Government News: Top Stories

Ireland's crisis flares as investors dump bonds
by Shawn Pogatchnik

The Associated Press Translate This Article
10 November 2010

DUBLIN (AP) - Ireland's financial troubles loomed large Wednesday as investors—betting that the country soon could join Greece in seeking a bailout from the European Union—dumped Irish bonds and drove the interest rate on the country's borrowing to a new high.

The yield, or interest rate, on 10-year bonds surged above 8 percent for the first time since the launch of the euro, the European Union's common currency, 11 years ago.

Bond traders increasingly believe that Ireland soon will be forced to tap Europe's emergency fund for euro-zone nations facing a threat of bankruptcy. The 16 nations of the euro zone created that euro750 billion backstop in May as the EU and International Monetary Fund provided an emergency euro110 billion loan to Greece.

Another bailout would send more shock waves through the currency union, which has struggled to find ways to keep individual governments from overspending and threatening the currency's value.

Flaring financial tensions have driven the euro off recent 6-month highs of $1.428 versus the dollar. The euro fell to $1.3705 Wednesday afternoon from its opening of $1.3773.

The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout of five banks would cost at least euro45 billion, equivalent to euro10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.

To combat this, Ireland plans to impose euro4.5 billion in cuts and euro1.5 billion in new taxes in its 2011 budget. It will be the first stage in a four-year plan designed to slash the deficit by euro15 billion.

The governor of Ireland's Central Bank, Patrick Honohan, said he doubted that any intervention from the EU and IMF would impose anything tougher than what Ireland is already proposing to inflict on itself.

'I doubt that the IMF would be interested in advocating a shift in policy,' Honohan told an audience of international bankers and investors in Dublin. 'The fiscal policy that's been laid out ... seems exactly the right balance for what is needed to get the finances back on a convegent path.'

The yield on 10-year Irish notes rose steadily from 7.94 percent and reached 8.64 percent in afternoon trade. Interest rates on Portuguese 10-year debt also reached a new euro-era high above 7.2 percent, while equivalent bonds of Spain and Italy rose to 4.5 percent and 4.1 percent, respectively.

At the opposite poles of European debt risk, the yield on German bonds—benchmarks of safety—were little changed at 2.4 percent while Greeks' little-traded bonds rose to 11.6 percent, the world's highest rate.

The yield on Irish 10-year T-bills has risen almost without pause since Oct. 15, when it stood at 6.1 percent. As the bond selloff drives their face value lower, new buyers are demanding ever-higher yields as compensation.

Traders accelerated their offloading of Irish bonds after London-based LCH.Clearnet Group, the world's second-largest bond clearing house, announced Wednesday it is increasing the cash deposits it requires from traders dealing in Irish bonds. This makes it even less attractive for investors to hold Irish debt.

LCH.Clearnet's move follows decisions this month by the governments of Russia and Chile to stop buying Irish debt.

Like Ireland, Portugal and Spain both are enduring bond-market speculation of a future default, and are slashing spending to cope with deficits far above the euro-zone limit of 3 percent of GDP. Only Ireland is simultaneously trying to fund a massive bank-bailout program that threatens to swamp its ability to pay its own bills.

Portugal did successfully auction euro1.25 billion in new bonds Wednesday. Its new 10-year bonds paid average yields of 6.8 percent, up from 6.24 percent at a similar auction in September—but below the 7-plus percent prevailing on Wednesday's wider market. Less positively, the yields on its auctioned 6-year bonds were 6.15 percent, far higher than the 4.37 percent that prevailed two months ago.

Analysts said the particularly strong jump in the cost of selling shorter-term debt illustrated how buyers are pricing in the potential for default pressures to grow in Portugal sooner rather than later.

On Tuesday, yields on Portuguese 10-year bonds spiked above 7 percent for the first time in expectation that the bond auction might face even greater difficulties.

Prime Minister Brian Cowen insists Ireland has enough cash on hand to fund the government budget through June 2011. But he needs the interest rates being demanded by investors to fall substantially before Ireland needs to borrow again in early 2011.

Unless Irish yields decline to pre-crisis levels, Ireland would have to pay punitive rates of interest to woo new buyers of Irish bonds, further handicapping its ability to rein in government costs.

But some economists say tapping the European fund—whose rules have yet to be fully agreed among members—could be nearly as expensive, with rates likely to exceed 6 percent. And the reputational damage done to Ireland if it failed to pay might do even more damage, they argued, to a country that relies heavily on investment from 1,000 foreign multinationals.

'If the EU and IMF were asked to intervene in Ireland, they'd just do what we're trying to do anyway,' said John O'Hagan, an economics professor at Trinity College Dublin. 'So why not keep trying to do it under our own steam and maintain our independence?'

Overshadowing Ireland's struggle is the question of how long Cowen can cling to power. Opposition chiefs insist they will vote against the 2011 budget when it's unveiled Dec. 7 in hopes of forcing him from office.

Cowen has a three-vote majority in parliament that includes highly conditional support from two independent lawmakers, who are seeking extra finance for rural road projects, a hospital and a casino project—goals diametrically opposed to Ireland's austerity push. Cowen says he cannot provide public details of his private funding promises to the two lawmakers.

Cowen's majority is expected to fall to just two votes following a Nov. 25 by-election to fill a seat left vacant for the past 17 months.

Opposition lawmakers bombarded Cowen with demands that he surrender power and call an early election, so that a new government with a strong majority could take charge.

'It's like the last days of the Roman Empire around here,' Labour Party lawmaker Pat Rabbitte told Cowen. He accused the prime minister of destroying Ireland's morale, and called on him to drive immediately to the official residence of Ireland's symbolic head of state, President Mary McAleese, to resign.

'The people who are dropping the morale are the people who exaggerate the weaknesses in our economy,' Cowen replied, jabbing an accusatory finger at the opposition benches.

Copyright © 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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