Market nerves send interest rate on state debt soaring
Published 08/09/2010 | 05:00
A new bout of nerves on financial markets sent the interest rate on Irish government debt to the highest levels since the formation of the euro in 1999.
At one point the yield for investors in Irish government bonds topped the psychological 6pc level, before easing back slightly. The yield on 10-year bonds surged by a quarter of a per cent, leaving a gap of 3.69 percentage points over German bonds.
There was even greater turmoil in the market for short-term loans, with a 0.29pc rise in Irish two-year bonds -- the biggest recorded for any eurozone country yesterday.
In Brussels, Finance Minister Brian Lenihan said the spike in borrowing rates "reflects wider European trends".
He insisted the issue of Ireland tapping the EU stabilisation fund -- for countries having difficulties with borrowing on markets -- had not been raised over the course of the two-day meeting of finance ministers.
"We have not [asked about external help] because the markets have remained open to Ireland throughout the economic crisis," he said.
Mr Lenihan added that the Government was "satisfied" it could identify what the final cost of covering losses at Anglo Irish Bank would be.
"We will need to hold our nerve and identify the precise losses and demonstrate how these losses can be worked out over a period of time," he said.
The minister declined to be drawn on suggestions the European Central Bank (ECB) had stepped in to curb rising yields on Irish debt by buying bonds.
"That's a question for the ECB," he said.
Tomorrow, the National Treasury Management Agency (NTMA) is to auction up to €600m of short-term bonds, repayable over the next six months.
This may give some guide as to whether the bond markets are accurately reflecting the cost of borrowing for the State.
The NTMA is due to have a more significant auction of up to €1.5bn in long-dated bonds on Tuesday week.
So far, there is no indication that this will not take place, but NTMA executives will take soundings among lenders during the next two weeks.
Traders blamed fears about the state of eurozone banks as one reason for the latest flight into safer, low-yielding bonds, and away from those of peripheral eurozone countries.
An article in yesterday's 'Wall Street Journal' said some EU banks understated their holdings of potentially risky government bonds in the recent "stress tests" of 91 of the largest banks.
"Because of the limited nature of most banks' disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice," the newspaper said.
"You have to be an adrenaline junkie to be very active in those markets," Frances Hudson, head of global thematic strategy at Standard Life Investments, told Bloomberg.
"We aren't heavy in any of the peripherals."
Poor figures on German manufacturing orders also added to fears over global growth. Renewed economic weakness could spell trouble for countries wrestling with large budget deficits, such as Greece and Ireland.
"This data warns of weakness in output in the coming period," said Marc Chandler, head of global currency strategy at BBH in New York. (Additional reporting from Bloomberg)