Saturday 10 December 2016

Market goes from relief to confusion on bailout denial

Rare positive as yield on bonds falls to 8pc despite rumours of emergency funding

Published 13/11/2010 | 05:00

German Chancellor Angela Merkel has taken a leading role in Europe's peripheral sovereign debt crisis with Ireland. REUTERS
German Chancellor Angela Merkel has taken a leading role in Europe's peripheral sovereign debt crisis with Ireland. REUTERS

RELIEF on the bond markets gave way to confusion and conspiracy theory last night after the Government was forced to deny that talks are under way for an EU bailout.

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It came after the yield on Irish government bonds fell to 8pc after hitting 9pc on Thursday. It was the first positive day on the market for Ireland in two weeks.

The day began with leaders of the big eurozone economies, who are attending the G20 summit in South Korea, saying that "burden sharing" under a future EU mechanism would not be applied until after 2013.

They said only bonds issued after the mechanism is in place would be affected. The leaders made it clear funds are available to support Ireland if requested.

The statement in effect confirmed that the European Financial Stability Facility set up in May at the height of the Greek debt crisis is still in place and is unchanged.

That was good news for bondholders who feared a ratcheting up of rhetoric from European leaders in the past two weeks was preparing the way for terms and conditions, including burden sharing, before the current scheme ends in 2013.

The yield on Irish bonds fell sharply on the news and continued to fall through the day. The relief rally pushed up the value of the bonds.

Yields on Portuguese, Spanish and Italian bonds all fell on the same news. It was the first time the cost of borrowing has fallen since German officials warned bondholders that they could face losses under a future EU bailout mechanism.

As the market absorbed the latest news, the rumour mill went into full swing.

A report from news agency Reuters said unnamed officials in Europe had confirmed that Ireland was in talks to receive emergency funding.

Traders said the market was swept by speculation that an €80bn debt relief package is being prepared to help Ireland borrow in 2011.

A Department of Finance spokesman categorically denied the report. "There have been no talks on an application for emergency funding from the European Union," the spokesman said.

Ironically, the rumours were considered positive for bonds and may have added to the rapid fall in yields.

Mystery

With fears of losses if Ireland is bailed out now behind them, the bond market has plenty to gain if their bonds are to be repaid in full with EU money as they fall due.

That makes the vehemence of the Government's denials a mystery to many in the market. They say the country should arrange access to EU funding even if it has no plan to use it.

Brian Barry, of Evolution Securities, said: "It would be prudent for the Government to have the EU backstop in place before it goes back to the market, that would provide confidence to the market."

Some in the market were not convinced the G20 message really changes the long term situation for Ireland. Unicredit analyst Luca Cazzulani said: "The statement at the G20 tries to convince people that only new debt will be affected by risk sharing after 2013.

"But in order to have new debt the country has to first repay all of the existing debt.

"You still have a problem because new debt still has to be issued at a high rate. I'm not convinced this is a final solution."

Irish Independent

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