Irish bonds rebound, bank shares hold ground over plan to break up Anglo; inflation returns

Irish bonds rebound, banks hold ground after Anglo

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

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 euro400 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 euro250 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 euro150 million of securities due to expire in February 2011 yielded 1.925 percent, versus 1.98 percent previously.

And the risk spread between 10-year Irish and German bonds on international markets also narrowed Thursday to 3.5 percentage points. Irish 10-year 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 — staged a modest rally, then fell back.

Bank of Ireland gained a cent to euro0.71, Allied Irish lost a half-cent to euro0.75, while Irish Life & Permanent — the only Irish-owned bank strong enough to operate without state bailout funds — remained unchanged at euro1.63.

The market reaction came as a report Thursday confirmed that Irish prices rose for the first time since 2008. While consumers like falling prices, they reflect extremely slack economic demand.

The Central Statistics Office said average prices rose 0.2 percent annually, ending 19 straight months of sliding prices.

The biggest annual gainer was the cost of education, up 9.5 percent. But retail prices remain depressed from a year ago, with clothing down 8.2 percent, household goods and services down 4.0 percent, and food and drinks down 3.2 percent.

Nonetheless, prices in August rose 0.7 percent from the previous month, the biggest such monthly gain since mid-2008.

The biggest monthly price jumps were recorded in clothing, up 3.7 percent because of the end of particularly aggressive summer sales, and in mortgages, up 10 percent because Irish-based banks are hiking their interest rates to counteract their own higher borrowing costs. Food prices dipped a further 0.3 percent.

Economists said they expect Irish inflationary pressures to remain weak given the government’s plans to keep slashing its budget deficit by euro3 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.

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