Monday 23 January 2017

New EU bailout rules leave country at markets' mercy

Published 24/03/2011 | 05:00

THE yield on Ireland's 10-year government bonds hit 10pc for the first time since joining the euro, as parts of the grand bargain to save the eurozone appeared to unravel

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Portugal, whose government was on the brink of collapse last night, and Greece, which is now expected to default sooner rather than later, also saw bond yields surge.

The dramatic sell-off of Irish, Greek and Portuguese government bonds continued for a second day yesterday, as the European Parliament ratified new bailout rules that will force default on rescued countries from 2013.

Surging borrowing costs for the three countries marks a definitive change in market attitudes since new European Stability Fund (ESM) rules were agreed this week. ESM bailout rules mean losses can be forced on lenders to countries that have to access a bailout.

Market reaction to ESM appears to undermine the effort of European leaders meeting today to agree measures to end the debt crisis with a "grand bargain".

Weaker

However, Padhraic Garvey, at ING Bank in the Netherlands said this week markets separated the weaker countries from the rest, with most eurozone countries actually boosted.

"This looks bad if you're in Dublin, but not so bad from Madrid, or Berlin," he told the Irish Independent.

That's because the threat of contagion from the three weakest to the rest of the eurozone appears to be over and bailout funds are now large enough to cope with the three remaining troublespots. Spain's cost of borrowing dropped yesterday, while Slovenia comfortably sold a 15-year bond deal.

"Greece, Ireland and Portugal are now on their own in terms of the markets. It's an awful place," said Mr Garvey.

The yield on the benchmark 10-year Irish government bonds hit 10pc yesterday for the first time since the launch of the euro.

Two-year and 10-year Irish bonds were being sold at almost the same 9.9pc yield, flattening the yield curve, a signal of extreme risk aversion.

Greek 10-year bond yields were 12.4pc yesterday with Portugal's 10-year yield passing 7.5pc and the country's two-year bond yield not far behind at 6.5pc.

Portugal's government looked set to fall last night after failing to pass austerity measures through parliament.

"The likelihood the Portuguese government will fall this week looks high," said Nicola Mai, an economist at JPMorgan in a note.

The country is expected to seek a bailout within days.

The markets are now even less willing to lend to Ireland than back in November, scotching hopes the IMF/EU bailout deal provided a stepping stone back to self-reliance.

Yesterday, Standard & Poor's warned that Ireland's annual deficit could double to €38bn under a worst case scenario of five straight years of 4pc economic contraction.

However, Mr Garvey said Ireland could be better placed to get back to the markets thanks to rising exports, but this would only be the case if the banking crisis could be resolved.

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