'ECB opened the door; it is now up to the Irish Government to walk through it'

The euro spiked but the effects on Irish sovereign bond yields were short-lived after the ECB unveiled a bigger than expected package of bond-buying designed to keep the cost of borrowing of crisis-hit European economies as cheap as possible during the pandemic crisis.

Austin Hughes, chief economist at KBC Bank Ireland, said that the €1.35 trillion announced by ECB president Christine Lagarde, has paved the way for governments across Europe, including the Irish Government, to announce significant recovery packages in the coming months to save their economies from plunging into a deep recession.

“The ECB has opened the door, it is now up to the Irish Government to walk through it,” Mr Hughes said.

The euro at one stage rose sharply against the dollar and traded at 88 pence against sterling but the effects on Irish bond yields was limited. The Irish 10-year benchmark bond traded only 1 basis lower to 0.13% while the equivalent German bond traded at -0.31%.

The lower that the Irish bond yields can fall the better the news for the Government because it implies the exchequer can make significant servicing costs as Ireland’s budget deficit climbs to €30bn this year. 

The ECB and European governments don’t want to repeat the same mistakes from the financial crisis of a decade ago when the smaller eurozone countries, including Ireland, were one by one shut out of sovereign bond markets as the cost of borrowing became prohibitive.

President Lagarde and her colleagues decided to expand the bond purchases by €600bn to €1.35 trillion, and extended them until at least the end of June 2021. Italian bonds rallied, with the yield on 10-year debt compared with the German equivalent set to narrow the most since mid-May.

“Action had to be taken,” Ms Lagarde said in a press conference. While there are nascent signs of the downturn bottoming out, “the improvement has so far been tepid”, she said. The vast majority of economists surveyed by Bloomberg last week had predicted a boost of €500bn. Still, some said after the decision that the ECB will have to act again, perhaps as soon as September.