Sunday 8 December 2019

Borrowing costs fall as hopes of tackling deficit rise

Government's banking package appears to have halted sell-offs

Emmet Oliver

Ireland's borrowing costs have dropped to their lowest level since May on hopes no further bank capital injections will be needed and the Government and opposition parties are planning to tackle the deficit on an agreed basis.

Irish bond yields (10-year) were trading at 5.8pc yesterday and the gap or 'spread' over German rates was at the lowest level since May.

However, Ireland continues to have the second highest borrowing rates in the eurozone after Greece and is still trailing Portugal, where yields have been hovering around 5.4pc.

The Government's banking package announced in late September, including severe haircuts on AIB loans going to NAMA, appears to have halted Irish bond sell-offs, at least temporarily.

However, the influence of the European Central Bank in stabilising prices is not known. An investor roadshow by Finance Minister Brian Lenihan, is believed to have been well received. Some US buyers who have shunned Irish securities over recent months are reported to have returned to the market. Ireland is holding no more bond auctions this year, with all eyes on December 7 Budget.

The so-called 'peripheral' countries are all benefiting from a market view that their deficits can be cut without choking off growth, but economists remain split over whether austerity will simply end up triggering a double dip recession.

Portugal's spread over Germany narrowed significantly yesterday as the EU described its cuts as a "bold step''.

"There's the opinion that the Portugese government will finally reach an accord on the budget," said Glenn Marci, a fixed-income strategist at DZ Bank in Frankfurt. "Everybody in the country is clear that if they fail to do so, or fail to comply with the market expectations of a solid budget, then they will be in heavy trouble. Then spreads would widen."

Portugal's plan includes cuts to the public wage bill and increases to some taxes to trim the budget shortfall. Greece's near default led to a surge in borrowing costs for other indebted countries earlier this year.

"It's a bold and significant step to stabilise public finances," EU Commissioner Olli Rehn told reporters before a meeting of EU finance ministers in Luxembourg yesterday.


In recent days, Portuguese, Greek and Irish bond yields have posted their biggest drops versus German bunds since May, amid growing confidence that the nations will succeed in cutting their deficits and data that showed lenders in the region are less dependent on ECB funding.

Portuguese government bonds have returned 3.39pc this month so far, cutting their loss in 2010 to 4.34pc, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Spanish bonds made 1.07pc during October, compared with a 0.4pc loss by German bonds.

Bunds rose earlier as stock markets declined amid speculation a report today would show business confidence stayed near a 21-month low, fuelling concern that Europe's economic recovery wasn't yet secure.

The yield on the bund was little changed at 2.38pc.

It reached 2.383pc on October 15, the highest since September 23.

Irish Independent

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