Last Tuesday the National Treasury Management Agency (NTMA) held another successful auction of government bonds, selling €1bn in debt. The NTMA has now raised all but €1bn of this year's €25bn bond sale target – €20bn of new funding to meet the country's projected 2009 budget deficit and €5bn to refinance maturing debt.

Demand at last week's auction was very strong, just as it was in July, with a key factor being that Ireland is paying more in interest to investors than any other eurozone country to get its funding. The one good thing is that the premium (or interest-rate differential) we are paying over benchmark German bonds has narrowed in recent weeks. The yield spread of 10-year Irish debt over equivalent German paper has dropped to around 1.65% from not far off 3% in March, as fears of an Iceland-style bust recede. It is clear that overseas investors now believe Ireland is dealing with its economic problems, and as long as that remains the case the NTMA shouldn't have too much difficulty in raising its required funding.

However, it is dangerous to suppose that the answer to all our problems is to keep borrowing. The debts we are building up are unsustainable. Ireland now needs to borrow more to fund a larger budgetary deficit, while paying more to borrow. This means that ever-increasing proportions of the country's tax revenues will be needed to service the national debt. In 2009 over 11% of estimated tax revenues will be used for this purpose, compared to about 4.5% as recently as 2007.

But as long as we are borrowing, we need to ensure we are paying the least possible amount in interest. Therefore, it is imperative that international investor perception of Ireland is not damaged in the coming months. The problem is that there are some potential 'banana skins' for the government before year-end.

The first of these is the ongoing battle to sort out the banking crisis, with still many question marks over whether the National Asset Management Agency is the right solution, and whether the bill to set up the agency will be passed in the Dáil in its current form.

Some commentators believe that, as this bill is one of the most important in the history of the state, it should be put to a referendum. However, the longer the banking issue is left in limbo, the more damage is done to Ireland's reputation abroad.

Speaking of a referendum, the Lisbon treaty rerun in October could send the cost of funding soaring again, if the majority vote 'no'. I believe it would be wrong to use the referendum as a way of bashing the government. There is every chance we would have followed in the footsteps of Iceland had we not been a member of the EU, and the eurozone in particular, where access to funding from the European Central Bank has been critical in getting us through this crisis. If we vote 'no' a again, the international markets will probably push up the interest-rate differential again of Irish government bonds.

One of the main reasons the interest-rate differential of our debt vis-à-vis Germany's has narrowed in recent months is that overseas investors were encouraged by the government's plan, outlined in the supplementary budget in April, to get the public finances back in order. It is essential that there is no let-up in this goal and that further fiscal austerity is implemented in the December budget,

It is clear from the latest exchequer returns that there is little mileage to be gained by raising taxes further; the onus has got to be on cutting expenditure. An Bord Snip Nua has recognised this and so have international markets, and this is not the time for government to chicken out.

If the government can get through the next four months or so, then Ireland's economic prospects for 2010 and beyond should be somewhat brighter.

Alan McQuaid is chief economist at Bloxham Stockbrokers