NTMA to proceed with sale of €1.5bn debt

THE National Treasury Management Agency is determined to press ahead with the sale of €1.5 billion in fresh Government debt next Tuesday, despite interest rates on Government debt hitting record highs yesterday.

Finance Minister Brian Lenihan and the International Monetary Fund moved yesterday to sooth investor fears that Ireland’s sovereign debt crisis is deepening, after a newspaper report on the possibility of an IMF bailout sent investors running for cover.

The Department of Finance said there is “no truth in a rumour” that the Government may ask for IMF intervention and said this was based on a “local misinterpretation of a research report”.

Finance Minister Brian Lenihan said the “slight extension” seen in the country’s bond spreads is “normal” before a bond auction.

“There is a slight extension of bond spreads because there is an auction next week and that is the normal trend,” Mr Lenihan said.

Asked about the Barclays Capital report yesterday that Ireland may need external aid at some point if conditions worsen, Mr Lenihan told reporters: “What it said was that the Government was taking the right steps at the right time.”

Mr Lenihan said the Barclay’s report pointed out that the Government has no difficulty in funding itself, but it did correctly signal that we must be extremely careful in how we proceed.

The International Monetary Fund said yesterday it does not foresee its financial assistance being needed for Ireland and praised authorities’ policy efforts to prop up the banking system.

“As we have said before, we do not envision that IMF financing will be needed,” an IMF spokesperson told Reuters.

The Irish 10-year bond yield climbed to highs around 6.5%, driving the yield premium that investors demand over German Bunds up to 4.1%, up 31 basis point on the day and a euro lifetime high.

The Irish credit default swap, a gauge of the cost of insuring the sovereign’s debt against default within five years, hit a record high of 425 basis points, about 38 bps up on the day, according to CDS monitor Markit.

This means it costs €425,000 a year to protect €10m of Irish Government debt from default for five years.

Davy Stockbrokers yesterday issued a research note entitled “Reports of Ireland’s debt greatly exaggerated; solvency and liquidity concerns misplaced” in which it states: “Concerns have increased that the ultimate cost of re-capitalising the banking system, combined with weak public finances, will result in a default by the Irish Government.

“However, given our estimates of these costs (even under stressed scenarios), together with gradual underlying improvements in the public finances, we believe that this is a very unreasonable conclusion.”

The increase in the cost of Government borrowing comes against a background where investors are paying record-high premiums to insure against default on European sovereign bonds relative to corporate notes as governments struggle to reduce fiscal deficits while companies repair balance sheets.

Davy said Ireland still faces many challenges, one of which is to communicate the reality of its stabilisation efforts to a sceptical audience. “The Government has already pre-funded this year’s Exchequer requirements and part of next year’s. Recent sovereign issues in peripheral markets suggest that continued funding will not be a problem,” Davy argues.

The brokerage says Irish banks face funding maturities of €26bn this month. “We believe that only a portion of this (€8-12bn) will have to be funded in the open markets,” Davy added.


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