Tuesday 27 June 2017

Borrowing costs hit 10pc as euro crisis deepens

French President Nicolas Sarkozy, right, speaks with Spain’s Prime Minister Jose Luis Rodriguez Zapatero at the EU summit in Brussels yesterday
French President Nicolas Sarkozy, right, speaks with Spain’s Prime Minister Jose Luis Rodriguez Zapatero at the EU summit in Brussels yesterday
Donal O'Donovan

Donal O'Donovan

IRELAND'S cost of borrowing hit 10pc for the second successive day, the highest since the creation of the euro. It came as the dramatic collapse of Portugal's government blew any hope of ending the euro crisis off the agenda at this weekend's European leaders' summit.

While Ireland was being battered by the markets, most eyes were on Portugal. Analysts said its latest political crisis make it inevitable the country will need a bailout deal, possibly by this weekend.

Portugal has major bond repayments falling due in April, and has been priced out of the bond markets.

The yield, or cost of borrowing, on Portugal's 10-year government debt hit 7.6pc yesterday, the highest level since the launch of the euro.

Two-year Portuguese bond yields hit a euro era high of 6.7pc.

Bondholders insuring Portuguese bonds against default saw insurance costs surge to 5.5pc of face value per year, up from 4.97pc on Monday. It means it costs €550,000 per year to insure €10m of bonds.

It costs 6.03pc per year for similar insurance on Irish government bonds.

Yields on Ireland's 10-year and two-year government debt were both back above 10pc at times yesterday. That matching the euro era highs recorded on Wednesday, though yields ended the day slightly better at around 9.9pc.

Spain was generally included in with Greece, Ireland and Portugal, the 'PIGS' when analysts discussed the group of most vulnerable euro countries at the time of the Irish bailout.

But Spain has successfully moved away from that group in terms of investor sentiment since the start of the year.

Spanish banks and a state-backed electricity fund were able to borrow in the bond markets this week, in spite of the wider crisis. Spain's borrowing costs fell this week, as Portugal's skyrocketed.

Elizabeth Afseth, of Evolution Securities, said the key difference is that Spain's debt to GDP ration, a critical measure of risk, is not expected to reach 100pc. The country is also thought to be able to absorb even big real estate losses in its banking sector.

Analysts think Spanish banks could need around €50bn to recover from those losses. The government thinks it will be half that amount, but either figure is relatively small compared to the size of the economy.

The 'spread', or difference between Portuguese and German 10-year bond yields hit a new high of 6.71pc -- 'spread' is seen as a key measure of risk.

The spread of Irish bonds over top AAA-rated European countries, including Germany, also surged.

It caused clearing house LCH Clearnet to demand a 38pc cash deposit for deals involving Irish bonds, yesterday. The normal deposit is 3pc. Clearing houses facilitate bond trading deals.

Last November, LCH raised the extra margin for Irish bond deals three times before the bailout deal was announced.

It eventually reached 45pc, but was reduced to 30pc in December in reaction to calmer markets.

Irish Independent

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