Investor fears see Irish bonds rise close to record spread

IRISH 10-year bond yields yesterday climbed within 50 basis points of the 454 basis-point record spread, set on September 29, relative to similar German bunds.

The cost of bonds widened as investors feared the severity of the cuts will undermine growth and make it harder to get the deficit back to 3% of GDP by end 2014.

The ESRI has warned of the dangers of a slash and burn approach, calling for the deadline to be extended to 2016.

Investors fear the sharp fiscal correction, which they have been demanding, will result in even deeper tax losses to the exchequer and plunge the country into an economic black hole.

Alan McQuaid, chief economist, Bloxham Stockbrokers, said in a note yesterday it was highly questionable whether the four-year deadline could be achieved.

“We still think that it will be a tall order for Ireland to meet the 2014 deadline given the fragility of both the domestic/global economy,” he said.

The stance taken by the EU Commission and the visit next week by the EU Economic and Monetary Affairs Commissioner Olli Rehn to brief the social partners, shows how seriously it is taking the four-year time frame.

“Quite simply, Ireland must deliver,” he said.

To achieve that Ireland will have to generate economic growth and that stands a better chance of being delivered “if tax increases are kept to a minimum,” he said.

“The immediate objective is to deliver a credible four-year plan that the markets buy into,” he said.

Because of the €50bn bank bailout the budget deficit is set to hit 32% in 2010 before falling back to 11% next year.

Many fear the huge task of getting the deficit to 3% by end 2014 could tip the economy into a protracted recession, or a period of low growth where employment could stay above 10%.

Despite the high cost of funding Bank of Ireland, the country’s largest bank, paid a premium to sell the first public benchmark bond by an Irish Government-guaranteed lender in six months.

It offered €750m of two-and-a-half year notes priced to yield 420 basis points more than the benchmark mid-swap rate, the equivalent to 482 basis points over German government debt, according to data compiled by Bloomberg.

“It is undoubtedly expensive and pricing like this wouldn’t be sustainable in the long-run,” said Sebastian Orsi, an analyst with Merrion Capital in Dublin.

“But it will show if an Irish bank can get access to the market and hopefully that, in turn, will lead to more favourable pricing in future.

“The level of demand will be interesting to see,” he said.