Borrowing cost sets record as yields on debt hit 7.19pc
Market 'spooked' by Germany's plan for tougher regulation
THE cost of Government debt hit a new high yesterday. It comes as figures from Citigroup show Ireland is increasingly relying on its own banks and insurers to fund Government borrowing.
The premium that lenders demand to hold Irish rather than German bonds hit 4.58pc early yesterday. The difference in the cost of borrowing between the two countries, known as the spread, is now at its highest level since the launch of the Euro. The yield on Irish Government debt has hit 7.19pc.
Early chatter on the London markets said a 'Sunday Independent' article by UCD economist Colm McCarthy was partly responsible for the swing.
The article outlined a "scary scenario" if a tough budget is not passed in December, Brian Barry, a credit strategist with Evolution Securities, which advises bond investors, said.
However, Mr Barry said Germany's plans to introduce an EU-wide restructuring regime is more likely to have spooked the market. Germany wants to change the Lisbon Treaty and replace the European Financial Stability Facility with a tougher regime. This includes forcing losses on bondholders if a member has to be bailed out by the EU.
The cost of insuring Irish debt against default rose by nearly a quarter of one percent on Monday. Bondholders are paying almost 5pc of the value of their bonds to insure against potential losses.
Greek debt is seen as the most likely candidate for such a move. Yesterday it cost 8.31pc to insure Greek bonds.
At the current level, borrowing on the markets would prove crippling for the country.
Ireland is due to resume borrowing in January. New research from Citigroup shows domestic lenders will take an increasingly large slice of the debt when it comes.
Citigroup economists used World Bank data to show that the percentage of international lending to the Irish Government fell over the past two years, even as the amount of Irish debt increased.
The share of Irish sovereign debt held by foreign lenders fell from more than 80pc before the crisis to close to 60pc in the first half of this year.
Domestic banks' share increased 20pc over the course of 2010. The same trend was seen in Greece and was even more noticeable in Portugal.
ECB's acceptance of Government bonds as collateral for banks to borrow against is one driver of the trend.
It is also easier for local banks to understand the dynamics of their home markets. International lenders can struggle to understand the politics of national budgets.
However, Brian Barry said banks may be staying closer to home because they believe domestic lenders will be better protected in the event of a sovereign default. That's because a country in default is more likely to try to protect its own banks than outsiders, to ensure liquidity in the domestic economy.