Kieran O'Donnell (Limerick East, Fine Gael)
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Question 5: To ask the Minister for Finance if he has received an analysis of the reason Irish debt costs are rising relative to those of other states. [39084/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As the Deputy is aware, the day-to-day management of the debt is handled by the National Treasury Management Agency, NTMA, and, as such, it is on its advice that the Government relies regarding the operation of our debt funding.

The cost of raising long-term debt in the capital markets can be measured in relative terms compared to other countries. This is known as the "spread". In the case of Ireland, its cost of borrowing can be measured against the relative borrowing costs of other states, for example, Germany, The Netherlands, Portugal or Greece. The spread to Germany is the benchmark measure and it is observed by comparing the yields on bonds of similar maturity.

The recent turbulence in financial markets has been severe and this has been reflected in bond spreads. Only time and an historical perspective will allow a true analysis of the causes and, more important, the relative weight that should be ascribed to the different factors. As international difficulties have evolved over the past few months, all small and non-core sovereign issuers, such as Ireland, have experienced widening spreads. Liquidity has been a major factor. Most investors have focused on German Government debt as it is considered the most liquid investment. This means German bonds can be readily accessed and traded, and also that there is a liquid futures market in German Government bonds to manage the associated market risks. However, while spreads have widened against Germany, absolute yields have remained low or even decreased, depending on the timeframe, because of the extent to which German yields have fallen.

Ireland's economic success has resulted in a relatively low ratio of debt to GDP and also a low absolute level of debt. We have not been a frequent issuer of bonds which reflects both the relative size of the economy and the healthy state of the public finances for the past decade. These positive factors have had the effect of contributing to liquidity difficulties for Ireland in the current market.

There are a number of other factors in addition to liquidity that influence borrowing costs. These include the state of the public finances, the borrowing required and competition for funding in the sovereign debt markets. It is not possible to state the extent to which each of these factors will affect the spread in the future.

The strategy underpinning budget 2009 is designed with the clear intention of restoring balance to the public finances over the medium-term cycle while having reference to the overall economic climate. In doing so, the Government seeks to restore the current budget to surplus and to limit the level of borrowing required as order and stability return to the Exchequer finances.

Kieran O'Donnell (Limerick East, Fine Gael)
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Does the Minister agree he must borrow €18.4 billion to balance the public finances in the coming year? Since the Government's guarantee scheme for the banks was introduced in September, the cost of Government borrowing increased by 0.6%. The borrowing of €18.4 billion will therefore give rise to an additional cost of €91 million in interest payments. The Minister has devalued the international credit worthiness of the Irish economy. The reasons, as already stated by the Minister, include the state of the public finances. The Government has not made the critical hard decisions. In light of the bank guarantee scheme and the worry in the financial markets over the need for capitalisation of the banks by the Government, it is critical that the Minister introduce proper reform measures. He will be borrowing in the order of over 35% to ensure a current budget balance. I suggest he look at this figures again.

With a view to lowering the cost of State borrowing, what does the Minister propose to do to inspire confidence in the international market in terms of the state of the public finances, the bank guarantee scheme and the capitalisation of the banks?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Deputy O'Donnell is now referring correctly to the percentage of the borrowing total and not to borrowing as a percentage of the expenditure total. This has been the source of the disagreement between us on the statistics.

Kieran O'Donnell (Limerick East, Fine Gael)
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No.

Richard Bruton (Dublin North Central, Fine Gael)
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I referred to 40% of the Minister's borrowing.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I am trying to be of assistance to the Deputy because it is very easy to throw out a catchphrase during Question Time. Deputy O'Donnell was referring the percentage of borrowing on the current account as a percentage of total borrowing, not to the percentage of borrowing on the current account as a total of current expenditure.

Kieran O'Donnell (Limerick East, Fine Gael)
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Tax was never deemed to be an expenditure item. The Minister should get his facts correct.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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He referred to the giving of the guarantee to the banks and seemed to be unaware of the fact that far more extensive guarantees and direct capital investments have been made in banking systems by Governments throughout Europe. Our guarantee has been the cheapest of any given in Europe.

Joan Burton (Dublin West, Labour)
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Wait and see.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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It involves a payment for the guarantee by the relevant institutions to the Exchequer. It is worth noting that because it is clear that the widening spreads in bond markets reflect massive investment in the banking sector right across Europe.

Kieran O'Donnell (Limerick East, Fine Gael)
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Our credit worthiness is on a scale with that of Italy, which has consistently experienced difficulties with general Government bonds over many years. On the spread the Minster referred to, the figure is 1.2% higher in Germany than in Ireland. How does the Minister explain the 0.6% increase in the cost of borrowing to the Irish Government since the introduction of the bank guarantee scheme? What will he do to lower the cost?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Despite the difficult and volatile market conditions since September, the NTMA has continued to be successful in raising finance for the Exchequer.

Kieran O'Donnell (Limerick East, Fine Gael)
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At a cost.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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Over €2.5 billion in short-term funding was raised in October and, this week, the NTMA issued a new €4 billion three-year benchmark bond.

Kieran O'Donnell (Limerick East, Fine Gael)
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It will cost €49 million extra.

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The bond was oversubscribed within 36 hours and close to 100 applicants participated in the transaction. The successful launch of the bond in these conditions confirms the confidence of investors in the Irish Government bond market.

Kieran O'Donnell (Limerick East, Fine Gael)
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Will the Minister explain the reason for the increase?

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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There is a wide variety of factors.