Ireland’s cost of borrowing hits new high

THE fallout from the banking crisis pushed Ireland’s cost of borrowing to new highs yesterday as the interest rate on 10-year bonds rose to 3.89% above German rates.

Investors continue to demand higher risk premium on money they lend to Ireland, Greece, and Spain due to the perceived risk they could default on their debts.

As a result, the cost of 10-year Irish bonds hit new historic highs, peaking at 3.89% above 10-year German bond rates. The 10-year yield was 6.03% by late afternoon.

Taoiseach Brian Cowen moved to play down concern the gap between how much Ireland and Germany pay for their borrowing.

“There has been turbulence generally in international bond markets for some time and you have seen ebbs and flows.

“Ireland is regarded as having a government that is implementing the plans that it has agreed. It does indicate that there has been a more fragile international environment that we have been operating against in recent months,” he said.

An article in yesterday’s Wall Street Journal, casting doubt on last month’s European bank stress tests, spooked investors, forcing up the cost of borrowing for Ireland, Greece and Spain.

Responding to the surge in negative investor sentiment, Mr Cowen said there has been uncertainty in bond markets for some time. He stressed Ireland’s efforts to deal with its fiscal deficit and the banking crisis had been well received internationally.

Davy Research in a note yesterday said Ireland was well positioned to meet its current funding needs and said renewed concerns about Ireland’s sovereign debt and the €26bn of bank term funding maturing this September “have led Irish banks to under perform and government spreads to widen”.

The size of the funding problem “is overblown” due to pre-funding carried out earlier this year and other action taken by the state, it said.

Davy unwittingly added fuel to the fire when it said any extension of the bank guarantee would impact on earnings of AIB and Bank of Ireland in 2011. For that reason it changed its rating to “neutral” for the two banks.

That shift in the rating hit the share of both banks and by late afternoon AIB was down 4.7% to 77 cents and Bank of Ireland was off 6.3% at 72 cents. Davy said they were assuming the guarantee would be extended, the cost of which “significantly weighs on our 2011 numbers” for the two banks.

US-based international consultancy group, Merrill Lynch, said that Anglo Irish Bank was not a “black hole” for the Government.

It agreed with the Government’s own assessment that the cost of rescuing Anglo is likely to peak at €25bn.

“We believe concerns about the ultimate cost of the bailout are overdone,” it said.

Others disagree. Rating agency Standard & Poor’s put the cost at €35bn last week and suggested the bank was undermining Ireland’s credit rating, which it downgraded to AA-.

Fine Gael finance spokesman Michael Noonan said that figure was about right and called for an immediate winding up of the bank to limit taxpayers’ exposure to the nationalised bank.