Ireland ‘edging closer to debt default’

AS the cost of bonds hit new highs yesterday a leading economist warned Ireland is edging closer to a debt default than many realise.

Jim Power, chief economist, Friends First, said unless the Government can convince the markets it can service its mounting debt “access to IMF funding is inevitable”.

The state has to convince investors that “Ireland is a safe credit risk” in the next few months or it could be forced to throw itself at the mercy of the IMF by February, he said.

Mr Power was commenting after the cost of Government borrowing continued to hit new highs on the markets yesterday.

The yield on Irish 10-year bonds increased to 7.68% or 768 basis points in market jargon. The cost of borrowing to the state also hit a new record high of 5.18% over what Germany has to pay investors. Several factors continue to drive up the cost of borrowing to the state. Increased political uncertainty has emerged following the resignation of Fianna Fáil TD Jim McDaid which reduces the Government’s slender majority.

That point was highlighted yesterday by Davy Research on the unfolding debt crisis, which requires slashing €6bn off next year’s budget and a further €9bn over the following three years to get the deficit back to 3% by the end of 2014.

The deficit will hit 32% this year as the €50bn cost of the bank bailout is included in the arithmetic.

“Political uncertainty increased considerably with the resignation of Jim McDaid,” which was followed by the announcement the Donegal South-West election would be held this month, the note said.

“The risk that Irish spreads fail to fall substantially by the New Year has grown considerably”, it concluded.

Mr Power added that looking at how the markets have been reacting to the Irish crisis, it is clear that “very fundamental stuff is going on here,” he said.

Markets are nervous that a snap general election could return a new government and that key budget decisions could be delayed for up to “six months after that”, said Mr Power.

The move in the past few days by Germany to make bondholders pay towards any future bailout of a eurozone state has also increased pressure on rates.

Speaking in Brussels yesterday after the ECB held rates at a record 1% low, its president Jean-Claude Trichet said he thought the proposed budget plans from Ireland (not announced at that stage) should help to ease investor concerns about the country’s fiscal health.

“I have no reason to think that observers will be disappointed,” Trichet said.

Nervousness about the state of the banking sector took a further hit yesterday when it emerged holders of subordinated debt in AIB have lost about 30% of their investment in little more than a month as speculation increases they will be forced to share losses at the bank, according to Bloomberg.


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