Greek jitters makes Irish loans second costliest in EU
RENEWED jitters about Greece's ability to solve its problems had a knock-on effect on both the euro and bonds issued by countries such as Spain and Ireland which have been lumped together by many investors because of their high levels of borrowing.
The premium investors demand to hold Irish, Spanish, Portuguese, Italian and Greek bonds instead of benchmark German bonds rose yesterday on renewed worries about the long-term health of small and heavily indebted countries. The euro fell against the dollar and the pound for the first time in six days.
The yield gap, or spread, on Irish-German securities gap rose four basis points to 143 points yesterday, leaving Ireland with the second highest repayment rates in the eurozone.
The Greek premium jumped 17 basis points to 411, Spanish securities increased four basis points to 76, Portugal rose five basis points to 134 and Italy advanced two to 87 basis points.
The rise suggests Greece may well have to tap a €45bn international bailout agreed last week to convince investors it can avoid a default.
The European Union will provide Greece with €30bn for three years if the nation requests the cash. The International Monetary Fund would provide another €15bn.
"There are concerns that the money will not be available," said Toby Nangle of Baring Investment Services in London. "There are people who are willing to place their own money at risk in anticipation of this thing not going through."
Parliaments in Germany, France and Ireland must vote on whether to contribute their share of the loans. Ireland is set to contribute €500m while Germany is set to shell out €8.5bn. Ireland will pass legislation on Greek aid within the next couple of months, Finance Minister Brian Lenihan said this week.
Some of the world's biggest investors remain sceptical about Greece's ability to solve its problems. Pacific Investment Management, which owns the world's largest bond fund, said this week it was not yet ready to buy Greek bonds.
BlackRock, the world's biggest asset manager, said that donor countries need to demonstrate they could withstand a backlash from their citizens.
"I don't think Greece would go as far as waiting to be seen as failing in the market," Christopher Pryce, a director at Fitch Ratings in London, said on Wednesday. "They would prefer to go to the EU. It could well be a week or two. I don't think they could leave it much longer than that." Fitch cut its rating for Greece two levels on April 9 to BBB-, one rung above junk.
"If legislation fails in one parliament you may find time is running out rather quickly," said David Schnautz, a fixed-income strategist at Commerzbank in London. "You don't have that much time for trial and error."