Irish bond yields hit euro-era high amid fears over Italian contagion

IRISH BOND yields hit a new euro-era high yesterday while stock markets sold off around the world as Italian contagion fears escalated.

Italian bonds plunged and the country’s stocks fell to the lowest in two years as euro-zone finance ministers failed to convince investors that the region’s second-most indebted nation would avoid following Greece, Ireland and Portugal in requiring a bailout.

The euro recorded sharp declines yesterday.

It hit a seven-week low against the dollar, reflecting a so-called flight to safety as money moved into dollar-denominated assets.

The 17-nation currency dipped 1.6 per cent to $1.4044.

Irish 10-year bond yields closed at 13.2 per cent yesterday as peripheral European countries felt the impact of growing investor disquiet. However, Italy was at the centre of attention, with that country’s bond yields reaching their highest level in 10 years. Yields on its benchmark 10-year bonds closed at 5.68 per cent.

The escalation in Italy’s borrowing costs came as European finance officials held crisis talks in a bid to resolve Greece’s intractable debt problems.

“The size of Italy’s economy makes sovereign credit issues there a much greater concern,” said Gary Flam, who helps oversee $6.5 billion (€4.6 billion) at Bel Air Investment Advisors.

“Greece, Portugal and Ireland are manageable given the small size of those economies relative to the EU. Once you cross the threshold into Spain and Italy, you’re taking a big step up. That’s a major negative.”

Ryan McGrath, a bond trader at Dolmen Securities, said investors were waiting for some kind of guidance from Europe as to how it intended to tackle the spiralling debt crisis.

“The market is trading on headlines, or the lack of them, at the moment,” he said.

The longer the market was without guidance, the worse the situation would get, he added.

Now that the debt crisis appears to be spreading from peripheral European countries to “heavyweights” such as Italy and Spain, Mr McGrath said it may put more pressure on Europe to try to solve the problem “once and for all”, rather than on an ad-hoc basis.

Last week Portugal’s sovereign debt rating was slashed to below investment grade by Moody’s, sparking fears that Ireland could be the next euro-zone member to be downgraded to junk status.

That, in turn, raised questions over Ireland’s future ability to re-enter bond markets.

Ireland is funded until 2013 under the EU-IMF deal. However, the bailout plan envisages a limited return to bond markets towards the end of 2012.

Although Ireland’s record bond yields were not the main focus yesterday, Mr McGrath said that “the further we go up, the more we have to come down . . . to re-enter the market”. – (Additional reporting: Bloomberg)