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Irish Debt Costs May Rise on Bank Woes’ ‘Sheer Size’

Ireland may face rising borrowing costs at a bond auction as concern deepens that bank bailouts will make it harder for the nation to contain its budget deficit, the biggest in the euro region.

The National Treasury Management Agency will sell as much as 1.5 billion euros ($1.9 billion) of four- and 10-year bonds tomorrow. Ireland has already seen short-term borrowing costs soar. The yield on six-month bills at an Aug. 12 auction was 2.46 percent, a 100 basis-point jump in three weeks.

While the government has spent almost two years on an austerity drive to trim its budget deficit, the cost of supporting lenders such as Anglo Irish Bank Corp. is undermining sentiment. Concern that bailing out lenders will become increasingly expensive helped drive the extra yield, or spread, that investors demand to hold Irish 10-year bonds instead of benchmark German bunds to the most since May today.

“I’m not in a rush to buy Irish bonds,” said Robin Marshall, a director of fixed income at Smith & Williamson Investment Management in London, which manages $20 billion in assets. “The government has done all it can to address the problem, but that doesn’t cap the rise in bond yields. It’s just a reflection of the sheer size of the banking problem there.”

Credit-default swaps on Irish government debt rose for a ninth day, climbing 18.5 basis points to 302.5, the highest since March 2009, according to data provider CMA.

Bank Costs

The European Commission last week approved a total capital injection of as much as 24.5 billion euros into the nationalized Anglo Irish Bank, more than the 22 billion euros Finance Minister Brian Lenihan had said the lender might need.

The spread between Irish 10-year bonds and German bunds widened 11 basis points today to 304 basis points. It was 306 basis points on May 7, just before the European Union announced a 750 billion-euro financial backstop for the region’s most indebted nations. Credit-default swaps on Irish government debt rose 10 basis points to 294, according to data provider CMA.

The Irish debt agency paid a yield of 3.11 percent when the 4 percent 2014 bonds were sold on May 18, and 5.537 percent when the 5 percent 2020 was auctioned on July 20.

“I don’t think the market doubts the Irish government’s willingness and commitment to deal with the country’s problem,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “But due to the magnitude of the problem in the banking sector, which is so intertwined with the country’s finances, some people are starting to wonder if it will be able to deliver positive results.”

The government took over Anglo Irish in 2009 after losses increased on property developers it financed during a building boom. It pumped 7 billion euros into Bank of Ireland and Allied Irish Banks Plc, the nation’s largest lenders, and set up a so-called bad bank to purge them of toxic real-estate loans.

While Ireland’s woes are centered on its banks, economic- growth concerns are weighing on the bonds of some of Europe’s peripheral nations. Greece’s recession deepened in the second quarter and Spain grew less than economists forecast, data last week showed. Ireland resumed expansion in the first quarter and the government last month raised its 2010 outlook to project growth of 1 percent.

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