Moody's warning as bond yields hit record

THE COST of raising money for the State rose to a new high yesterday as markets appeared to place no faith in the Government’s four-year plan.

Irish debt was also hit by news that European clearing house LCH.Clearnet has increased the margin it requires on the Republic’s bonds by 15 percentage points, citing higher bond yields.

“This decision is based solely on publicly available yield spread data and in no way represents a forward-looking market view,” it said in a circular to members posted on its website.

This is the third time in about two weeks the clearing house has raised the margin, or deposit, needed to trade sovereign Irish bonds.

Separately, ratings agency Moody’s said its downgrade of Irish debt was now likely to be more substantial than signalled in October, noting this would have negative consequences for its view on the banks. The agency warned of downgrades on the debt of Bank of Ireland, AIB, Irish Life Permanent and EBS.

The financials were again battered on the Iseq yesterday, with AIB worst off as it shed almost 12 per cent to close at 30 cent. Bank of Ireland was down nearly 4 per cent at 25.6 cent and Irish Life and Permanent dropped by 5 per cent to 59.7 cent.

Across Europe, shares mostly ended higher, with the euro also strengthening against the dollar, mostly on the back of comments from ECB Governing Council member Axel Weber. The Bundesbank chief said the EU’s rescue fund is sufficiently capitalised to calm the region’s markets.

Irish 10-year debt nonetheless hit a new peak of 9.08 per cent yesterday, lifting the premium investors must pay to hold Irish debt over its German equivalent above 6.5 percentage points.

“The market has written the whole thing off,” said Alan McQuaid, chief economist with Bloxham Stockbrokers, adding that traders are now “looking for contagion” to other parts of the euro zone. Evidence of the crisis spreading was apparent in the markets yesterday, with yields on both Spanish and Portuguese debt touching highs.

Mr McQuaid described the movements as being akin to “a game” for the markets, which seem to have lost confidence in Europe’s politicians. He believes policymakers need to seize back the agenda and “play dirty” with the markets by being less open about policy meetings or decisions before they happen.

“Markets don’t play fair and you’ve got to play by their rules,” Mr McQuaid said. “I don’t see any immediate solution,” he added.

The Government is unlikely to re-enter the bond markets for the three-year duration of the proposed EU-IMF bailout programme, but, according to Mr McQuaid, current bond yields still matter. “Once it goes up, it’s hard to get it back down again,” he said.

Brian Devine, chief economist at NCB, has calculated the bailout package from the European Financial Stability Fund will cost 5.23 per cent for three-year money and 5.85 per cent for five-year funds. “We believe the loans will be concentrated in the 2013-2018 range over the life of any agreement,” Mr Devine noted in his research.

– (Additional reporting, Bloomberg)