Ireland’s public finances will be boosted by up to €500 million a year under the European Central Bank’s €1.14 trillion stimulus to revive the euro zone economy.
In a major intervention to spur growth and prevent deflation, the ECB will spend €60 billion a month from March this year until September 2016, buying up bonds issued by single currency member states.
The scheme mirrors quantitative easing campaigns undertaken with some success by central banks in the US, the UK and Japan, but resisted in Germany over concerns that ECB bond- buying would ease pressure on countries to assert control over their public finances.
Markets cheered the ECB intervention, which was bigger than expected. The euro fell to its lowest level against the dollar for 11 years, stock markets jumped and borrowing cost of euro zone governments declined to record lows. Irish 10- year bonds fell to a fresh low of 1.15 per cent before rising slightly.
‘Real economy’
The ECB will acquire large tranches of debt from major euro zone countries such as Germany, France, Italy and Spain, the aim being to redirect money invested in their bonds into bank lending and other investment in the “real economy”.
Government sources said the package should have several benefits for Ireland. The sources said the weakening of the euro should boost Irish exports and tourism while the cost of bank financing should also fall, leading to more lending.
A little more than €600 million a month will be spent on Irish bonds as part of the plan, in line with Ireland’s 1.16 per cent share of the ECB’s capital.
Most of this debt will then be held by Central Bank of Ireland, which will receive interest on the bonds from the Government and repay it to the exchequer in the form of dividends.
“The bottom line is that this now has created a bit of fiscal space around Europe. The interest payments on government debt will go back to governments,” said Prof Alan Ahearne, head of economics at NUI Galway.
Pre-crash
Saying some Irish bonds issued in the pre-crash years yielded annual interest around 4 per cent, he said a rough calculation suggested the total annual benefit when the 19-month campaign reaches its conclusion could be between €300 million and €500 million.
There had been concerns in Government circles that less Irish debt would be acquired as a result of large bondholdings in the Central Bank in the wake of the deal to scrap the Anglo Irish Bank promissory note scheme.
However, a source close to the Central Bank in Dublin said the deal would not undermine Ireland’s eligibility to benefit in full from the ECB plan.
ECB chief Mario Draghi said the intervention would continue “until we see a sustained adjustment in the path of inflation which is consistent with our aim”. The ECB targets an inflation rate below but close to 2 per cent but euro zone prices fell last month.
German chancellor Angela Merkel, who took to the stage at the World Economic Forum in Davos while Mr Draghi was speaking in Frankfurt, said the “world is amply supplied with liquidity right now” and urged governments to seize the moment to reduce debt.
