Ireland as one of Europe’s safe havens for investors? Something of a milestone was hit this week when the cost to the State for raising short-term borrowings dipped below that of Germany, traditionally the euro zone’s benchmark.
By Thursday morning the quotes were more or less the same for short-term, two-year German and Irish borrowings at just under 3.1 per cent. Looking at 10-year bond yields – the more traditional comparative measure – Ireland at 3.54 per cent was still a bit above Germany at 3.37 per cent.
But as interest rates rise worldwide and investors focus on countries with high debts and deficits – notably France – Ireland remains in a sweet spot. The domestic debate on volatile corporate taxes and the risks ahead is not resonating in international markets.
Long-term interest rates are on the rise worldwide because of fears of rising inflation and increases in central bank rates. As this has happened, the cost of borrowing for countries with higher debt levels - like the US, the UK and particularly France – have taken the biggest hit.
Ireland’s borrowing costs have risen too. The National Treasury Management Agency (NTMA) recently borrowed new 10-year funds at a rate of 3.5 per cent. A year ago the rate was 2.5 per cent while back in 2022 the State was raising 10-year cash at 1.5 per cent and there were even some six-month borrowings conducted at negative interest rates.
Market conditions are now a world away from that period, but Ireland is at the right end of the euro zone league and 10-year borrowing costs here compared to over 5 per cent in France, 4.6 per cent in Italy, 4.5 per cent in Belgium and 4 per cent in Spain.
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Particular concerns surround France, with a debt-to-GDP level approaching 120 per cent, a deficit of 5.4 per cent of gross domestic product (GDP), political paralysis and riots on the street.
Its 10-year bond rate has jumped by 1.3 percentage points since June, sparking fears that the European Central Bank (ECB) might need to step into the market, or that some kind of borrowing shock could lie ahead which could ripple out across the euro zone.
Fears of debt pressures have left big institutions looking for safe havens. And Ireland with its low debt-to-GDP ratio and significant budget surplus is benefiting. Investors seem happy to overlook the risks from the well-discussed reliance on potentially volatile corporate tax revenues from a few big multinationals. Or perhaps in an uncertain world they reckon these dangers are sufficiently far into the future not to worry about.