Anglo blamed as cost of debt doubles
Published 13/08/2010 | 05:00
A SHOCK doubling in the cost of some government borrowing yesterday has been blamed on uncertainty about the final cost of bailing out Anglo Irish Bank.
But the government agency in charge of the national debt is determined to go ahead with a more significant fundraising next Tuesday -- despite yesterday's worrying rise.
The monthly borrowing of up to €1.5bn will now be watched closely next week to see if there has been a real fall in Ireland's credit rating.
The shock came when lenders demanded an average rate of almost 2.5pc on short-term loans due for repayment in February. This compared with a rate of just under 1.4pc for similar loans only three weeks ago.
The European Central Bank bought Irish government loans yesterday, according to reports on the financial news service Bloomberg, in what will be seen as a move aimed at easing market strains.
Yesterday's expensive fund-raising came a day after news that yet more money might have to go into Anglo Irish Bank than had previously been estimated.
The governor of the Central Bank, Patrick Honohan, has described the rates now being demanded for government borrowing as "ridiculous" and said they "are a setback for our hopes of a narrowing to reflect the fiscal credibility of the country".
A Central Bank source said yesterday that Dr Honohan stood by his words, despite yesterday's sharp rise in debt yields.
Borrowing costs for Ireland and Portugal have been rising steadily, after a short-lived fall when EU stress tests of banks were published last month.
The more important 10-year loans are costing more than 5pc -- an annual rate which is about as fast as the economy can possibly be expected to grow.
Lenders are worried about budget deficits in both countries and about budgets and banking costs in Ireland.
They fear EU statisticians will insist that the 10-year bill for rescuing Anglo is all recorded on this year's government accounts -- producing a deficit of more than 20pc of output (GDP).
Growing political opposition to more spending cuts will also raise questions in the minds of international banks that lend to the Government.
"There is a danger that markets get spooked and demand rates well in excess of 5pc at next week's fundraising," said Brian Lucey, associate professor of finance at Trinity College Business School.
He added: "Anything much over 5pc is dangerous territory."
Markets are also worried about €80bn in loans which Irish banks are due to repay and replace with fresh borrowings in the next few months
The new debt will be guaranteed by the State, but no one can see when the State might be free of these liabilities.
"One wouldn't read too much into what happens in quiet August days," said Rossa White, economist at Davy Research.
He added: "But there will be no major progress until we get EU decisions on the Anglo restructuring plan and move beyond that."
Nick Stamenkovic, a strategist at RIA Capital Markets in Edinburgh, said: "Irish debt is currently in the firing line because of concern over the fate of the country's banks and its implication on government finances.
"Investors are going to demand higher risk premiums."
The National Treasury Management Agency believes that cancelling next Tuesday's monthly fundraising would be seen as a panic measure.
It will therefore auction four-year loans and 10-year loans at the best interest rate it can get.