Irish people will have to pay more on their mortgages and personal loans as a result of the international debt crisis, ratings agency Moody's has warned.
The news comes as fears over our national debt sent the cost of borrowing soaring last week, and as Colm McCarthy, the author of the An Bord Snip Nua report, warned that the government might have to consider introducing an early budget to reassure international markets spooked by the Greek crisis.
McCarthy told the Sunday Tribune yesterday that, because of the current turmoil, the market for buying and selling government debt is as bad now as it was a year ago and that it wasn't possible to buy or sell Irish government bonds last Friday.
While he stressed the government should sit tight for the moment – to see how the EU and ECB deal with the crisis – it should "stand ready" if necessary to "send a clear signal" to the markets by either laying out the parameters of next December's budget or even consider bringing the budget forward.
McCarthy said he was not at this point in favour of the option of bringing forward the budget, but with the international markets in crisis, it may need to be considered.
Moody's said that because domestic banks face higher funding costs under the government guarantee, the rise in Irish 10-year government bond yields to nearly 6% last week will ultimately affect personal borrowing rates. That's because banks are being charged a so-called 'spread' over government rates when they issue bonds under the guarantee. For the first time in recent history, Ireland is now paying more to service its debt pile than former communist country Poland.
Exceptionally high levels of personal debt make Irish borrowers more vulnerable to interest rate rises and the combination of high personal and government borrowings in Ireland will make it hard for the country to pay down debt without further damaging the economy, Moody's said.
In addition, the cost of raising two-year money for Ireland rose 50% last week to more than 4.5%, meaning the government is now less likely to make any money from loaning €1.3bn to the Greek government. Market sources also warned that bond markets will be effectively closed to Ireland if yield spreads go much higher because there is no demand in the secondary market for Irish debt.
The government needs to borrow about €55bn more from the markets over the next 30 months and paying a higher interest rate threatens to push up debt service costs by many hundreds of millions of euro, potentially leading to another painful round of spending cuts and tax rises.
Before the latest Greek-inspired debt crisis drove up sovereign interest costs, experts predicted that Ireland would face paying an interest bill of €5.7bn next year, up from €4.4bn this year.
"It will depend on how sustained the recent rise in interest rates is going to be. If it is sustained, that would increase the interest burden," said Brian Coulton, head of global economics at credit rating agency Fitch Ratings in London. European leaders and the European Central Bank were scrambling this weekend to rescue Europe from the growing threat that the Greek contagion will spread.
The ECB may reluctantly be forced to say it will directly buy national bond paper, including that of Ireland, at auctions or offer European banks even more cheap money to stabilise the banking system.
"If there is no [European] solution within the next four weeks, we're in [eurozone] break-up territory anyway. A bond auction in four months becomes meaningless," said one senior bond analyst at a Dublin securities firm.
But Dietmar Hornung of Moody's said it held to its view that Ireland "was different" from some southern European countries. The agency stressed that the economic indicators for Ireland suggested the economy would pick up and that government finances were stabilising.
Finance minister Brian Lenihan yesterday said there was no question of bringing forward the budget, stressing our "very ambitious by EU standards" budgetary plans for this year were on target. "I don't see any pressure to broaden or deepen the target for this year," he said.
Lenihan – who travels to Brussels today for a vital meeting of European finance ministers scheduled to discuss the current international crisis – said the government had already begun its preparations for December's budget, well ahead of the normal timetable.
Departments had been given until the end of this month to come up with definitive spending plans for next year. He said this was being done to ensure the maximum amount of time to make "good sound decisions" in the budgetary process.
Lenihan also stressed that approval of the Croke Park deal would send a very positive signal internationally.