Government may have one month to stave off bailout
Finance Minister Brian Lenihan may have just one month to stave off an international bailout.
The extra yield that investors demand to hold Irish 10-year bonds over German bunds surged to a record yesterday as Mr Lenihan tries to put together a 2011 budget by December 7 that convinces investors he can get the country’s finances in order.
“The behavior of international bond markets suggests the Government’s various announcements haven’t convinced markets that we are on a credible, stable path,” said Karl Whelan, an economics professor at University College Dublin and a former economist at the Federal Reserve.
“The budget is going to be crucial in determining if we can change that attitude.”
The premium on Irish bonds has doubled since August and is now wider than the spread on Greek debt four days before it sought a European Union-led bailout in April.
That’s putting pressure on Lenihan to cut the deficit and overcome both an economic slump and the rising cost of bailing out the country’s banks.
While the Government doesn’t need to raise money this year, its €20bn cash pile may only last until the middle of 2011.
Lenihan will pave the way for the budget when he publishes a four-year roadmap for cutting the deficit in the next two weeks.
Ireland’s bond premium rose 27 basis points to 467 basis points yesterday. That’s 37 basis points above the level on September 30, when the National Treasury Management Agency canceled debt auctions scheduled for October and November.
“The market seems to be worried that Ireland will have to get support,” said Michiel de Bruin, who oversees about $35bn as head of European government debt at F&C Netherlands in Amsterdam.
“People are worried about how the Government will be able to show that it’s able to anchor the deficit and the debt, and at the same time maintain growth.”
Lenihan aims to narrow the budget gap to 3pc of gross domestic product by 2014 from about 12pc this year. When the costs of the banking rescue are included, this year’s deficit jumps to 32pc of GDP.
Health Minister Mary Harney yesterday offered to pay health workers to leave the Government payroll. In an interview with RTE radio, she said the Government would save €200m a year if 4,000 to 5,000 workers take up an offer of voluntary severance and early retirement.
“A successful re-entry to the market in the New Year is still doable,” said Colm McCarthy, an economist who headed the Government’s spending review group last year. “If investors are convinced and borrowing costs come down, a bailout is far from a foregone conclusion. If not, then it’s touch and go.”
Investors have dumped Irish bonds in the past three months after the Government was forced to pump more money into its banking system.
The administration said on September 30 that the cost of rescuing the country’s lenders may jump to as much as €50bn, or almost one third of GDP. Four weeks later, it said it needs €15bn of savings by 2014 to hit its budget target.
The yield on Ireland’s 10-year bond has risen 217 basis points since August 2, climbing to 7.14pc yesterday.
“There’s a pessimism bubble out there on Ireland right now,” said John McHale, an economics professor at Galway University.
“To break that, the Government’s four-year plan needs to convince investors we won’t need a bailout and we won’t default. It needs to be as detailed as possible and include legislation where possible.”
Credit-default swaps linked to Irish debt were at 498 basis points yesterday, according to CMA prices. The cost of insuring Greek debt for five years was 830 basis points, the most expensive in Europe.
German proposals to put in place a permanent debt-crisis mechanism at EU level are also adding to Ireland’s problems, says Harvinder Sian, a London-based analyst at Royal Bank of Scotland.
While German Chancellor Angela Merkel wants to force bondholders to foot some of the bill of any future bailout of a euro member, some officials argue that could spook investors at a time when countries such as Ireland and Portugal are trying to cut deficits.
“Up to last week, I would have said that Ireland could avoid a bailout by taking the measures needed to reduce the deficit,” said Sian.
“Now, the measures being proposed by Angela Merkel are casting a shadow, not just on Ireland, but across the periphery.”