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Irish Debt Slides on Deficit Woes; Greek Bonds Rally After Poll

Irish bonds tumbled for a 10th consecutive day and the extra yield investors demand to hold the debt instead of benchmark German bunds reached a record on concern the nation is struggling to redress its budget deficit.

German 10-year bunds rose as stocks fell, driving investors to the euro region’s safest assets as European Union Economic and Monetary Affairs Commissioner Olli Rehn discusses spending cuts and tax increases with officials in Dublin. Greek bonds rallied after Prime Minister George Papandreou ruled out calling a snap election after a first-round victory in local polls. Portuguese bonds weakened, pushing the yield difference over bunds to a record high, before the nation sells debt this week.

“Irish debt is trading poorly, along with Portugal, and that lends support to bunds,” said Peter Schaffrik, head of European rates strategy at Royal Bank of Canada Europe Ltd. in London. “There are clearly concerns over the current Irish budget, the plan and the political support.”

The yield on the Irish 10-year security climbed 21 basis points to 8.04 percent at 4:32 p.m. in London. The difference in yield, or spread, between the debt and bunds widened to a record 550 basis points, or 5.5 percentage points, Bloomberg generic data shows. The 5 percent bond maturing October 2020 slid 1.21, or 12.1 euros per 1,000-euro ($1,391) face amount, to 79.74.

The yield on the 10-year bund slipped three basis points to 2.39 percent, while the two-year note yield gained one basis point to 0.93 percent.

Spending Cuts

The European Central Bank resumed government-bond purchases last week as concern over Ireland’s finances grew. The Frankfurt-based central bank said it completed 711 million euros of purchases after reporting no settled transactions for the previous three weeks.

The Irish government announced a plan last week to cut spending and increase taxes by as much as 6 billion euros in 2011. 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. Lenihan told the Sunday Business Post in an interview published yesterday that the 2011 budget, scheduled for Dec. 7, will “absolutely” pass through parliament.

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.”

The cost of insuring Irish debt rose. Credit-default swaps on Irish government debt surged 23 basis points to a 601, according to data provider CMA. It reached a record 606 basis points earlier today.

‘Change’ Wanted

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase signals a deterioration in perceptions of credit quality.

Greek Prime Minister Papandreou said his government would continue to press ahead with its task of reducing a crippling budget deficit and debt burden.

“Change is what the Greek people wanted when we were voted into power a year ago,” Papandreou said in a statement yesterday broadcast live on state-run NET TV. “The Greek people reaffirmed they continue to want this change, to ask for it.”

The yield on the Greek 10-year bond dropped six basis points to 11.53 percent, with the spread over bunds narrowing to 898 basis points after climbing above 900 basis points on Nov. 5 for the first time since Sept. 21.

“There’s some kind of relief rally after the Greek election results, but it’s very specific to Greece,” Schaffrik said. “The broader picture is still dark. As long as Germany holds quite strong leverage over Europe, markets will be scared.”

Two-Tier Plan

In an interview with Der Spiegel magazine, German Finance Minister Wolfgang Schaeuble said he has a two-tier plan to make holders of euro-area government bonds liable for potential losses in a future crisis.

In the first phase, any euro-region country that is struggling to avoid insolvency would be forced to apply austerity measures and bonds maturing in this period would be extended, Schaeuble is cited as saying.

Should the fiscal steps in the first instance fail to reduce the risk of insolvency, second-phase measures would apply in which buyers of new bonds would be forced to accept cuts in redemptions, Der Spiegel cited him as saying.

Portuguese 10-year bonds fell, widening the yield spread to similar-maturity benchmark German bunds to as much as 444 basis points, or 4.44 percentage points, according to Bloomberg generic data.

Portugal plans to sell as much as 1.25 billion euros of debt maturing in 2016 and 2020 on Nov. 10.

Portuguese Funding

“It looks as though there is some concession building in Portugal ahead of the auctions,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London.

Portugal has completed “more than 93 percent” of this year’s funding requirements and this week’s auctions will be the last this year, Alberto Soares, president of the nation’s debt agency, said today. “We have been intensifying efforts to diversify our investor base,” said Soares, speaking from Lisbon with Andrea Catherwood on Bloomberg Television’s “The Pulse.”

German bonds have returned 8.6 percent this year, compared with an 8.9 percent gain for U.S. Treasuries, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greek debt has lost 18 percent, Irish securities lost 9.9 percent, while Portuguese bonds lost 7.9 percent, the indexes show.

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