Irish bonds, banks shares rebound over plan to break up debt-crippled Anglo; inflation returns

Irish bonds, banks rebound after Anglo split plan

DUBLIN — Investors welcomed Ireland’s plan to split up its most debt-crippled bank, Anglo Irish, by bidding strongly Thursday for government bonds and bank shares.

While much skepticism remains about Ireland’s ability to claw back its deficit and prop up its banks, developments on the bond market and Irish Stock Exchange suggested markets were reassured by Wednesday’s plan to break Anglo into “good” and “bad” banks.

A €400 million Irish bond auction was heavily oversubscribed at lower interest rates than a similar auction Aug. 26. The strong take-up despite a lower offered payout indicated that investors consider Irish state debt less risky than two weeks ago.

The National Treasury Management Agency, which manages Ireland’s government debt, said €250 million of securities due for repayment in April 2011 sold at an average yield of 2.19 percent, compared with 2.35 percent two weeks ago. Another €150 million of securities due to expire in February 2011 yielded 1.925 percent, versus 1.98 percent previously.

And the risk spread between Irish and German bonds on international markets also narrowed Thursday to 3.6 percentage points. Irish bonds had traded in a range of 3.8 to 3.9 points — a record high dating back to the foundation of the euro — before the Anglo announcement.

Shares in Ireland’s three listed banks — Allied Irish Banks, Bank of Ireland and Irish Life & Permanent — also rose modestly Thursday, recouping most of this week’s earlier losses.

The market reaction came as a report Thursday confirmed that prices rose for the first time since 2008.

The Central Statistics Office said average prices rose 0.2 percent over the year up to August, ending 19 straight months when prices slid. While falling prices can appeal to consumers, they also indicate extremely slack economic demand.

Economists said they expected Irish price gains to remain weak given the government’s plans to keep slashing its budget deficit by €3 billion ($4 billion) in the coming year through spending cuts and tax rises.

Prime Minister Brian Cowen has pledged to reduce Ireland’s deficit to within 3 percent of GDP by 2014. It is currently forecast this year to hit somewhere between 11 percent and 20 percent, depending on whether the cost of the nation’s bank-bailout program is included.

Prices in August rose 0.7 percent from the previous month, the biggest such monthly gain since mid-2008. Thursday’s inflation report noted that the biggest price jumps were recorded in clothing, because of the end of particularly aggressive summer sales, and in mortgages, because Irish-based banks are hiking their interest rates to cope with their own higher borrowing costs.

The biggest annual riser, education, rose 9.5 percent from the previous year. Many retail goods also have kept falling in price over the past 12 months: clothing by 8.2 percent, household goods and services by 4.0 percent, and food and drinks by 3.2 percent.

Many Irish retail businesses have sharply pruned their prices since 2009 amid a slump in consumer spending, reflecting the impact of rising unemployment and falling net incomes. The Insolvency Journal of Ireland says more than 1,400 businesses and firms went bankrupt last year and more than 1,000 already this year.

Online:

Inflation report, bit.ly/3AdfuU

Ireland’s Small Firms Association, bit.ly/defUPO

Irish company closures, www.insolvencyjournal.ie/industrial_stats.aspx