Nervous markets drive Irish debt to new high of 6.78pc

Donal O'Donovan and Laura Noonan

September 29 2010 04:45 AM

THE cost of Irish government borrowing touched a new high yesterday, with experts warning the surge could continue unless someone steps in to restore Ireland's battered credibility.

Yields on ten-year government bonds soared to a record 6.78pc yesterday, after the bearish Standard & Poor's added its voice to a raft of ratings agency warnings that spooked an already jittery market.

S&P, which famously predicted the cost of rescuing Anglo could be as much as €35bn, yesterday warned the cost could in fact top that estimate and potentially trigger a downgrade of Ireland's credit rating.

And while financial sources say the ratings agencies are only "underscoring" what the market has already done, Padhraic Garvey, head of developed markets debt at ING Group, last night warned that higher yields look set to continue rather than abate.

"Right now the path of least resistance is for the yield to get wide," he said. "The yield has been grinding out since August, it passed 6pc and it looks like we are heading for 7pc."

The Government has been hoping tomorrow's announcement on the likely cost of Anglo's bailout will curb soaring yields, but market sources last night expressed scepticism about that prospect.

Magic bullet

"We're looking for a magic bullet from one announcement," said Donal O'Mahony, global strategist at Davy Capital markets. "Some would doubt whether one single piece of information from an Irish voice about one particular issue will be enough in itself.

"We're in the middle of a spiral that has no obvious circuit breaker."

Other sources agree that government announcements can no longer be made with an assumption they will be believed.

One source pointed out that while Finance Minister Brian Lenihan had insisted "until he's blue in the face" that banks would honour senior bonds, the market was now pricing in an 80pc probability of Anglo defaulting on its senior debt.

An analyst in London agreed credibility was scarce: "The rumour is that the Government will impose something on Anglo senior debt holders, even though the Government had insisted it would not."

Some are hoping Brussels or another significant external force will feature alongside tomorrow night's Anglo announcement, giving the market an "aggregate response" to Ireland's financial crisis.

ING's Mr Garvey said a sell-off by bondholders rather than activity from speculators was driving Irish bond yields.