ECB buying of Irish bonds 'vital' support
Massive buying by the ECB is the only hope for reversing the freefall of Irish government bonds, a bond expert warned last night. But fiscal discipline remains the long-term issue.
The yield on 10-year government bonds hit a high of 7.77pc yesterday. Irish bonds have fallen for eight straight days. Bonds dipped below 80pc of face value. The risk premium over German bonds increased by a quarter of a percent to 5.27pc.
Gary Jenkins, head of credit at investment bank Evolution Securities, told the Irish Independent that the path of least resistance is now for prices to fall further. "The concern must be that this could spiral out of control," he said.
"ECB buying could stabilise the situation. Other than that it's about Ireland coming up with figures that convince the market, but that is a slower process," Mr Jenkins said.
A pre-Budget announcement by the Government confirming that it will reduce the deficit by €6bn in 2011, as it seeks to implement the deepest cut in the first of a €15bn four-year plan, also failed to move the bond yields yesterday evening.
Irish bonds, along with those of Portugal and Greece, have slumped since German Chancellor Angela Merkel said she favoured haircuts for bondholders if countries have to be bailed out by the Eurozone.
The rapid fall in bond prices has raised fears the ECB is no longer supporting the market by acting as the buyer of last resort. The ECB has not reported buying government bonds for three weeks.
Dow Jones newswire said the head of the ECB Jean Claude Trichet did confirm yesterday that the bond-buying programme is still in place. Mr Jenkins said recent purchases had not yet been reported.
The ECB does not comment on individual trades but published weekly totals of the types of debt it has bought.
Yesterday, three traders said the ECB had bought Irish bonds. Traders also reported some buying on Monday, but it has not yet been in big enough sizes to halt the slide.
Mr Jenkins said it is the timing of the German plan that is worrying. "There is nothing wrong with investors taking the pain when things go wrong, investors know that. The problem is holding a debate on the issue in public. It can become self-fulfilling," he said.
While Mr Jenkins agreed that that the pain-sharing plan is behind the latest fall in Irish bond prices he said it is not the primary cause of weakness.
"The underlying cause is that the sovereign has taken on too much debt," Mr Jenkins said.
Until that is under control the country remains at risk of poor market perception.
Mr Trichet gave a cautious welcome to Finance Minister Brian Lenihan's announce ment yesterday of €15bn of cuts over four years to tackle that issue.
"The €15bn is not, in our view, insufficient at the moment I am speaking, but you have to be alert permanently and stand ready to do all what is needed," he said. The government's decision to take the biggest hit in the first year of a four-year plan was crucial.
"My interpretation is this message of the Government, particularly on the frontloading of the programme, is of extreme importance," he said.
He added that it was imperative that the country stick to a deadline to cut the deficit by 2014.The ultimate goal is the 3pc at the end of the period," Mr Trichet added.