Irish bonds now look like the riskiest in all Europe
Sunday February 01 2009
THE widening gap between Irish and German bond yields is a sure sign that the financial markets have lost faith in the ability of the Irish Government to manage our economic affairs.
With this country now paying three per cent more than Germany to borrow money, investors are betting that the Irish economic downturn is going to get much worse before it gets better.
For the first eight years after Ireland joined the euro, the gap between Irish and German bond yields never went much above 20 basis points (0.2 per cent). This is the sort of gap one would expect between two bond markets, one large and liquid, the other small and relatively illiquid, in the same currency area.
As soon as the credit crunch first struck in August 2007, the yield gap began to widen, stretching to 50 basis points by early 2008. It continued to widen throughout 2008 hitting 150 basis points by the end of last year.
However, it is what has happened since the beginning of 2009 which should really put the fear of God into the Department of Finance and the National Treasury Management Agency. In just one week following the Government's decision to nationalise Anglo Irish Bank, the yield gap widened by a massive 100 basis points.
By Friday Irish five-year bonds were yielding 4.73 per cent, 2.27 per cent more than comparable German bonds while the yield on Irish 10-year bonds at 5.65 per cent is a massive 2.39 per cent more than what the German government is paying for 10-year money.
By demanding that the Irish Government pays between one-and-three-quarters and almost twice as much for money as Germany the bond markets are clearly sending a signal.
In the short-term the widening yield gap is a vote of no-confidence in the Government's handling of Ireland's twin fiscal and banking crises. Longer-term investors are pricing in the risk of Ireland being forced to leave the euro altogether.
This year the Government will have to borrow almost €20bn to fund its operations. This means that the national debt, which stood at around €37bn for most of the Nineties and this decade is now rising rapidly, hitting €50bn by the end of last year.
And it's still rising with the Government having borrowed a further €6bn last month. By the end of this year the national debt will be touching €70bn, having almost doubled in just two years.
And that's before the cost of bailing out the banks is factored in.
Last September's unconditional deposit guarantee exposed the Irish Government to a potential liability of €480bn. Since then, the Government has nationalised Anglo Irish (which had gross "assets" of €102bn at the end of September) and has promised to inject up to €6bn of fresh capital into AIB and Bank of Ireland.
Add it all up and it's not difficult to see the Irish national debt doubling, -- perhaps even trebling -- from its end-2008 level.
No wonder the bond markets are worried. With the cost of insuring Irish Government debt against now the most expensive of any eurozone country, the gap between Irish and German bond yields looks set to widen even further.
- Dan White
