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Thursday 18 July 2019

Cost of borrowing for the Government nears zero but signals market fears


Warning: Former EU economy commissioner and now head of Finland’s central bank Olli Rehn. Picture: Reuters
Warning: Former EU economy commissioner and now head of Finland’s central bank Olli Rehn. Picture: Reuters
Donal O'Donovan

Donal O'Donovan

Borrowing costs for the Irish Government fell to a record low yesterday - at one stage to just 0.03pc a year for 10-year bonds.

Prices suggest investors would actually pay to lend to Ireland for periods of up to seven years - where there are now so-called negative yields.

Ireland is not alone. Germany's benchmark 10-year government bond yield fell below the European Central Bank's (ECB) deposit rate for the first time.

The plunge in borrowing costs - in reality implied borrowing costs because only new debt is affected - is the strongest sign yet that financial markets are braced for interest rate cuts soon from the ECB.

"It is quite astonishing," said Tim Graf, chief macro strategist at State Street Global Advisors in London.

The plunge in debt costs for safer borrowers is good news for the Exchequer, but signals wider fear in the markets that growth in the eurozone has stalled.

Olli Rehn, the former EU economy commissioner who is now the head of Finland's Central Bank and was once an outspoken advocate of austerity, said the economic slowdown is no longer temporary and could be harder and longer lasting than expected.

"We should no longer see the recent slowdown in growth as a brief temporary dip in the economy, as a soft patch," Mr Rehn told German newspaper 'Boersen Zeitung'.

"We are experiencing a longer phase of weaker growth," he said, and argued the ECB needed to provide more stimulus - including potential interest rate cuts and more bulk buying of bonds.

The slowdown in much of the eurozone has not affected Irish growth rates, which continue to surge well ahead of peers.

The shift is stark for the Government though. The 10-year yield on Irish Government debt of 0.03pc means the cost of borrowing €10bn is just €3m a year.

At the peak of the financial crisis, borrowing €10bn would have cost €1.4bn a year, according to Austin Hughes, chief economist at KBC Ireland.

That historic low cost debt will prompt calls for a wide range of adjustments to current Irish Government plans for public spending and taxation, he said.

Fiscal policy is likely to become looser, he said.

Davy chief economist Conall MacCoille said bond prices indicate an economy that will have zero growth for a decade, but that is distorted by expectation about ECB actions.

The mismatch between low interest rates and Ireland's robust growth has echoes of the Celtic Tiger era, he said, when low borrowing costs fuelled overheating of the Irish economy.

Irish Independent

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