Wednesday 26 July 2017

Bond yields hit new high as concerns over defaults grow

Donal O'Donovan

Donal O'Donovan

BOND yields for Portugal, Ireland and Greece hit euro era highs yet again last night. It came after ratings agency Fitch said the new ESM bailout mechanism "heightens rather than diminishes" market fears of default by one or more of the three countries.

It comes a day after rival ratings agency Standard & Poor's (S&P) cut its ratings for Portugal and Greece due to the same fear, S&P will wait for today's stress test results before deciding whether to cut Irish government debt ratings.

European Commission spokesman Amadeu Altafaj said yesterday that Standard & Poor's was wrong to cut the ratings.

"We don't share that assessment," commission spokesman Amadeu Altafaj told reporters in Brussels. "We have our own assessment, and it's not the one of the agency."

Surge

The latest surge in the yield, or cost of borrowing for the weakest economies in the euro zone, pushed the yield on Irish 10 year bonds to 10pc last night, Portugal's 10 year bond yield was close to 8pc.

It means the three countries remain frozen out of the private sector debt market with no realistic prospect of a return to normal borrowing before 2013.

Fitch also said that the deal agreed at last week's European leaders' summit hurt the prospects for countries like Ireland securing affordable market funding.

Prices bear out the belief that hopes of accessing the markets have now became remote for the three distressed peripheral borrowers. However, Italy and Spain have definitively shrugged off association with the three PIG economies.

A year ago the difference in borrowing costs over 10 years between Italy and Portugal was just 0.25pc. The difference is now a staggering 4pc.

Italy sold a five-year government bond this week at yield of 1.66pc, cheaper than the 2.21pc it paid just two months ago and 8.5pc cheaper than Irish two- year bond yields.

Spain's cost of borrowing has also fallen since the latest round of the crisis kicked off earlier this month. As Portugal has moved inexorably towards needing a bailout Spain's cost of borrowing over 10 years fell from 5.5pc on march 10 to less than 5.2pc today.

The outperformance of Italy and Spain appears to vindicate the decision of European leaders to focus averting a future crisis with the introduction of the ESM, instead of trying to help Portugal avoid a rescue.

Fitch said the new mechanism that will come into force in 2013 does provide the basis for effective resolution over the longer-term, even if it hurts Ireland and a small group of other countries in the short. Portugal is still resisting being sucked into the bailout mechanism. Yesterday, the country's Secretary of State for Treasury and Finance Carlos Costa Pina said his country can meet "debt redemption commitments scheduled for 2011".

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