'Fair wind' should Government need to borrow billions more if Covid lockdown lasts longer   

Taoiseach Micheál Martin. The Government should have little difficulty in raising billions more should the Covid-19 lockdown go on longer and the rollout of vaccines be delayed further. Picture: Moya Nolan

Market interest rates, or yields, of Irish sovereign bonds have risen but remain in negative territory, meaning the Government should have little difficulty in raising billions more should the Covid-19 lockdown go on longer and the rollout of vaccines be delayed further.

As recently as early January, the Government's debt office, the National Treasury Management Agency, or NTMA, launched its 2021 funding campaign by raising €5.5bn by selling a new 10-year benchmark bond and paying a negative yield of around  0.25%. 

The NTMA is aiming to raise between €16bn and €20bn this year to help fund a prospective Government budget deficit of around €20.5bn. 

Paying negative yields means that in the era of record low interest rates due to the extreme crisis for the global economy the Government will pay back less than it borrowed to investors when the bonds mature.

However, market rates for Irish 10-year bonds have risen from their record low levels in recent weeks but still traded on Friday at a negative rate, of 0.13%. World government interest rates have risen on hopes for a huge stimulus to the US economy from the new White House administration of president Joe Biden. 

The cost of borrowing, although still close to record low levels for Ireland, is much lower again for the eurozone powerhouse Germany, whose benchmark 10-year bond was trading at a negative yield of 0.45% on Friday. 

Italy's 10-year bond trading at a positive yield of 0.49% and Spain's 0.16% reflect the Covid toll on their economies.          

Massive programme

Unlike the onset of the last crisis in 2008, the ECB has committed to keeping eurozone government interest rates at rock-bottom levels through its massive programme of bond purchases.  

Davy chief economist Conall Mac Coille said that despite the rise in global interest rates pushing Irish yields slightly higher there was still "a fair wind" behind Ireland financing its Covid-driven budget deficit this year. 

He said that the ECB will still be there behind the eurozone government debt markets should the Covid economic crisis last longer. 

Dermot O'Leary, chief economist at Goodbody, said that the financing outlook remains "very favourable".

However, Mr O'Leary said that with the EU lagging Britain in its programme to roll out vaccines, Ireland risks being an outlier in reopening its economy.

Investors looking into Europe from the US may perceive the potential for a faster recovery in Britain, despite it posting a huge slump of almost 10% in its GDP for last year, he said. 

A relative delay in vaccines in Ireland compared with Britain could also weigh on the bad loans of Irish banks should the lockdowns be prolonged, said Mr O'Leary.

Meanwhile, Jack Allen-Reynolds at Capital Economics said that for Italy the Covid-19 crisis has led to "something of a paradox" because as its national debt has risen, "the probability of default has fallen" because of low interest rates. 

He said the backing of the Five Star Movement for the plans by Mario Draghi, the former head of the ECB, to lead a new Italian government has been welcomed by bond investors.