Business Irish

Monday 20 November 2017

Government to use cash pile to avoid record borrowing rates

Dara Doyle

Finance Minister Brian Lenihan will use a €20bn cash pile to stave off a Greek-style rescue, as the Government taps the funds to avoid paying record rates to borrow.

The Government canceled next week’s debt auction and another scheduled for November after the yield on 10-year Irish bonds rose to a record 454 basis points above benchmark German bunds.

Finance Minister Brian Lenihan has said the country is “fully funded” to the middle of 2011. Ireland has €4.4bn of bonds maturing next year, compared with about €27bn in Greece.

“Twenty billion euros and the lack of redemptions buys the Government some time,” said Jens Peter Soerensen, an analyst at Danske Bank A/S, Denmark’s biggest bank, who recommends investors buy Irish Treasury bills.

“At some point, investors are going to look at 2pc on a German bund or 6pc on an Irish bond, and say let’s buy Ireland.”

Lenihan plans to travel to New York this week to convince investors that Ireland will fix its financial system without bankrupting the State.

The Government’s bill to bail out the banks may reach €50bn, stoking concern that it would become the first nation after Greece to seek aid and draw from the €750bn rescue fund set up by the European Union and International Monetary Fund in May.

The extra yield investors demand for holding 10-year Irish bonds rather than German bunds fell to 423 basis points from the September 29 high of 454 basis points.

The slide occurred after the Government canceled plans to raise as much as €3bn in bond sales.

Euro peripherals

Only Greece’s yield premium over German bunds is wider than Ireland’s among the so-called euro peripherals. It was 754 basis points on October 8, compared with Portugal’s 399 basis points, Spain’s 174 basis points and Italy’s 149 basis points.

Mr Lenihan will lay out his plan next month to narrow the budget deficit to 3pc of the gross domestic product by the end of 2014.

The fiscal deficit is set to increase to 32pc of GDP this year with the Government’s pledge to inject funds into lenders led by Anglo Irish Bank.

The Government has pumped €22.9bn into Anglo since the bank was seized in January 2009 as bad loans soared with the collapse of the property market.

The lender may need an extra €6.4bn of capital, plus another €5bn in the event of unexpected losses. Mr Lenihan said last month the Government will also take a majority stake in Allied Irish Bank.

The Government needs spending cuts and tax increases of about €4bn in 2011, Christopher Pryce, a director at Fitch Ratings in London, said in a recent interview with Bloomberg Television.

‘Impressing the markets’

“That is probably sufficient to maintain confidence in Ireland,” Pryce said. “It is a matter of impressing the markets with their determination.”

Austerity measures aimed at reducing the budget deficit are “the right thing to do,” said Daniel Leigh, an IMF economist.

“There’s no alternative right now,” Leigh said. “There’s a lot of pressure from the markets.”

Credit-default swaps linked to Irish debt ended last week at 430 basis points, down 17 basis points from October 7, according to CMA prices. Swaps for Greece were at 727 basis points, making them the most expensive in Europe.

The National Treasury Management Agency will repay 11pc of total borrowings in 2011, according to data compiled by Bloomberg. That compares with about 20pc for Spain, 18pc for Portugal and 17.5pc for Italy.

Yield gap

“They are taking a gamble that the budget will deliver and get spreads down,” said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin.

“If that doesn’t happen, maybe you skip a few auctions at the beginning of the year. But at some point, you have to go to the market. If you can’t go to the market, then you have to look at outside aid.”

Greece covered €8.5bn of bond redemptions in May after receiving €20bn from euro-region allies and the IMF, the first portion of a three-year aid package.

“The huge redemptions coming up for Greece forced the issue in May,” said Anke Richter, a strategist at London-based brokerage Conduit Capital Markets. “The bottom line with Ireland is that it’s funded till next summer.”

Lenihan has time to get borrowing costs down by convincing investors that Ireland will pay its bills, said Soerensen of Danske Bank. The yield on the 10-year Irish bond is 6.48pc, up from 4.5pc six months ago.

“The Government has a significant problem” unless yields fall, said Soerensen of Danske Bank, which owns National Irish Bank. “But it isn’t under any immediate pressure to raise cash, and even in the unlikely event that the Government had to call upon IMF/EU aid, investors would still get paid. There isn’t going to be a default.”


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