Belfast Telegraph

Wednesday 23 April 2014

Republic borrowing costs are doubled

A shock doubling in the cost of some Irish government borrowing yesterday has been blamed on uncertainty about the final cost of bailing out Anglo Irish Bank.

But the agency in charge of the Republic's national debt is determined to go ahead with a more significant fundraising next Tuesday - despite yesterday's worrying rise.

The monthly borrowing of up to €1.5bn will now be watched closely next week to see if there has been a real fall in Ireland's credit rating.

The shock came when lenders demanded an average rate of almost 2.5% on short-term loans due for repayment in February. This compared with a rate of just under 1.4% for similar loans only three weeks ago.

The European Central Bank bought Irish government loans yesterday, according to reports on the financial news service Bloomberg, in what will be seen as a move aimed at easing market strains.

Yesterday's expensive fund-raising came a day after news that yet more money might have to go into Anglo Irish Bank than had previously been estimated.

The governor of the Central Bank, Patrick Honohan, has described the rates now being demanded for government borrowing as "ridiculous" and said they "are a setback for our hopes of a narrowing to reflect the fiscal credibility of the country".

A Central Bank source said yesterday that Dr Honohan stood by his words, despite yesterday's sharp rise in debt yields.

Borrowing costs for Ireland and Portugal have been rising steadily, after a short-lived fall when EU stress tests of banks were published last month.

The more important 10-year loans are costing more than 5% - an annual rate which is about as fast as the economy can possibly be expected to grow. Lenders are worried about budget deficits in both countries and about budgets and banking costs in Ireland.

They fear EU statisticians will insist that the 10-year bill for rescuing Anglo is all recorded on this year's Irish government accounts - producing a deficit of more than 20% of output (GDP).

Growing political opposition to more spending cuts will also raise questions in the minds of international banks that lend to the Republic.