Irish sell €1.5 bln ($2 bln) in bonds as debt nerves ease; Spain, Greece auction T-bills too

By Shawn Pogatchnik, AP
Tuesday, September 21, 2010

Irish sell $2B in bonds as eurozone debt fears ebb

DUBLIN — Ireland sold euro1.5 billion ($2 billion) in government bonds Tuesday in a closely watched test of whether international investors would keep buying Irish treasuries despite the country’s deficit, the biggest in debt-burdened Europe.

Analysts called the auction a success, noting it attracted bids 5.1 times the amount of bonds on offer. Together with solid bond auctions in Spain and Greece, the sale offered markets reassurance for the moment that Ireland and other indebted countries were getting some relief from short-term market pressures.

But analysts cautioned that Ireland had to pay higher-than-expected interest rates compared to previous bond auctions, reflecting investors’ fear of an eventual Irish default. And the higher rates could be an additional financial burden in coming years.

“Serious challenges remain ahead, but in the short term we believe that public finances are not out of control,” said Sonia Pangusion, Irish market analyst for IHS Global Insight.

She said Ireland’s government had secured enough borrowing to manage its finances through mid-2011.

The National Treasury Management Agency said its offering of euro1 billion in 8-year bonds will pay a yield of 6.02 percent, whereas a similar sale three months ago required just 5.09 percent. Its sale of euro500 million in 4-year bonds will pay 4.77 percent, compared to just 3.6 percent last month.

Nonetheless, Tuesday’s auction provided immediate relief for Ireland following recent rapid escalation of its borrowing costs based on fears, in part, that the country cannot afford its ballooning bank bailout.

Ireland is on course to post a 2010 deficit exceeding 20 percent of GDP, by far the worst in the 27-nation European Union. Even excluding bank-bailout costs it is expected to exceed 11 percent, still the worst foreseen in the bloc. Greece, by contrast, is aiming to reduce its deficit this year to 8 percent.

Another EU nation battling a swollen national debt, Britain, reported unexpectedly large deficit-spending figures Tuesday. Britain, which does not use the euro, saw borrowing soar in August to 15.9 billion pounds ($24.7 billion), a record for the month and 27 percent higher than forecasts.

Yields on existing Irish 10-year bonds had reached 6.56 percent Monday, more than 4 points above the yields of benchmark German bonds. Both were record highs dating back to the launch of the euro in 1999.

But those numbers fell Tuesday to below 6.3 percent and 3.7 points respectively, driving down the cost of servicing Ireland’s euro88 billion national debt.

Shares in Ireland’s two biggest banks — Bank of Ireland and Allied Irish Banks, both of which have received billions in state support — rose on the news. But Ireland’s other publicly listed bank, Irish Life & Permanent, slid slightly. Unlike the others, it is receiving no state aid.

In Spain, the government sold euro7 billion in 12-month and 18-month bonds at average yields of 1.91 percent and 2.15 percent, respectively. Those rates were marginally higher than in previous auctions.

Greece sold euro390 million in 3-month treasuries paying interest of 3.98 percent, slightly lower than a similar sale last month.

Together, the bond sales painted a picture of a euro zone that retains strong borrowing power even at its most debt-battered extremes. The euro common currency rose to $1.3150, approaching Friday’s five-week high versus the dollar, but fell back to $1.3130 in afternoon trade.

Citigroup’s chief economist, Willem Buiter, said the premium being demanded on Irish bonds remains “ridiculous,” given Ireland’s commitment to budget-cutting and its strong cash reserves. He said Irish treasuries should be trading within a percentage point of German rates if what he called irrational market fears could be eased.

Interest rates on Irish bonds have surged in recent weeks amid growing doubts about Ireland’s ability to pay its bills.

The biggest source of concern is the as-yet-unconfirmed cost of absorbing dud property loans at nationalized Anglo Irish Bank. The government has already sunk nearly euro23 billion into the bankrupt lender, but outside analysts estimate the total bill could exceed euro35 billion — one-fifth of Irish GDP.

Fears also have been fanned by media speculation — vigorously denied by the government and IMF — that Ireland might seek support from the EU-IMF emergency fund, which already is offering Greece bailout funds at a rate of 5 percent interest. That’s less than what Ireland had to offer to sell Tuesday’s 8-year bonds.

Analysts said Ireland should expect to keep paying out hefty premiums of 3 to 4 points above German rates until the markets are convinced that Ireland has put a firm lid on its bank-bailout costs and its deficit has been placed on the road to reduction. Ireland plans to publish an analysis of Anglo bailout-costs next month and slash more than euro3 billion from its 2011 budget to be published in December.

Howard Wheeldon, senior strategist at BGC Partners in London, said the bond sale demonstrated there was “no question of the government needing to go cap in hand to the IMF.” He said sending this message meant the high yields conceded Tuesday were “a price that will have to be paid with little complaint.”

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