Cost for State to borrow sinks to almost zero on ‘Lagarde effect’

The cost for the Irish State for any long-term borrowing is fast approaching zero as markets reacted to the nomination of Christine Lagarde to head up the ECB.

Cost for State to borrow sinks to almost zero on ‘Lagarde effect’

The cost for the Irish State for any long-term borrowing is fast approaching zero as markets reacted to the nomination of Christine Lagarde to head up the ECB.

Across Europe, government bond yields tumbled as the “surprise” nomination of the boss of the IMF to succeed Mario Draghi increased the chances the central bank would cut interest rates and increase stimulus for the slowing eurozone economy, Dermot O’Leary, chief economist at Goodbody said.

The implied cost investors charge the State for new borrowing for 10 years hit an all-time low of 0.07% after sliding by seven basis points on the day.

It comes less than nine years after Ireland was locked out of the bond markets and when faced with prohibitively expensive rates of over 6% it was forced to accept a €64bn bailout from the troika of the IMF, EU, and ECB.

The “Lagarde effect” on debt-laden Italy was even more dramatic — its cost of borrowing for 10 years slid by a huge 25 basis points to 1.6%, while the yield on the German bond fell further into negative territory, to minus 0.39%, which means that investors effectively are subsidising the German government’s new borrowings.

Owen Callan, senior analyst at Investec Ireland, said that markets were betting that Ms Largarde would be every bit as dovish as Mr Draghi by pumping even more stimulus into Europe’s economies.

Because the IMF chief is a politician —- she was previously a French finance minister —- and not a banker, markets also perceived Ms Lagarde at the ECB would keep adding to stimulus for much longer.

Mr Callan said that speculation surrounds the ECB cutting its deposit rate and not its other main rates, which could mean that Irish tracker mortgage holders whose home loan rates are tied to other key ECB rates may not automatically benefit if the ECB were to cut only its deposit rate in the coming months.

Mr O’Leary at Goodbody said any deposit rate cut would be “bad news for sure for savers”, who are already facing meager returns on their deposits.

Nonetheless, he said any move by the ECB to cut rates would in time be passed on to benefit other home loan borrowers.

Appointing a person for her political background rather than for her banking expertise is “positive for maintaining the euro as a project” should the eurozone be hit by another crisis hit, Mr O’Leary said. Global stock markets were also cheered by the nomination.

Low bond yields in Europe and the expectation of further interest rate cuts by central banks worldwide helped push global stock market indices as the benchmark US S&P 500 hit another record high.

Traders greeted the decision by sinking German 10-year bund yields to record lows, lowering Italian two-year yields back into negative territory for the first time in over a year.

The yield on 10-year UK gilts fell four basis points to 0.68%, which left it below the Bank of England’s main policy rate for the first time in a decade. US Treasury yields slumped to their lowest since late 2016.

“We have already seen some weak data in recent weeks, so that is the backdrop,” said Elwin de Groot, head of macro strategy at Rabobank.

“And now [we] have Christine Lagarde as the likely successor of Mr Draghi at the ECB, which for the market says that the dovish policies will continue,” the analyst said.

Investors continued to seek out the safe haven of bonds due to concerns of slowing global growth after data showed Britain’s economy apparently shrank in the second quarter.

Speaking at the Oireachtas Budgetary Oversight Committee, Finance Minister Paschal Donohoe again ruled out a second budget this year should Britain crash out of the EU at the end of October.

Asked about Tory Party contender Jeremy Hunt’s pledge to cut UK corporation tax to 12.5%, he said it would be up to Ireland to show its competitiveness if a new British leader were to cut the key tax rate.

On health spending, he said the Government needed “to avoid” overrun in health spending later this year.

And he said he was confident the 2019 plans for Vat revenues would be met this year and he would detail carbon tax plans at the budget in early October.

Additional reporting Reuters

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