Friday 2 December 2016

Bond markets wobble over fears of major election upset

Published 24/02/2016 | 02:30

Over the last week, the spread between Ireland's debt costs and those for Germany and other so-called core eurozone borrowers has risen. Photo: Jason Clarke Photography
Over the last week, the spread between Ireland's debt costs and those for Germany and other so-called core eurozone borrowers has risen. Photo: Jason Clarke Photography

Irish borrowing costs have ticked up in recent days as the possibility of a so-called Brexit and political risks at home have focused international investors' attention on potential risks to the economy here.

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Borrowing costs increased yesterday, despite strong jobs numbers released by the Central Statistics Office. A combination of pre-election political uncertainty, the risk Britain will leave the European Union and growing nervousness among investors is being blamed for a noticeable increase in Irish borrowing costs in recent days.

Over the last week, the gap or spread between Ireland's debt costs and those for Germany and other so-called core eurozone borrowers has risen.

The premium bond investors would charge Ireland to borrow for 10 years has increased from 0.11pc more than Belgium's debt costs four weeks ago, to 0.35pc more.

The spread, or extra interest, bondholders demand for lending to Ireland versus Germany has increased to 0.84pc, from around half a percent last year.

The price the Government here pays to borrow on the bond market had dropped to an all time low just four weeks ago, and crucially had edged close to the levels lenders charge super safe borrowers like Germany and France. The wider turmoil in global markets since then has pushed up debt costs for Ireland and all but the safest of bets.

"Political risk dominates the domestic backdrop," according to bond trader Ryan McGrath of Cantor Fitzgerald.

The fragmenting political landscape has increased the possibility of a hung Dáil, while there is also now an outside scenario of a Left-leaning rainbow coalition, despite Sinn Féin's failure to gain momentum during the campaign, he wrote in a note to investors. That would echo the situations in Portugal and Spain, where government debt costs shot up after recent elections in both countries failed to elect clear ruling majorities.

Donal O'Mahony, of Davy Stockbrokers, said Irish debt costs remain modest despite the recent weakness, because policy risks are seen as low.

"The moves (in debt costs) are not dramatic, and will remain modest and contained unless and until you get policy (as opposed to political) uncertainty in Ireland," he said.

With fiscal and banking policy hemmed in by European rules, any radical policy shift is unlikely unless there is a major election upset, which is not expected given the combined polling for Fine Gael, Labour and Fianna Fáil, he said.

The wider context for rising debt costs is the coming UK referendum and volatility that has churned through markets from China and the Middle East to London in recent weeks, Mr O'Mahony said.

Irish Independent

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