Greek exit fear drives Irish bond debt off low

The cost of borrowing for the Irish state has tripled since April, but the Greek crisis is hurting others such as Spain and Portugal much more, a leading analyst has said.

Donal O’Mahony, global strategist at Davy Stockbrokers said the Irish 10-year bond has risen from an all-time record low of 0.60% in April to 1.80% yesterday as markets price in increased risk that Greece will leave the eurozone.

However, the interest rates on the same-dated government bonds in Portugal have soared from 1.55% in April to 3.20%, while Spanish 10-year debt has risen from 1.20% to 2.35% in the same period.

Yields on German bunds have dropped to 0.78% from 1.06% late last week, but remain well above their record low of 0.05% reached in April when the so-called bond bubble in Europe was drawing to a spectacular end.

“Now in the last few days the Greek fright has exposed Ireland’s one Achilles heel —nearly 73% of the marketable non-official debt is owned by foreigners,” said Mr O’Mahony.

“So whenever you get market shocks or repositions, Ireland becomes vulnerable to risks in the markets because it does not have that shock absorber.

“Whereas if you compare that with Germany or France, 70% of their market is domestically owned. So it is quite the reverse.”

However, even a tripling in the costs of Irish borrowing on the markets will have little impact on the Government and the National Treasury Management Agency because the average cost of Ireland’s existing debt is at 4%, he said.

That means that any time the NTMA refinances debt lower than the 4% rate, that the average cost of Irish debt falls.

This “gives a triple benefit of strong growth, a primary surplus, and falling debt service costs. All those [factors] are allowing Ireland to see 3 to 4 percentage points to come off its debt-to-GDP ratio every year”, said Mr O’Mahony.

The Central Bank yesterday said that government bond yields, despite the Greek uncertainty, remained low.