Higher interest rates pose major financial risk to Ireland, Donohoe warns

Even "minute changes" in interest rates could pose a major financial risk to the State as it takes on more debt to deal with the pandemic, Minister for Finance Paschal Donohoe has warned.

Addressing an online seminar hosted by the Institute of International and European Affairs (IIEA), Mr Donohoe said the money being borrowed to support workers affected by the lockdown will have to be paid back or refinanced at higher interest rates in the future.

“Some appear to be arguing that we make the same mistake about public debt for Ireland as was made about private debt a decade ago,” he said, referencing the huge build-up in borrowing prior to the 2008 financial crisis.

Low interest rates “are not going to be a normal” and this poses a threat to highly indebted countries such as Ireland.

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“If you have a national debt well in excess of €200 billion, a minute change in those interest rates can have a very significant effect on the day-to-day operation of the Irish State,” he warned.

Protecting incomes

“This has happened to us twice before in my lifetime and I’m very determined that we get the balance right between avoiding that risk developing again while at the same time borrowing the right amounts of money to protect incomes and restart our economy,” Mr Donohoe said.

The low interest rates of recent years, driven by European Central Bank policy, have delivered a massive boost to the public finances with the State being able to replace expensive borrowing with cheaper funding.

However, there is now a fear of the reverse, with countries that have borrowed heavily during the pandemic being hit with higher rates in the near future.

Mr Donohoe failed to rule out the possibility that the Government’s projected budget deficit for this year may climb even higher than €30 billion, the current worst-case scenario.

The Government had had to shape its response to the Covid-19 pandemic “at break-neck speed, with incomplete information and unclear outcomes”, he said.

“There has been no playbook for governments to turn to. Our first economic priority was to project incomes, jobs and companies through the pinnacle of the pandemic.”

Exceptional supports

He said the Government has already committed exceptional financial supports for workers and businesses, amounting to €13.3 billion or 7.5 per cent of gross national income.

“We have been able to act decisively and proportionately because we managed our public finances with care in recent years,” he said, while warning the increased borrowing will have to be paid back at some stage. However, he said the biting austerity policies after the 2008 crisis would not be repeated as the State’s financial position was very different this time around.

“As we gradually reopen our economy, a different challenge confronts us – stimulating the recovery,” he said, noting it would be harder to reopen the economy than to close it.

Asked if he had become more pessimistic about a no-deal outcome in the Brexit talks amid signs both sides are far from agreement, Mr Donohoe said that at this point “it’s too early to add to our pessimism and too early to create a sense of unjustified optimism”.