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Dublin: 2°C Thursday 20 January 2022

Government borrowing costs exceed 7% for first time

The cost of Irish borrowing is more expensive than ever – and briefly exceeded the 7% ceiling for the first time.

Updated 09.34

THE COST OF BORROWING for the Irish government has broken the 7% barrier for the first time since joining the Euro, according to new data this morning.

Having closed just off their all-time record last night, with the interest rate for government ten-year borrowing at 6.767% when trading closed, the interest rate this morning shot up to above 7% before stabilising.

As of 9am, secondhand government debt was trading at 7.063%, having risen a massive 0.29% in under 90 minutes. Shorter-term borrowing had also become significantly more expensive in opening trading.

Within thirty minutes, however, the price had fallen back below the 7% barrier to hover at about 6.97%.

Though the government announced in September that it would not be holding any further auctions of new government debt until the new year (hoping to allow the price of borrowing to fall in the meantime, while it prepared the four-year budgetary strategy) the new landmark price of borrowing will mean that the world’s investors think the likelihood of a sovereign default is high.

This can probably be attributed to the government’s announcement earlier this week that the next four budgets would require an overall adjustment of €15bn – double the amount previously indicated, and meaning that the government may struggle to find the funds to redeem previous bonds when they fall due.

The increase in the price of Irish borrowing left the spread between the ten-year bond yields of Ireland and Germany to 451 basis points. By comparison, a mere ten days ago when the cost of Irish borrowing had dipped below 6% again, the spread had tightened to 362bps.

This morning’s spike may also be an adverse reaction to the news that Germany wishes to reopen discussions on the Lisbon Treaty, hoping to safeguard the Europe’s €750bn bailout fund amid concerns that its constitutional court could declare such a fund to be in conflict with the treaty.

Given the difficulty in securing a deal on the treaty in the first place – with discussions and ratification taking eight years to conclude – investors may believe the chances of adjusting it quickly are slim.

Such fears would also be reflected in the price of Portuguese borrowings, where fears that the bailout fund might disappear and that the country’s under-pressure government might not be able to pass a Budget have driven bond prices up by 0.23% in just 30 minutes of trading.

About the author:

Gavan Reilly

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