Friday 26 April 2019

Default fears as Ireland's debt costs continue to rise

Countries learning the 'hard way why sustainable public finances are necessary'

Pat Boyle

THE cost of servicing the national debt continues to rise with investors becoming increasingly concerned at the possibility Ireland will default on its soaring debt pile.

And as government debt continues to surge, the slowing euro area economy has fuelled speculation that ECB lending rates will fall again. This rate speculation yesterday helped drive the key three-month inter-bank lending rate or Euribor to a record low.

With the Government, through the National Treasury Management Agency set to borrow some €15bn this year and take the total national debt towards the €70bn mark, investors yesterday drove up the cost of products used to insure against a default on Irish borrowing.

The cost of insuring against a default in Irish Government debt has now risen by 0.95pc in the past week with analysts lumping Ireland in with other European countries deemed to be a concern for investors.

Traders said yesterday that Ireland led a surge to record levels in the cost of insuring against a default on government bonds on concern the high price of bank bailouts and economic stimulus packages will strain public finances.

Higher debt default costs ultimately feed through to higher debt costs as investors look for better returns on riskier bonds or government debt.

A debt default by several euro-region countries has become more likely as nations struggle to finance the cost of bank bailouts and rescue packages, ING Groep analyst Carsten Brzeski said.

Risk

Investors are most concerned about Ireland and Greece, and may start assessing Portugal, Spain and Italy, Mr Brzeski, a senior economist at ING in Brussels, wrote yesterday.

"These countries have been hit hard by the financial crisis," Mr Brzeski wrote. "The risk of a sovereign default seems to be more reasonable. Many euro-zone countries will now finally get to learn the hard way why sustainable public finances are necessary." The outlook on Ireland's AAA credit rating was cut to "negative" from "stable" last month by Standard & Poor's and Moody's Investors Service. Greece had its credit rating lowered one step to A- by S&P, the lowest among the 16 euro nations.

Credit-default swaps on Irish government bonds jumped 95 basis points to a record 355 basis points or 3.55pc, the most of any euro area country. This rate compares to 265 basis points on products insuring against a default by the Greeks.

Part of the problem is the government bank guarantee scheme -- the debts held by Irish financial institutions are more than 11 times the size of the economy, according to BNP Paribas SA. "The biggest budgetary offenders are facing a difficult future," Mr Brzeski said.

International investors are concerned not just by the domestic picture but the entire euro-region economy which contracted by 1.5pc or the most in, at least, 13 years in the fourth quarter, compounding pressure on the European Central Bank to reduce interest rates to an all-time low next month.

The ECB will cut rates by at least half a point next month and may have to consider something even more radical. The euro interbank-offered rate, or Euribor, for three-month loans fell to a record low of 1.94pc on speculation the ECB will reduce its key rate next month. (Additional reporting Bloomberg)

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