Cost of bonds for state eases

THE cost of borrowing to the state has eased since the Government put the cost of the banking bailout of €50 billion into the market on Thursday.

The interest rate on 10-year bonds has fallen from 6.74% earlier this week to 6.33%, which means the spread against German bonds narrowed to 400 basis points or 4% from 429bp.

The Irish authorities produced a significant raft of announcements on Thursday to give some clarity on the state’s total financial support for the banking sector, said Dan McLaughlin, Bank of Ireland’s chief economist.

At this point bonds are rallying relative to German securities as concerns ease that political opposition will hamper efforts to control the public finances, after Portugal and Spain this week announced deficit-cutting measures.

Those budget announcements provide evidence that market pressure is still bearing fruit, analysts said.

While pressure has eased on the cost of borrowing to the state, Irish banks had a mixed day.

Following Thursday’s shock disclosures that AIB will need an extra €3bn in capital funding, the bank’s share price lost a further 4 cents to 47 cents yesterday – a fall of over 7%.

In 2007 AIB shares hit a high of €23.95 before the markets realised they were thriving on an unsustainable property bubble. Their high this year was €1.79.

Bank of Ireland, which was declared not to have any further funding issues by the regulator, gained 2 cents to 64c, a gain of 2.42%.

As the cost of bonds eased, economists warn that Ireland faces very tough challenges ahead and its progress on the budget front will be very closely monitored.

Colm McCarthy, a UCD economist and chair of An Bord Snip, said the Government is facing the prospect of both spending cuts and raising taxes over the coming years as part of its budget strategy.

The Government could expand the tax base by including water and residential property taxes and the author of the Bord Snip report said it detailed a wide range of cost savings that should be given further consideration.

He told RTÉ that large capital projects such as Metro North risk being deferred at this stage, given the huge pressure on the Government to get its deficit back into line.

Alan McQuaid, chief economist at Bloxham Stockbrokers, said in a note yesterday that the issue for us has moved from the banks to the economy.

“A recurring and far more serious issue is the underlying deficit which, even after deducting the bank burden, is expected to be an eye-watering 12% of GDP this year, four times the EU limit and the worst shortfall in the union.

“The problem that Ireland faces is markets may be less forgiving in the future if the underlying problems turn out to be even worse than the Government has now admitted,” he warned.


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