The Irish 10-year sovereign bond yield on Monday closed at a record high of
7.87%, since the euro was launched in 1999. Meanwhile, also on Monday, NCB
Stockbrokers warned that a Sword of Damocles hangs over Ireland.
European commissioner for economic and monetary affairs Olli Rehn told a news conference
in Dublin last night that there should be cross-party consensus
on the economic challenges facing Ireland.
“I find it very important for Ireland and for its people in
the first place that a broad cross-party consensus could develop
on the necessary measures of fiscal consolidation and structural
“That’s the best way to avoid any further costs for the
people and overcome the crisis sooner rather than later.”
The best way for Europe to support Ireland was to “endorse
convincing measures by the Irish Government and parliament . . .
and that’s why I’m here today and tomorrow in Dublin”.
In relation to structural reforms, he said: “I would
actually prefer to first listen to Brian Lenihan.” It was
important that there were reforms in the labour market: “It is a
work in progress.”
Bank of America Merrill Lynch said on Monday that when Ireland returns to the bond
markets, it will “most likely” face lower borrowing costs.
Credit-default swaps on Irish debt rose Monday and the costs
of annual premiums for 5-year default insurance on €10m worth of
Irish debt rose 606 basis (6.06%) to €606,000, according to data
The die was cast when it took a 2
year period of slow motion to put cost figures on the Anglo bailout
and then only because the bond markets started to sell Irish bonds
The current pattern is similar to earlier in the year when the focus
was on Greece.
Now that the Government have ramped up the fiscal adjustment and
the international media have been carrying negative stories for
months, it looks as if it will be nigh impossible to lure the
Jeannie back into the bottle.
Why would bond yields return to below 5% in early 2011?
The fear of default has already been germinating for months and
if the Cowen government tries to stagger on from week to week from
January, what value will its assurances be?
A new government very soon, with an aura of credibility, is the
likely the only chance to prevent a return to foreign control on
Asked about negative perceptions of the Irish economy abroad,
Commissioner Rehn said that “it’s always essential that the product is right
and then you can do good marketing”.
NCB Stockbrokers' economist Brain Devine commented in a report issued on
"If Ireland is going to be able to issue in the funding markets then a
number of things need to happen:
1) A credible, conservative and well marketed Budget will have to be delivered
by the Minister for Finance (not sufficient as of yet).
2) Risk aversion towards the periphery more generally will need to subside
(little evidence to date), and
3) Continued evidence that the economy is stabilising as seen in this month’s
NCB PMIs, the Live Register data and the tax figures.
A number of primary dealers in Irish bonds have released pieces over the last
couple of days saying they believed it was likely that Ireland would need to tap
the EFSF (EU/IMF bailout fund) in the coming months. When your sales force
doesn’t believe it can drum up sufficient demand for Irish bonds at feasible
rates it gives an indication of sentiment out there. It is increasingly looking
like the EFSF is the most likely scenario.
If there is not a dramatic change in sentiment we actually believe that it would
be a positive for both the Irish economy and the bond market were Ireland to ask
for the EFSF. Plans would be laid down in black and white and worries about
interest costs would subside as they would be largely known. People and
corporations like to make decisions in a stable world.
Crucially it would enable
the country to focus on correcting the deficit, regaining competitiveness and
promoting its virtues – highly educated, English speaking, productive work force
with world-class companies and a pro-business environment. Key of course in this
view is that the 12.5% corporation tax rate would not be lost. The EFSF is there
to help a country in 'difficulty' not cause it further problems."
Devine said the Department of Finance's latest
forecasts of growth of an average of 2.75% over the period 2011-2014 - - 1.75%
GDP growth in 2011; 3.25% in 2012; 3% in 2013 and 2.75% in 2014 - -
are at the upper range of forecasts and they have generally been perceived as
being too optimistic by the market.
The Sword of Damocles over Ireland (pdf)