Central Bank of Ireland: Creditworthiness Concerns Averted by ECB Policy Action

1 April 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s policy actions avoided increased concerns about creditworthiness in the wake of the pandemic’s impact on fiscal developments, the Central Bank of Ireland said Thursday.

In its quarterly bulletin for 2Q 2021, the central bank noted that Ireland’s general government balance had gone from a surplus of 0.9% to a deficit of almost 9% of modified gross national income last year.

‘Such a deterioration in the public finances might typically generate concerns regarding credit worthiness, putting upward pressure on government financing costs’, the bulletin said. ‘However, this was avoided by the swift and decisive monetary policy action by the ECB, which contained government borrowing costs in the Eurosystem at historically low levels.’

Besides the impact on national finances, monetary accommodation has also been a source of direct support via lower private-sector borrowing costs and indirect support via the spillover effects of increased economic activity, the bulletin continued.

According to the Irish central bank, ECB measures can be expected to raise the output of the Irish economy this year by 1.4%.

‘In the near term, policy should remain focused on supporting household incomes and firm liquidity in order to provide the most solid basis for recovery’, the bulletin said. ‘However, the size and nature of support should be ready to adapt to changing circumstances.’

The central bank called Ireland’s increased debt and deficit ratios ‘both warranted and necessary’, but added that ‘when health risks diminish, any continued support via current expenditure should be targeted and temporary and any permanent increases in current expenditure would need to be funded in a sustainable manner.’

Higher post-pandemic growth should help reduce the public debt ratio, but ‘additional actions may also be required to close any structural imbalances between expenditure and revenue when the recovery is firmly established’, the central bank said.

The Irish economy faces a deteriorated near-term outlook owing to the increase in Covid-19 case numbers, the bulletin said. Economic developments would be subdued in the first half of the year, ‘reflecting a more protracted duration and more gradual relaxation of level 5 restrictions than had been assumed in the last bulletin.’

‘However, the prospect of a successful deployment of vaccines from an increasing range of choices offers the prospect of recovery from the second half of the year underpinned by continued support from accommodative monetary and fiscal policy’, it said.

The bulletin observed that the apparent economic expansion last year of 3.4% ‘point[s] to remarkable resilience in headline growth given the exceptional scale of the Covid-19 shock to domestic and world demand.’

Still, domestic demand collapsed and the labour market was hard hit, the bulletin noted.