Friday 20 April 2018

Markets see Ireland as a better punt than Spain

Italian Prime Minister Mario Monti. Photo: Reuters
Italian Prime Minister Mario Monti. Photo: Reuters
Brendan Keenan

Brendan Keenan

GOVERNMENT borrowing costs remained below those of Spain yesterday, as both Dublin and Madrid prepare to face the bond markets today.

Market prices showed investors willing to lend to Ireland for 9 years at just under 6pc, while the rate for Spain was 6.3pc, and 5.75pc for Italy.

Positive reaction to last week's EU summit -- especially the changes to bank rescues -- has seen the yield on 9-year Irish government loans fall below 6pc for the first time since late 2010.

At the depth of the eurozone crisis this time last year, yields hit 15pc. They had settled just below 7pc before last week's EU deal. Analysts say the present premium over Spain may not last. Traders were caught out by the scale of the banking agreement and the switch towards Irish bonds may have been overdone.

While too much should not be made of the yield figures, with the Government not borrowing on the market, the chances of it being able to return to commercial borrowing later this year had improved, they said.


Sentiment will also be helped by an expected quarter point cut in interest rates from the European Central Bank today. A further cut, bringing the official rate to 0.75pc, is expected, partly as a result of the summit agreement.

With half of all Irish mortgages 'tracking' the ECB rate, any cut brings an immediate benefit to disposable incomes, as well as other benefits to the economy.

Today, the National Treasury Management Agency (NTMA) dips its toe in the market for the first time since the 2010 bailout; borrowing €500 million to be repaid in October.

Since bailout funds are available to make the repayment, there is little risk to lenders, but the yield they demand will be closely watched.

"For Ireland to be able to borrow for longer periods, we will need to see the details of the summit agreement," said Dermot O'Leary, chief economist at Goodbody Stockbrokers.

"Before Friday, I did not think they would be able to do longer term borrowing, but the odds on it happening, even by September, have shortened considerably."

Existing government loans fall due for repayment at different dates. Relatively little is due in 2017, which may persuade the NTMA to try to borrow five-year money from a syndicate of banks in a few months' time, if conditions seem favourable.

However, another bailout may still be needed, with the country having to replace an existing €8bn loan due for payment in January, and government borrowing next year forecast to be €14bn.

There was little further fall in bond yields yesterday, as Italian prime minister Mario Monti confirmed that Italy's budget deficit this year would be worse than forecast at 2pc of GDP, rather than 1.3pc.

He was speaking after talks with German Chancellor Angela Merkel, which followed reported differences between them at the recent summit.

Mr Monti tried to repair any damage, telling a leading German newspaper that he supported Dr Merkel's conditions for any mutual eurozone borrowing through eurobonds.

"We need a partial mutualisation of debt, but also more central control of national budgets," he told the 'Frankfurter Allgemeine Zeitung'.

"Without proper control, it would be irresponsible to burden others with a share of your own debt," he said. "Germany and Italy take the same line on this and are prepared to surrender national sovereignty."

"Things have steadied since yesterday," said Cathal O'Leary, bond analyst at NCB Stockbrokers. "There was a bit of an increase in Spanish spreads over Ireland, but markets are probably reacting to the bonds which Spain is offering tomorrow."

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