Cost of state borrowing falling

INVESTORS are taking a more favourable view of the Irish economy due to Government action in the budget, resulting in a fall in the cost of state borrowing.

That trend is set to continue and it is predicted the extra yield investors demand to hold Irish bonds could fall by 0.5% within weeks.

Commerzbank AG said yesterday that the tough measures Ireland has taken and its ability to cope on its own with its budgetary problems should see the yield differences fall further.

The spread could fall by between 80 and 70 basis points in two months after Ireland slashed spending.

The creation of NAMA has also helped Ireland’s international profile, said David Schnautz, an interest-rate strategist at Commerzbank in Frankfurt.

Germany’s European Affairs Minister Werner Hoyer said his government believes Ireland will pull through its economic crisis without needing an EU bailout.

He said the economic transformation in this country and the budgetary cuts taken in recent years had convinced European observers of the country’s prospects of recovery.

“Of course everybody is concerned... but there is a fundamental belief in what the Irish are doing,” he said.

Ireland was not in the same category as Greece and the German government admires the ability of this country to take unpopular decisions without disruptive public protests.

Irish 10-year bonds yielded 154 basis points more than similar-maturity German bunds yesterday, down from 283 basis points on March 19, 2009, which was the biggest gap between the two rates since before the euro’s debut in 1999.

The equivalent Greek spread with Germany widened to 396 basis points last month and was at 229 basis points yesterday.

“Ireland is our favourite pick among the peripherals because they have already implemented their austerity measures and don’t need to rely on any political decisions in the European Union,” Mr Schnautz said.

Reforms “are moving rather smoothly and in the right direction. This should give investors comfort with the spreads still rather attractive,” he said.

Irish bonds of all maturities have made investors 1.8% this year, compared with losses of 2.3% for Greek debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Commenting on the current debt crisis recently Dermot O’Leary, economist Goodbody Stockbrokers, also forecast an improving outlook for Ireland.

“We would not be surprised if this changes in the very near future,” he said.