Monday 23 October 2017

Brexit already hitting us as borrowing costs increase

Greencore chief executive Patrick Coveney
Greencore chief executive Patrick Coveney

Colm Kelpie and Gavin McLoughlin

The premium Ireland would pay to borrow compared with Eurozone benchmark Germany hit its highest level in nearly a year on Tuesday as investors fretted about the economic impact on Dublin of a potential British exit from the European Union.

The gap between Irish and German 10-year bond yields widened to 88 basis points in early trade, the highest since July 2015, according to Tradeweb.

The crucial referendum takes place next week, with recent polls showing a lead for the 'leave' camp, bookmakers slashing the odds on a Brexit and the UK's biggest-selling newspaper urging readers to quit the bloc.

"Ireland in the last few days has been the clear under-performer as markets penalise the country's strong trade links with the UK," ING rates strategist Martin van Vliet said.

Aside from the economic impact of Brexit, Northern Ireland, security of energy supplies and freedom of movement might also fall into doubt. The gap or spread between Irish and German bond yields, which serve as a measure of their likely borrowing costs, has risen 23 bps this week alone. That is more than for any other Eurozone country bar junk-rated Portugal and Greece, which have been shunned as investors take cover in safer assets.

Cantor Fitzgerald, one of Ireland's main bond dealers, said the Irish spread to Germany could widen a further 20 bps in the event of Brexit. Investors have become so concerned Britons will vote to leave that 10-year German yields turned negative on Tuesday, while Berlin yesterday sold 10-year debt at a record low average yield of 0.01pc at auction.

Meanwhile, Greencore chief executive Patrick Coveney thinks Britain will vote to leave the European Union next week.

Mr Coveney said it would be "very very bad" for the Irish, European and world economies if Britons voted for a Brexit.

"My personal judgement is that that's what they're going to do... I don't think it's like Scotland where the simple shock value enabled the Scottish people to come back from the precipice," he said.

Mr Coveney said he thought there would be an outflow of resources from the UK on "a pretty massive scale" if Brexit happens.

He said Brexit would be negative but not catastrophic for Greencore, adding that the company's costs would rise due to probable weakness in sterling and its revenues would probably fall due to reduced British demand.

He said restrictions on the free movement of people would have a modestly negative effect on the business.

Mr Coveney, a brother of Housing Minister Simon Coveney, was speaking at a Dublin Chamber of Commerce event yesterday morning.

"The vast majority of Greencore's business takes place in the UK," said.-

Mr Coveney said he didn't think Brexit would lead to a flow of foreign direct investment into Ireland.

"I just don't think there's any evidence for that. The FDI investment from America that's chosen to come to Ireland to go into Europe is here already. There are not big flows of incremental further investment that I'm aware of." (Additional reporting Reuters)

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