Ireland hit with 5.5pc bond rate as markets worsen
Ireland was forced to issue some bonds at over 5.5pc yesterday as conditions in the European bond market remained highly challenging.
The National Treasury Management Agency raised €1.5bn at the latest bond auction and has now raised 90pc of the State's 2010 borrowing requirement which stands at €20bn.
However, the 10-year bond was issued at a yield of 5.53pc, while a six-year bond was issued at 4.49pc. The yield, or risk premium, leaves Ireland facing some of the highest borrowing costs in the eurozone.
The NTMA yesterday dismissed suggestions that a downgrade this week by Moody's had an impact on the pricing. It also reminded markets it had €20bn in cash to fall back on.
"Allowing for cash balances, including the €5bn of long-term funding carried over from last year, the Exchequer is fully funded into the second quarter of 2011," said an NTMA statement.
It said demand for some of the bonds was almost 3.6 times the amount of debt on offer.
The auction brings the total funds raised from the bond market in 2010 to €16.5bn.
"When account is taken of the €1.6bn raised in the domestic retail savings market the total long-term funding raised so far this year amounts to €18.1bn," said the NTMA. The next auction of Irish debt is on August 17.
Meanwhile, the NTMA decision to hold large amounts of cash is costing almost €1bn a year, but is a price worth paying, senior ESRI economist John Fitzgerald said yesterday.
The agency is holding around €20bn in short-term money which gives a low rate of interest. "That money is borrowed at around 5.5pc, so the difference represents a cost of around €1bn," Mr Fitzgerald said at the launch of the ESRI's new medium-term analysis.
"This is not a criticism of the NTMA. There have been severe liquidity problems in the bond market this year. Thanks to this cash, there is no need for large scale borrowing until next year.
"But we are paying a substantial prices for the security of not having to go to the markets. It is a kind of insurance policy. In current conditions, I think it is a price worth paying."
In Hungary yesterday, the Stoxx Europe 600 Index erased earlier gains as the Hungarian government raised 10 billion forint (€34.5m) less than was planned at a sale of treasury bills. This ignited concern that European governments will struggle to finance their budget deficits as growth slows.