independent

Saturday 19 April 2014

Irish government bonds stable amid latest euro crisis

IRISH government bonds have so far shrugged off the latest euro crisis, with prices remarkably stable last week when borrowing costs soared across the rest of the euro area.

Going into the weekend, "five-year yields" -- the interest investors demand for holding government bonds over five years -- were 4.97pc, almost the same as the 4.83pc investors are demanding to lend to Spain or 4.7pc to lend to Italy.

It's a dramatic turnaround compared with last year when, at one stage, borrowing costs were three times higher for Ireland.

The sharp rise in borrowing costs for Spain and Italy last week has re-awakened fears that one or both of the two major economies could be locked out of the bond markets, and ultimately forced into a bailout.

In contrast, Irish government bonds ended the week almost unchanged, boosting hopes that the "Irish story" has definitively decoupled from the wider euro crisis.

If true, it would massively boost the chances of a return to borrowing in the bond markets later in the year, although only if the wider euro crisis can be contained.

Concern

This week, the big concern is whether Spain can tap the bond market at a sustainable price on Thursday, when it is due to sell bonds, after the yield investors demanded to hold its 10-year bonds hit 6pc in late trading Friday.

It's not much lower than Ireland would pay to borrow, even though this country is locked out of the markets. Long-term borrowing costs for Spain were below 5pc in March.

The crisis in Spain was the big story last week but traders said the relative stability of Irish government debt was one of the most striking features of the week.

"The view seems to be that Ireland is totally immune from the current crisis," said Brian Barry of Investec in London.

"People see riots in Greece and strikes in Spain and Italy and they don't see that in Ireland; it makes a difference."

However, Mr Barry said resistance to the household charge had registered with investors abroad as a possible indicator that the perceived success of austerity here could be reaching its limit.

In Dublin, bond trader Ryan McGrath said Irish bond prices were stable last week in part because Ireland wasn't the focus for most people in the markets.

"Volumes of trade were very light and Ireland is under the radar for now," he said.

Meanwhile, central bankers and economic policymakers from around the world will flock to Washington today as the IMF holds its annual spring conference.

IMF officials will present their analysis on the European crisis countries, including Ireland, on Friday.

Irish Independent

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