Ciarán Lynch (Cork South Central, Labour)
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Question 43: To ask the Minister for Finance the cost of Exchequer debt financing since 30 September 2008; the changes to the cost of insuring Irish Government bonds against default since 30 September 2008; if his attention has been drawn to the difficulties the NTMA has had in raising debt financing since 30 September 2008; and if he will make a statement on the matter. [38815/08]

Bernard Allen (Cork North Central, Fine Gael)
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Question 44: To ask the Minister for Finance if he has received an analysis of the reason Irish debt costs are rising relative to other states. [38724/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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I propose to take Questions Nos. 43 and 44 together.

As the Deputy is aware, the day-to-day management of the debt is handled by the National Treasury Management Agency and as such it is on their advice that Government relies in relation to the operation of our debt funding.

The cost of raising long-term debt in the capital markets can be measured in relative terms 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, 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.

Since September 2008 the turbulence in financial markets has been severe and this has been reflected in bond spreads. Only time and a historical perspective will allow a true analysis of the causes and, more importantly, 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 in the past has resulted in a relatively low debt to GDP ratio 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 Irish economy and the healthy state of the public finances for the last decade. These positive factors have in fact 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 which influence borrowing costs. These include the state of the public finances, the level of borrowing requirement, and competition for funding in the sovereign debt markets. It is not possible to say to what extent each of these factors will affect the spread in the future.

The following per cent yields on Ireland's 10 year bonds were observed in the secondary market since September 2008:

All of the factors detailed above have been absorbed into the pricing of insuring Irish Government bonds against default. At time of writing this works out at €11,370 for 10 years per million insured. This was approximately €6,650 at the beginning of October and €3,710 at the beginning of September 2008. However, the credit default swaps (CDS) market is neither liquid nor transparent and, as a result, prices quoted are volatile. CDS spreads are a cost to the investor — they do not directly affect the cost of debt to the Exchequer.

Despite the difficult and volatile market conditions since September, the NTMA has continued to be successful in raising finance for the Exchequer. 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. 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.

Finally, 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.