain extraordinarily optimistic.

For example, the official Department of Finance forecast is that the economy will grow by 3.3pc in GDP terms next year, with 4.5pc growth coming the year after that.

The bond market is not so sure the Government can dig its way out of the problems via growth.

The other concern is the total cost of the banking rescues. While these are one-off hits, they are very substantial hits.

For example, if recent Standard & Poor's estimates are correct, the total cost of Anglo Irish Bank's capitalisation will be €35bn, which amounts, in raw terms, to 40pc of the current national debt of Ireland which stands at €87.2bn, according to the NTMA.

Of course, the Government strongly rejects the S&P figures, but because of the uncertainties buried in the Anglo balance sheet, it is proving difficult to disprove S&P with hard verifiable numbers.

Until that moment comes, and the wider economic clouds clear, Ireland's borrowing costs are likely to remain under pressure.

Irish Independent

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