Money-for-nothing era is coming to an end – better get ready

Mario Draghi has started to unscrew the stabilisers. Like a favourite uncle, he will try and persuade the cyclist that the support is still there – and will even run along for a while holding the back-carrier. He might even stick the wheels back on for a while if things get rocky.

But the message from Frankfurt this week is clear: the ECB already owns a massive whack of our Government borrowings, and it is going to be buying a lot less in future. A new risk factor has just been added to the outlook for 2017, to add to Brexit, Trump and the Italian banks.

The ECB move leaves Ireland – and other higher-debt countries – increasingly vulnerable to the whims of the markets. We have seen before how quickly the economy can turn, and what this does to our public finances and the cost of borrowing.

But yet the country is taken up with talk of what public pay rises we can afford and how “politics” won’t allow people to be charged for anything. Meanwhile, the day when we will stop borrowing to pay our bills keeps being quietly pushed further into the future.

Roundabout ways

Central bankers have a way of saying things in roundabout ways. Legend has it that the famous Fed chairman Alan Greenspan had to propose to his wife a second time because he put it in such a circuitous way the first time that she had no idea what he was saying. And so Draghi said this week that the ECB was absolutely not planning to stop pumping billions of euro every month into the euro zone economy, while – effectively – starting to prepare everyone for this to slowly start happening.

The bottom line of all this for Ireland is that it is going to start costing the Government more to borrow money. We have been living in a free money wonderland. Or next to nothing anyway.The NTMA managed to raise long-term borrowings this year for Ireland at rates as low as 0.33 per cent. Investors have been paying Germany to lend them money. If this sounds crazy, it is because it is. It is a bubble. But it has been a huge benefit to the Irish exchequer, holding down borrowing costs and gradually easing the burden of our national debt.

The European Central Bank has had a key role in this. It has been buying Irish Government debt – and the debt of other euro zone countries – as part of a programme to pump cash into the euro zone economy. This has been vital in holding down long-term interest rates at their extraordinarily low level.

Biggest holder

The

European Central Bank

system now holds €30 billion of Irish Government bonds. It is now, effectively, the biggest holder of loans to the Irish Government. But from next April it will be buying less. It has been purchasing €1 billion a month. This could fall to around €400 million a month from next spring – and less after the end of 2017, unless the European economy lurches into another crisis and the ECB is forced to reverse its course.

Ireland is particularly in the firing line, as the ECB runs up against the limits of the amount of Irish bonds it can hold. Draghi has said there will be no rule changes to deal with this. Ireland and the Central Bank can manoeuvre a bit to allow some ECB bond-buying to continue. But the message is clear. The ECB will no longer be in the market mopping up any Irish Government bonds that it can buy. It will still be a buyer – when it can . But at least one stabiliser is being taken off the bike.

This, plus Brexit, means national economic policy should be in defensive mode. This does not mean that we should aim to do nothing. The economy is growing, though not at the rate suggested in the latest CSO figures, again rendered next to meaningless by multinational accounting. We do need to boost investment, particularly while borrowing remains cheap.

Budget rules

But we are struggling to deal with the implications of the EU budget rules, and the financial position we find ourselves in. Our politics still involves fights around the edges of where we should spend more and tax less. If growth were to slow sharply due to Brexit, we could quickly run out of room and be looking again at cuts or higher taxes. If corporate tax revenues were to head into reverse, we would be in trouble.

You could say that this is taking the glass-half-empty approach. And there is plenty to be upbeat about, notably the performance of the jobs market.But we are starting to move into an era where those lending us money will again be closely assessing the risks – and this will determine how much we will pay. With Brexit, Trump and the Italian banks, risks are on the rise – though not only for us, of course. With the ECB pulling back, we need to be able to sell a coherent story to investors – and not one that involves a Government just trying to get from one week to the next.

Despite all the surprises, 2016 will be another good year for our economic figures. But growth is going to slow in 2017 – and the risks are clear. “Super Mario” has signalled that, soon enough, we will be relying solely on our own reputation to borrow, rather than being supported by the ECB euro. The “money for nothing” era is coming to an end. We’d better start getting ready.