Irish, Portuguese bond spreads rise to new euro-era highs as investors turn to German bonds

Irish borrowing rates climb to new euro-era high

DUBLIN — Investors sold off Irish and Portuguese bonds Thursday, driving the borrowing costs of both countries to euro-era records amid continuing fears about heavy government debt levels in Europe.

Dublin analysts said a range of negative forces are driving the widening interest rate gap between Irish debt and German bonds, the benchmark of safety.

The rising gap, or spread, indicates increasing market perception of risk that Ireland might not be able to pay all its debts.

One factor was the high interest rate demanded during the government’s latest efforts this week to sell new bonds. A sale of euro1 billion in 8-year bonds Tuesday required a punishing premium of 6.02 percent, more than a point above the 5 percent available if Ireland were to tap the emergency EU-IMF fund established to aid Greece earlier this year.

And on Thursday, when Ireland sought to sell up to euro500 million in short-term bonds, international interest was disappointingly low.

Ireland’s National Treasury Management Agency ended up selling just euro400 million in bonds due to expire in February and April 2011 after attracting bids for barely four times that amount; a similar auction last month was nine times oversubscribed.

Bigger factors loom in the longer term.

Investors are awaiting an official Irish announcement on the total cost of its bailout efforts at five Dublin-based banks, particularly nationalized Anglo Irish. Finance Minister Brian Lenihan has promised to provide an independently calculated figure by the end of the month.

Until now, Lenihan has insisted that the Anglo losses — all to be covered by the government — won’t top euro25 billion.

Outside analysts say the bank’s property-weighted loan book will likely require a bailout nearer euro35 billion, a fifth of Ireland’s GDP.

Irish media speculation has mounted this week that the government will be forced to back away from its blanket guarantee on Anglo losses and instead require at least the lowest tier of Anglo’s financial backers, those holding “subordinated” bonds, to eat their own losses.

Also dampening sentiment against Europe’s most debt-struck economies was a report on European manufacturing that indicated slowing growth in August. Analysts see growth as essential for Ireland, Portugal, Spain and Greece to boost their tax intakes and claw their way out of heavy deficit spending.

Ireland confirmed Thursday it remains mired in a 2-year recession. Its second-quarter GDP figure slid 1.2 percent versus the previous quarter.