Ireland’s long-term borrowing costs have fallen below those of the UK for the first time in six years, the latest sign in the remarkable turnround in the euro zone which just two years ago seemed on the verge of break-up as investors fled peripheral economies.
The symbolic crossover of yields on Irish 10-year bonds and UK gilts follows a decision on Sunday by Portugal to leave its three-year bailout next week without the safety net of an EU line of credit after it was able to auction 10-year bonds for the first time since the bailout began.
In lunchtime trading yesterday the yield on Ireland's 10-year bond fell to 2.629 per cent, making borrowing by Dublin cheaper than the equivalent UK gilt yield of 2.656 per cent.
Borrowing costs
Some euro zone officials have expressed concern that the historically low borrowing costs in Italy, Spain and other once-vulnerable euro zone economies have eased pressure for needed economic reforms.
Concern is also growing that political decisions such as Portugal’s exit and the insistence by Athens that it does not need a third bailout are based on the faulty assumption that borrowing costs will remain at the current low levels indefinitely.
The reversal in long-term government borrowing costs reinforces a turnround for the Irish Government which was forced to pay more than 11 percentage points more to borrow than the UK as recently as 2011 and had to resort to an IMF and EU bailout.
Ireland's lower cost in borrowing demonstrates its position as the star pupil of the IMF and EU's bailout programmes, from which it graduated at the end of last year, and expectations that the UK's rapid recovery will lead to higher British interest rates within a year.
Investors' favourite
Even though the IMF said this week that Ireland still faced "significant economic challenges" and would have to work hard to maintain its recovery, it has remained investors' favourite peripheral euro zone country.
Lower borrowing costs also reflect a wider and seemingly insatiable appetite for euro zone periphery bonds as investors have moved rapidly from fear that the single currency area would disintegrate towards ebullience that the crisis appears over.
Much of the difference in borrowing costs stems, however, from divergent expectations for interest rates, which have a strong influence on shorter-term borrowing costs because investors need to worry less about a country's ability to repay.
Shorter maturities
Ireland's borrowing costs at shorter maturities are now significantly below those of Britain. The benchmark Irish two-year borrowing cost is 0.406 per cent, compared with London's 0.725.
At five-year maturities, Ireland can borrow at an interest rate of 1.241 per cent compared with the UK having to pay the higher rate of 1.969 per cent. – (Copyright The Financial Times Limited 2014 )
