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Sunday 4 December 2016

Greek default fears mount as Irish bond yields peak

Published 27/05/2011 | 05:00

Former ECB economist Otmar Issing: 'I'm sceptical about Greece'. Photo: Getty Images
Former ECB economist Otmar Issing: 'I'm sceptical about Greece'. Photo: Getty Images

THE yield on 10-year Irish government bonds hit a record high last night, as Greece and the ECB failed to convince the market that Greece can avoid a default. Ireland is seen as next in line if Greece fails.

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Markets punished the euro zone periphery as high profile economists rubbished the idea that austerity measure will see Greece through the crisis.

Fitch Ratings still expects Ireland and Portugal can stabilise their public debt even after bond spreads for the two countries increased.

Spreads at current levels imply a "very sharp jump" in the market's expectation of either a default or a restructuring that would impair creditors' interests, Fitch said yesterday.

"By contrast, Fitch maintains its view that public debt stabilisation can be achieved given strict adherence to fiscal consolidation targets in these two countries," it said.

Nobel prize winning economist Paul Krugman told a conference in Copenhagen that lenders to Ireland and the other high risk borrowers will lose money on their investments.

"It's basically inconceivable that there won't be some significant losses on present value for bondholders" of Greek, Portuguese and Irish debt, said Mr Krugman.

"Spain may be able to tough it out," he said, but it's "extremely" unlikely Greece will be able to honour its debts.

Mr Krugman said there is a 50pc chance Greece will be forced out of the euro.

At the same event the ECB's own former chief economist Otmar Issing agreed that Greece will probably not be able to repay its debt, because it's "insolvent."

As the markets digested that dire assessment, the yield, or cost of borrowing, on Irish government bonds hit 11.07pc. It's the highest since the launch of the euro.

The yield on the equivalent Greek bonds was 16.38pc. Portuguese bond yields remain close to their euro era highs.

Investors piled into the German debt after the prime minister of Luxembourg Jean-Claude Juncker said the Greek crisis could worsen next month.

Mr Juncker said the IMF could refuse to hand over its portion of aid for Greece next month, if the loan conditions are not met.

Credit analyst Gavan Nolan, of Markit, said Mr Junckers comments appeared to be aimed at scaring Greek opposition politicians into backing further austerity.

The immediate effect was to weaken confidence in the country from outside, however. The cost of insuring Greek bonds against default shot up immediately after the comments to just under the all time high.

The IMF downplayed Mr Junckers comments. Its European Director Antonio Borges said a decision on the next tranche of aid for Greece will be made once the review is completed and following the normal procedure. (Additional reporting Bloomberg)

Irish Independent

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