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News : Irish Economy Last Updated: Nov 10, 2010 - 6:38:53 AM

Irish 10-year sovereign bond yield closes at new record; Sword of Damocles hangs over Ireland
By Michael Hennigan, Founder and Editor of Finfacts
Nov 9, 2010 - 5:43:51 AM

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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 reforms.

“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 provider CMA.

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 last August.

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 Dublin's Merrion Street!

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 Monday:

"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)

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