Ireland Sells Bonds, Calms Concern That Bailout Needed
Ireland Central Bank Governor Patrick Honohan
Crispin Rodwell/Bloomberg
Ireland Central Bank Governor Patrick Honohan said yesterday that bank bailout costs remain “manageable” and shouldn’t derail the government’s deficit-cutting efforts.
Ireland Central Bank Governor Patrick Honohan said yesterday that bank bailout costs remain “manageable” and shouldn’t derail the government’s deficit-cutting efforts. Photographer: Crispin Rodwell/Bloomberg
Sept. 21 (Bloomberg) -- Gary Jenkins, head of credit research at Evolution Securities Ltd., talks about Ireland's bond sale and the outlook for the European market. He speaks on Bloomberg Television's "The Pulse" with Maryam Nemazee. (Source: Bloomberg)
Ireland Sells 1.5 Billion Euros in Debt
Crispin Rodwell/Bloomberg
Irish lenders have been hurt by the collapse of the country’s real estate market and a recession that led the economy to contract more than 7 percent last year.
Irish lenders have been hurt by the collapse of the country’s real estate market and a recession that led the economy to contract more than 7 percent last year. Photographer: Crispin Rodwell/Bloomberg
Ireland sold 1.5 billion euros ($2 billion) of bonds, easing concern that the country may need to be rescued by the European Union.
The extra yield that investors demand to hold 10-year Irish debt over German bunds, which exceeded 400 basis points for the first time yesterday, narrowed 18 basis points to 384 basis points after the auction. Ireland sold 1 billion euros of securities due October 2018 at a yield of 6.023 percent, up from 5.088 percent in June, the National Treasury Management Agency in Dublin said. It sold 500 million euros of bonds maturing in January 2014 at an average yield of 4.767 percent, compared with 3.627 percent at an Aug. 17 auction.
Until recently, investors fled Irish bonds on concern that the cost of shoring up the country’s banks will hurt efforts to tame the European Union’ biggest deficit, which was 13.6 percent of the gross domestic product last year. Central bank Governor Patrick Honohan said yesterday that bank bailout costs remain “manageable” and shouldn’t derail the government’s deficit- cutting efforts.
“For investors this is great but for the government and the taxpayers it is horrible,” said Willem Buiter, chief economist at Citigroup Inc., in an interview today. “From a technical point it was highly successful, over five times oversubscribed.”
The Irish 10-year bond yield fell 15 basis points to 6.38 percent as of 4:50 p.m. in London. The NTMA said the exchequer is now fully funded through the first half of 2011.
Spread Narrows
Portuguese spreads also narrowed, with the extra yield on its 10-year bonds falling to 385 basis points after touching a record 399 yesterday. Portugal will sell 1 billion euros in bonds tomorrow.
Today’s rebound came after a Bloomberg survey showed that Germany’s biggest bond dealers forecast that yields on Greek, Spanish, Irish and Portuguese bonds would fall to within 2.2 percentage points of benchmark German bunds on average in the next two years. That would be down from 4.61 percent percentage points last week.
In Ireland, Prime Minister Brian Cowen now needs to convince investors that he can get Ireland’s budget deficit under control and bailing out Ireland’s banks won’t sink the country’s finance.
“Clearly we’re paying higher interest rates,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. “You can’t go on paying a premium every single month for an auction.”
Bank Bailouts
Irish lenders have been hurt by the collapse of the country’s real estate market and a recession that led the economy to contract more than 7 percent last year. The government has injected almost 33 billion euros into banks and building societies, with two-thirds of that going to Anglo Irish Bank Corp., which was nationalized last year.
While Anglo executives say the lender may need a total of about 25 billion euros, Standard & Poor’s said the figure may be as high as 35 billion euros. That’s equivalent to 21 percent of gross domestic product.
A spokeswoman for the central bank in Dublin said yesterday that a final cost estimate for the Anglo Irish bailout is at “an advanced stage of readiness.”
Finance Minister Brian Lenihan, in newspaper interviews this weekend, rejected speculation that the cost of bailing out the banking system will force the country to turn to the EU and the International Monetary Fund for emergency funding.
Demand
Investors bid for 5.1 times the amount of the 2014 bond offered, compared with 5.4 times last month. Demand for the 2018 security had a so-called bid-to-cover ratio of 2.9, the same as in June.
“Our base case remains that the government will not turn to the EU and IMF for a funding package,” said Gillian Edgeworth, an economist at UniCredit in London. That “would change very rapidly in the event that the banking sector as a whole in Ireland experienced a significant deposit outflow,” she said.
Cowen’s government has cut wages and raised taxes in a bid to bring the deficit from 13.6 percent of gross domestic product last year to within the EU’s 3 percent limit in 2014.
The economic crisis and growing cost of the bank bailouts has led some of Cowen’s allies to express doubts about his leadership style. Tom Kitt, a lawmaker for Ireland’s ruling Fianna Fail party, said the party should meet to discuss its leadership. Lenihan, flanking Cowen at a press conference in Dublin late yesterday, said bond markets haven’t been affected by doubts over Cowen’s future.
“The most important rumblings around here are the rumblings we are seeing in international markets,” Lenihan said. He criticized opposition parties for “unhelpful” comments about the possibility of negotiating with Anglo Irish bondholders.
To contact the reporter on this story: Louisa Fahy in Dublin at lnesbitt@bloomberg.net;
To contact the editor responsible for this story: Colin Keatinge at ckeatinge@bloomberg.net
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