ECB plan could greatly cut Ireland’s borrowing costs

The ECB’s ambitious plan to restore stability to the eurozone could greatly reduce the cost of borrowing for Ireland when it exits the EU/IMF bailout programme at the end of next year.

ECB president Mario Draghi yesterday committed the bank to outright monetary transactions, which means buying an unlimited amount of short-term bonds of eurozone members that were finding it difficult to access market funding, if that country agreed to structural adjustment reforms.

Crucially, this scheme will be extended to countries exiting bailout programmes.

Ireland is scheduled to finish its bailout programme at the end of next year.

However, when Ireland makes a full return to the markets and if it cannot secure funding at reasonable rates, then it would have to agree to new conditions laid out by the EU/IMF for the ECB to renew purchases of the country’s short-term debt.

Overall, markets reacted positively to the ECB’s announcement. Sovereign debt yields for periphery eurozone countries, including Ireland, Spain, and Italy, were down and stock markets were up. The euro also strengthened against most major currencies

An OECD report also released yesterday found that the eurozone debt crisis had added significantly to the cost of borrowing for Ireland.

The Paris-based institution estimated that the fundamentals of the economy meant that the Government should not be paying over 1.25% more than the German government, meaning an interest rate of 2.6% rather than just under the 6% it is currently paying.

At its meeting yesterday, the ECB announced it was keeping the main interest rate on hold at 0.75%.

There had been an expectation that the bank would lower the interest rate by 0.25%, but because of inflation concerns, Mr Draghi said there would be no rate reduction.

The news was a blow to the country’s tracker mortgage holders. Despite an ECB interest rate cut in July, the pillar banks are increasing the rates on their standard variable rate mortgages. On Monday, State-owned AIB increased the rate on its standard variable rate mortgage from 3% to 3.5% while on Sept 22, Bank of Ireland will increase its rate by 50 basis points to 3.99%.