Irish central bank governor Patrick Honohan said the government needs to cut its budget deficit at a faster pace as the perceived riskiness of the country’s bonds jumps to a record.
“Some explicit reprogramming of the budgetary profile for the coming years is clearly necessary soon,” Honohan said in a speech in Dublin today. He said he expects “more clarity” and “detail” on the government’s budget plans.
The extra yield that investors demand to hold 10-year Irish bonds over German bunds today exceeded 400 basis points for the first time as the government struggles to convince investors it can cap the cost of bailing out its banking system. Portugal is also being punished by investors, with the spread on its bonds also touching a record today. That’s fueling concerns that both countries may have to follow Greece and ask the European Union and the International Monetary Fund for a rescue.
“We think there is a measurable risk that Ireland and Portugal will access the EFSF and IMF, but probably only early next year,” Goldman Sachs Group Inc. Chief European Economist Erik Nielsen said in a note yesterday. The countries are still well funded for some months, though a planned Irish bond sale tomorrow may be a “test,” Nielsen said.
Contracts insuring against an Irish default rose to a record 450 basis points from 421 today, according to data- provider CMA. Ireland is scheduled to sell between 1 billion euros ($1.3 billion) and 1.5 billion euros of four-and eight year bonds. Irish Finance Minister Brian Lenihan told reporters in Dublin today’s he’s “concerned” about the jump in Irish spreads, which rose as high as 404 basis points today. Portugal’s spread was 399 basis points.
Investors are selling Irish bonds partly on concern about the cost of rescuing Anglo Irish Bank Corp., which was nationalized last year. Standard & Poor’s said in August that Ireland may have to inject as much as 35 billion euros “over time,” putting pressure on the national finances. The government has injected 22.9 billion euros to date.
Lenihan has already there’s scope to reduce spending by more than the 3 billion euros ($3.9 billion) forecast in this year’s budget. Honohan, a member of the European Central Bank’s Governing Council, said he expects “reprogramming” of the budget beyond 2011 to be “convincing.” He also said that costs related to Ireland’s banking crisis remain “manageable.”
An upcoming assessment of Anglo Irish’s rescue, including both base capital and stress calculations, will help “narrow the range” of the estimated burden the banking system will place on the country’s finances, Honohan said.
The total Anglo cost will be less than the numbers “touted around,” he said.
Ireland has been cutting public salaries as part of an austerity drive aimed at narrowing its deficit to 3 percent of gross domestic product by 2014. Lenihan said in a newspaper interview published yesterday that Ireland won’t need European Union aid.
Lenihan said today he’s not concerned about “rumblings” about the leadership of Prime Minister Brian Cowen, who last week apologized for a “below par” radio interview. Tom Kitt, a lawmaker for Ireland’s ruling Fianna Fail party, said the party should meet to discuss its future leadership.
“Political instability as much as financial instability is what is now undermining Ireland’s position,” said Michael Noonan, finance spokesman for Fine Gael, the largest opposition party. “Political stability will not be restored by rearranging the deck chairs on the Titanic. ”