Lisbon Yes vote may cut cost of loans

MOODY’S Investor Service said the ratification of the Lisbon Treaty could help reduce the cost of Irish borrowing.

The prospects of cheaper debt for the state was forecast also by Danske Bank at a recent Dublin seminar. Five-year credit default swaps (CDS) on Irish government debt contracted to 130.5 basis points from 138.5 bps on Friday as investors became more positive on Ireland.

By late Friday 10-year Irish government bond yield spread over German Bunds narrowed by 6 basis points since the European settlement close on Friday to 159 bps, according to Reuters.

By midday yesterday the Irish bond spread was back up at 166 bps, however, and remained the highest-yielding in the eurozone, ahead of Slovak 10-year debt at 138 bps.

Reports that the Irish authorities were planning to issue a 15-year bond in a move designed to pre-fund next year’s budget wiped out Friday’s improvement in the cost of borrowing for Ireland.

According to Danske, for most countries the cost of borrowing relative to Germany is back to the levels seen a year ago, but for Greece, Ireland and Austria, relative funding costs have increased.

After the NAMA details were announced, the spread on Irish bonds fell to as low as 140bp, but market conditions, not NAMA, were the most likely reason for the sharp dip, said one analyst.

Overall while there may be some rise in the relative cost of borrowing for Ireland, Danske said it still expects the cost of funding for the Irish exchequer should continue to improve relative to Germany and other top rated countries in the period ahead.

With the ECB likely to raise the cost of borrowing next year, the cost of borrowing will go up for all countries, but the increase “will be less severe provided Ireland’s improving credit rating continues to hold”, said Colin Cunningham, head of Danske Markets, Dublin.