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Friday, September 21, 2012
As Irish bonds extend their rally, the gains for investors may be disguising a different story.
The yield on Ireland’s benchmark 2020 bond fell below 5% yesterday for the first time since the bailout in Nov 2010. The debt is the second-best performing in the euro area this year, trailing only Portugal.
All of the optimism that Ireland can raise money in the markets and avoid a debt restructuring is premature as the nation struggles to emerge from its worst recession in modern history, said Michael Saunders, Citigroup’s head of European economics in London.
"Ireland faces an almost impossible task to get back to fiscal balance," he said, adding a slower economic revival may eventually make Ireland’s debt unsustainable.
Gross domestic product was unchanged in the second quarter from the previous three months of the year, the CSO said yesterday. Analysts had expected a rise of 0.7%. The economy shrank 1.1% from the second quarter last year.
Government bonds with a maturity of at least 10 years returned 31% in the past year, including reinvested interest, indexes tracked by the European Federation of Financial Analysts Societies show. After reducing its budget deficit, the country sold bonds in July, returning to longer-term credit markets for the first time in almost two years.
Benchmark 2020 bonds rose for a third day, pushing the yield to 4.99% in London. "Ireland is making good progress on reform and fiscal measures," said Alberto Gallo, head of European credit research at Royal Bank of Scotland Group in London.
Since 2008, Ireland has made about €25bn, equal to 16% of GDP, of austerity measures. Sustaining the rally depends in part on reigniting growth after the economy shrank 15% since 2008. Saunders forecasts GDP will contract 0.6% this year and grow by the same amount next year.
With growth muted, the Government is pushing for European help to lower the cost of its legacy banking debt. Ireland has pledged or injected €64bn into the financial system, making it the world’s costliest banking rescue since the Great Depression.
"A lot depends on what kind of deal they get on the banks," said Saunders. "Will it significantly reduce the debt level? I’m not sure it will. If they don’t get relief, they are going to find it hard to fund themselves on a sustained basis at a tolerable yield and will be looking at some sort of second bailout programme."
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