Germany Plays Bad Cop as Irish Chase Bank Debt Help: Euro Credit

Germany Plays Bad Cop as Irish Chase Bank Debt Help
Ireland experienced the costliest banking crisis among advanced economies since the Great Depression, according to the International Monetary Fund. Photographer: Aidan Crawley/Bloomberg

Economic sovereignty is coming at a price for Ireland as borrowing costs in the bond market exceed the interest on bailout loans and Germany signals resistance to helping reduce the bill for rescuing its banks.

Faced with repaying maturing bonds in 18 months, the country’s debt agency last week sold 1 billion euros ($1.25 billion) of amortizing bonds with a weighted yield of 5.91 percent. Last month, it re-entered long-term international credit markets for the first time in almost two years, selling 4.2 billion euros of bonds with an average yield of about 6 percent. Ireland pays about 3.8 percent for its bailout funds.

Ireland experienced the costliest banking crisis among advanced economies since the Great Depression, according to the International Monetary Fund. As it seeks help from Germany and other euro partners to refinance the 64 billion-euro cost of saving its financial system, doubts are emerging about the scope of the agreement that may be on offer.

“The key goal of the recent efforts has been to finance the January 2014 bond redemption, the so-called funding cliff,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin. “The next goal is to reduce market yields to a more sustainable level, which would be assisted by a favorable deal” on the nation’s bank debt, he said.

The government originally faced repaying 11.9 billion euros. Through securities sales and debt swaps this year, the debt agency has cut that to about 2.4 billion euros.

Yields Fall

The yield on the benchmark October 2020 bond stood at 5.94 percent yesterday. It has dropped 119 basis points from 7.13 percent just before the June gathering of euro-region leaders, which unexpectedly opened the door to recapitalizing banks directly through the European Stability Mechanism.

Yet German Finance Minister Wolfgang Schaeuble said in an interview in the Irish Times newspaper last week that more help for Ireland may send the wrong signal to investors.

“We will have to avoid to generate a headline like ‘Aid programme for Ireland Topped Up’ because then investors in California or Shanghai might not understand that this top-up is a reward for Ireland, but might be tempted to conclude that what was agreed two years ago for Ireland was not enough,” Schaeuble told the Irish Times in the article published on Aug. 24.

“We cannot do anything that generates new uncertainty on the financial markets and lose trust which Ireland is just at the point of winning back,” he said.

Silence Please

Irish Prime Minister Enda Kenny hailed the decision to break the link between the state and banks as a seismic shift in policy that might ease the burden on the Irish taxpayer. After a real-estate bubble burst in 2008, Ireland now controls five of its six biggest domestic banks. Dublin-based Permanent TSB Group Holdings Plc this week posted a net loss of 566 million euros for the first half in part because of mortgage arrears.

“The German government would like to see silence, hard work and no complaints from Ireland at this stage,” said Christian Schulz, a London-based senior economist at Berenberg Bank, which is headquartered in Hamburg. “The German political attitude is that Ireland is a country that can deal with its own problems, is rebuilding market confidence and should not dampen this by embarking by any restructurings of any kind, at least not ahead of the German election.”

Germans cast ballots next year and voters are getting increasingly weary of being Europe’s paymaster.

German Votes

A poll published on Aug. 29 showed German Chancellor Angela Merkel’s governing Christian Democratic bloc nor a possible Social Democrat-Green alliance would have enough support to form a government were elections held now.

“The aim is to delay any resolution on this as much as possible,” said Schulz. “Keep hopes high and delay, to see where Ireland is towards the end of its existing program.”

Irish government bonds with a maturity of at least 10 years are the second-best performing in the euro region over the past year after Portugal, returning 33 percent, according to indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. Anticipation of a deal on Irish bank debt had spurred some of that recent performance and Schaeuble’s comments suggest it may take longer, O’Leary at Goodbody said.

“It is like giving a patient treatment and refusing to top-up this treatment despite continued pain and uncertainty as to whether it will actually pull through,” said O’Leary.

European finance ministers will meet Sept. 14-15 in Cyprus to review a first set of European Commission proposals to forge a euro-region banking union. Agreement is needed before any direct recapitalization of banks, or in Ireland’s case, retrospective recapitalization, can take place.

‘Bad Cop’

The comments “are probably simply part of the ‘bad cop’ role that Schaeuble likes to play when negotiating with the likes of Ireland and Greece,” said Owen Callan, a Dublin-based fixed-income analyst at Danske Bank A/S, a primary dealer in Irish government debt. “We would not read too much into them.”

The need for a deal has been reinforced by the fragile nature of the Irish recovery, necessary to ensure the nation’s debt is sustainable. While the economy grew last year for the first time since 2007, that was driven almost entirely by exports and companies such as Google Inc. and Intel Corp.

The European Commission lowered its 2013 growth forecast for Ireland to 1.4 percent from 1.9 percent. Economic confidence in the euro area fell to a three-year low in August, a commission report yesterday showed.

“The success of Ireland’s re-entry to markets in recent weeks will be judged on whether Irish bond yields continue to fall to below 5 percent,” said Conall Mac Coille, an economist at Dublin securities firm Davy. “Failure by EU politicians to deliver tangible measures to help debt sustainability poses a clear risk to market sentiment towards Ireland.”

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