Wednesday, September 29, 2010

Ireland is getting very ugly

It appears that Ireland is coming close to the brink. From the Irish Times:

THE GOVERNMENT'S borrowing costs hit a record high again yesterday after two credit rating agencies warned that Irish State debt faces further downgrades.

The cost of State borrowing jumped as the yield on 10-year Government bonds jumped by a quarter of a percentage point to 6.72 per cent.

The bond yields are now trading at levels similar to Greece at the start of April - only a month before the Athens government sought international support.

The yield premium investors demand to hold Irish 10-year bonds instead of benchmark 10-year German bonds reached a record 4.53 percentage points before narrowing to 4.48 percent.

The increasing debt costs came despite reports of bond purchases by the European Central Bank to help stabilise the markets amid investor fears about the mounting cost of Ireland's bank bailouts.

The ECB purchases focused on securities with maturities of as long as five years, the reports said.

The mounting pressure on State borrowing comes as the Financial Regulator and the Department of Finance prepare to announce a final estimate of the final cost of bailing out State-owned Anglo Irish Bank.

The bill is expected to surpass the current estimate of EUR25 billion, rising to about EUR28 billion to EUR29 billion with the possibility of the cost increasing further under a stress case but not above the EUR35 billion estimate of credit rating agency Standard and Poor's.

Minister for Finance Brian Lenihan will announce plans to meet tougher capital targets at Anglo, including a restructuring of part of the bank's bond debts.

A voluntary buyback of subordinated debt at Anglo is being planned but the Department of Finance has ruled out any possibility that investors in the bank's senior bonds will not be repaid.

The end of the two-year blanket Government bank guarantee from midnight tonight has increased the nervousness of the markets.

Some EUR4.2 billion of senior debt at Anglo and EUR1.8 billion of dated subordinated debt will not be guaranteed from tomorrow, which has led to market concerns that the Government will seek to share the bank's losses with these investors.

Ratings agency Moody's downgraded Anglo's unsecured senior debt by three notches on Monday, citing a small risk that the Government might not support this debt.

S&P analyst Trevor Cullinan estimated that the bill could rise above EUR35 billion in an interview. He said that any increase above this figure would lead to further downgrades.

The Government is coming under pressure to assure the financial markets that it can afford the cost of the banking rescues and cut the biggest budget deficit across the European Union.

PM Brian Cowen said that the Government would be providing details shortly of "a manageable way forward" of how Anglo will be dealt with in the long term. "We are determined to do what's necessary to achieve international confidence and build domestic confidence," he said.

Cowen denied that the country was close to a "tipping point".

The cost of insuring Irish sovereign debt against default soared to a record 519 basis points (5.19 per cent) from 488.5 yesterday.

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