Irish Fight to End Bond `Buyers Strike' as EU Examines Budget
Ireland will try to win support this week from the European Union to avoid a Greek-style bailout as investors balk at buying the country’s bonds.
EU Economic and Monetary Affairs Commissioner Olli Rehn arrives in Dublin today for a two-day visit after the government laid out a plan last week to cut spending and raise taxes by as much as 6 billion euros ($8.4 billion) in 2011.
While Ireland has the funds to avert the need for an immediate rescue, its cash may run out in the middle of next year unless it can raise money from the bond market in 2011. Ireland led a surge in the cost of insuring sovereign debt to a record on Nov. 5 as the government struggles to convince investors it won’t be the next Greece, whose economy was rescued by the EU and International Monetary Fund in May.
“It’s close to a buyers’ strike at this point,” said Jens Peter Soerensen, chief analyst in Copenhagen at Danske Bank A/S, a primary dealer in Irish government bonds. “Something needs to happen in the next few weeks to change the dynamic.”
Irish Finance Minister Brian Lenihan aims to narrow the budget gap to 3 percent of gross domestic product, the limit for euro members, by 2014 from about 12 percent this year. When the costs of the banking rescue are included, this year’s deficit jumps to 32 percent of GDP.
While Lenihan said on Sept. 30 that the cost of saving the country’s banks wouldn’t exceed 50 billion euros, Morgan Kelly, an economics professor dubbed the country’s “Doctor Doom,” said the figure may be 70 billion euros.
Kelly was given the ‘Doom’ nickname by newspapers including the New York Times after he forecast in 2006 that Irish property prices may decline as much as 80 percent.
“What is the point of rearranging the spending deckchairs, when the iceberg of bank losses is going to sink us anyway?” Kelly wrote in the Irish Times newspaper today.
Rehn is due to hold a press conference with Lenihan at 8 p.m. today in Dublin, the Finance Ministry said. On his visit to Ireland, the commissioner will look at the budget plan and also meet opposition political leaders, labor unions and employers.
“The clock is ticking between politics and the budget, with investors sitting in the backseat looking very green,” said Scott MacDonald, head of credit and economic research at Stamford, Connecticut-based Aladdin Capital Management LLC. “The budget is key to regaining confidence.”
The government will detail how it aims to cut the 6 billion euros on Dec. 7. Lenihan told the Sunday Business Post in an interview published yesterday that the 2011 budget will “absolutely” pass through parliament.
Fine Gael, Ireland’s biggest opposition political party, is not planning to back the budget, leader Enda Kenny said. The government, which has a majority of three seats, also faces a special election to fill a vacancy in parliament on Nov. 25.
In an interview with RTE radio aired yesterday, Kenny said that while the government’s plan to narrow the deficit is “about right,” he had “no faith” in Prime Minister Brian Cowen’s administration to deliver the savings.
Passing the budget is “about our capacity to keep our sovereignty rather than have external influences come on board,” Timmy Dooley, a lawmaker from Lenihan’s Fianna Fail party, said in interview with RTE aired yesterday.
Rehn said last week he welcomes Ireland’s plan to cut the deficit. He also said “difficult but necessary policy choices are still to be made as regards the measures needed to reach this objective” of cutting the deficit to below 3 percent.
Investors remain wary. Credit-default swaps linked to Irish debt rose as high as 587 basis points on Nov. 5, according to CMA prices. A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year.
The extra yield that investors demand to hold the country’s debt rather than benchmark German bunds has more than doubled in the last three months. The difference in yield, or spread, between Irish bonds and bunds was at 528 basis points as of 9:03 a.m. in London, up 106 basis points in the last month, according to Bloomberg generic data.
In Greece, the prospect of political upheaval unnerved investors ahead of local elections yesterday. The spread against German bunds widened to more than 900 basis points on Nov. 5 for the first time since mid September. The spread was at 880 basis points today, up 189 basis points since Oct. 25.
The country in May agreed a 110 billion-euro package of loans from the EU and IMF, and investors ever since have been betting on who might be next. The spotlight also has been on promises of narrower budgets in Spain and Portugal.
Ireland’s difficulties are being amplified by German proposals to force bondholders to foot some of the bill in any future bailout. Lenihan said on Nov. 3 “it’s not helpful to suggest Europe is going to restructure other countries’ debts.”
Erik Nielsen, chief European economist at Goldman Sachs Group Inc., said Ireland may need help from the European Stability Fund and the IMF in Washington in early 2011.
“This is starting to feel like a tsunami of new concerns,” Nielsen said “There is a considerable probability that the alphabet soup will get involved in financing Ireland and Portugal early next year.”
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