EU support eases cost of bonds

THE cost of Irish bonds eased significantly yesterday, following reassurances from EU leaders that lenders would not suffer any losses on the monies lent to eurozone countries.

On Thursday the cost of Irish 10- year bonds soared to 9.25% – a new record – as investors feared they would suffer serious losses if Ireland defaulted on its debts.

Yields on Irish 10-year Government bonds fell from their record highs to 8.18% by mid-afternoon yesterday. The gap between Irish and German bond rates, which went to over 6% earlier in the week, fell almost 1% and eased back to 5.68%.

The substantial shift in sentiment followed the release of a statement at the Group of 20 summit in Seoul yesterday by the finance ministers of the European Union’s five largest economies, France, Germany, Italy, Spain and Britain, pledging support to help Ireland out of its current crisis.

Fears of an Irish debt default intensified this week as the cost of borrowing to the State hit new highs.

Comments by leading economist Morgan Kelly of UCD, who wrote on Monday that Ireland was bankrupt and should approach the IMF for help, added to the gloom.

Rumours circulated on Wednesday that the economy was on the brink of collapse and that the Government was about to call in the IMF, but the crisis looks to have been averted, in the short term at least.

Further pressure came on Thursday when Joseph Stiglitz, former World Bank chief economist, said the situation facing Ireland was ‘dismal’ and there was little chance of it getting out of the mess off its own bat.

Finance Minister Brian Lenihan stressed the course of action being followed by the Government was correct and fully supported by international organisations. “Ireland is following the correct course of action in relation to its budgetary policies; no questions have been raised about that by European authorities,” he said.

Experts warn that if the cost of borrowing to the State stays at 8% or higher, it will make it very difficult for us to survive without help from the EU and the IMF.

Irish banks are under severe pressure and markets fear they will suffer sharp losses in their loans to both AIB and Bank of Ireland should they be undermined by further large-scale losses on residential mortgages.

Mr Kelly warned that the cost of mortgage bad debts could add a further €20 billion to the bank bail-out already standing at €50bn, placing a huge debt burden on taxpayers for years to come.

Mr Lenihan rejected those claims, saying he was satisfied that the losses identified by the financial regulator and the Central Bank took into account any losses that will arise from the bad debt linked to mortgages still to be written off by the beleaguered banks.