Business World

Sunday 19 November 2017

ECB steps in to calm markets as Portuguese bonds hit record high

Donal O'Donovan and Sarah Collins

THE Portuguese government's cost of borrowing hit a record high yesterday, forcing the European Central Bank (ECB) to act. It put the still unresolved debt crisis outside Ireland back at centre stage.

The yield, or cost of borrowing, on Portugal's 10-year bonds hit 7.52pc early yesterday. That is the highest level since the introduction of the euro 12 years ago.

"The problems are still there, they haven't been solved. With no indication that European leaders are closer to an agreement yields will continue to drift higher," said Elizabeth Afseth of Evolution Securities.

The Portuguese yield increased rapidly this week after it passed the 7pc mark on Monday. It comes as investors fear European leaders are no nearer to agreeing a comprehensive deal to end the debt crisis, after a meeting last weekend failed to deliver a plan.

Yesterday, ECB board member Lorenzo Bini Smaghi called for EU rescue funds be used to recapitalise banks, to avoid a repeat of the impact of the Irish bailout.

"We have seen the externalities created by the Irish government's decision to guarantee all Irish bank liabilities in the immediate aftermath of Lehman's failure in 2008," he said.

Smaghi said in a statement that the €440bn European Financial Stability Fund (EFSF) should be given extra firepower to recapitalise banks if there is a risk of cross-border contagion.

The yield on Irish 10-year bonds also rose sharply to just under 9pc early yesterday. The spiralling cost of borrowing forced the ECB back into the market to buy government bonds for the first time in two weeks to calm the situation.

Bond traders said the ECB bought government bonds after the yield hit the fresh high. Analysts said that even a small amount of buying was enough to calm the market in the short, convincing investors not to dump bonds and so drive prices lower.

Fresh high

The ECB bond purchases are officially never disclosed but traders say they are well flagged when they happen.

After the intervention the yield on Irish, Spanish and Portuguese bonds all fell rapidly. The yield on the Portuguese bonds at the centre of the storm was back down to 7.27pc by the close of trading, Irish yields dropped to 8.77pc.

Portugal needs to borrow in the bond market in March. The country previously indicated it would be uncomfortable taking on debt at a cost of more than 7pc.

Meanwhile, Citibank chief economist Willem Buiter said senior bondholders of banks could see haircuts by the end of the year across Europe.

"Ireland is still being beaten up for wanting to haircut senior unsecured bondholders," he told a Brussels conference yesterday. "But we could have a situation by the end of the year where European banks could be restored to health by making senior unsecured bondholders pay rather than the taxpayer."

"The real question is will Ireland go it alone, which would upset its European partners and cause market contagion throughout the EU."

Irish Independent

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