Irish-German bond differential steady

CAPITAL MARKETS:THE DIFFERENCE between yields on Irish Government bonds and German bonds held steady as Minister for Finance Brian Lenihan unveiled Budget measures designed in part to appease mounting concern in international capital markets about the stability of the public finances.

With the yield spread steadily increasing this year in the face of a radical increase in public borrowing due to collapsing tax revenues, the Government depends on the support of international capital markets to raise billions of euro in debt to fund expenditure.

In Budget measures published a week after credit ratings agency Standard Poor’s stripped Ireland of its cherished AAA credit rating, Mr Lenihan said he and officials from the National Treasury Management Agency will visit financial capitals around Europe in the coming weeks.

“These visits will give me the opportunity to communicate more effectively with foreign investors about our plan for renewal,” the Minister said.

There was no immediate response to the Budget plan last evening from Standard Poor’s or rival agency Moodys, both of which have a “negative watch” on their current ratings over Ireland’s sovereign debt.

The 10-year Irish/Bund yield spread, a crucial measure of the market’s assessment of the quality of Irish public debt, was broadly steady yesterday afternoon in a range of 205-207 basis points.

This was marginally up on the 202 spread seen earlier yesterday. A year ago the spread was 39 basis points.

“We would have seen a positive move on Irish bonds, spread tightening, if we’d had more moves on tax hikes rather than spending cuts,” said Peter Chatwell, rates strategist at Calyon in London.

“The nastiness of some of these numbers is offset by the scope of Lenihan’s actions, albeit through the less favourable option of cutting spending rather than raising taxes.”

The price of insuring against default on Irish Government debt rose to 224.3 basis points yesterday from 206 basis points on Monday before the Minister unveiled the Budget package. This means it costs investors €224,300 to protect €10 million worth of Irish Government bonds.

Such rates remain well below the record 400-basis-point price on Irish credit default swaps seen last February.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a country fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality. – ( Additional reporting: Reuters/Bloomberg)