Backing for Budget as spread on Irish bonds narrows
Published 11/12/2009 | 05:00
INTERNATIONAL investors gave a vote of confidence to Budget 2010 yesterday with a surge of support for Irish government bonds.
The support meant the cost of insuring against a default on Irish debt actually fell, dropping by 0.1pc relative to key German bonds, regarded as the strongest in the eurozone.
The support saw Irish credit default swap spreads moving in the opposite direction to those of Greece, which had been severely downgraded this week.
Negative sentiment towards Greek bonds had also contaminated the market for Irish and Spanish bonds, sending debt costs higher for both countries.
Economists said the reaction of international investors was crucial to the future of the country and marked a positive turn of events for the economy.
And one economist even went as far as to suggest the favourable reaction may have helped avert a €700m spike in the cost of servicing the national debt in a full year.
According to Simon Barry, an economist at Ulster Bank in Dublin, the 'spread' between Irish and German bonds narrowed because of a favourable view of the actions taken by Finance Minister Brian Lenihan.
"Overall the markets are very volatile, mainly because of the news coming out of Greece, and Ireland remains vulnerable to market developments there.
"But overall the interpretation has been favourable as there has been an improvement in the fundamental position in the minds of international investors. The minister grappled with some thorny issues and inevitably there is some credit due for that."
However, he cautioned that further tough action was needed.
"Around three-quarters of our deficit is structural in nature which implies that further tough action is inevitable. It will still be very important to show delivery against the plans. The size and nature of our budgetary problem means further consolidation, further corrective action will be needed in 2011 and 2012.
"In terms of people's perceptions, the minister needed to deliver against the stated plan and the €4bn mix was an improvement on the original presentation in that it was delivered through spending cuts rather than tax, which basically contributed nothing.
In the view of some bond holders, he said, Ireland was now ahead of the game -- rather than simply planning what to do, we are now in the implementation phase.
The rewards for this should come in lowering debt service costs. With the spreads between Irish and German bonds narrowing by 10 basis points yesterday afternoon, the cost of raising debt will be lower.
This point was taken up by KBS Bank economist Austin Hughes, who said it was critical that Mr Lenihan continued on the path he had started down. Any departure from this could not only push up our debt service costs, but also raise the cost of debt to business and households.
"Any attempt by Ireland to move away from a path of speedy and substantial adjustment at this stage would be taken very badly by financial markets, as developments in Greece in recent days graphically illustrate," he said.
He added that it would then be harder and more expensive to fund borrowing, possibly adding €700m to our annual interest bill.