€1bn sale to be biggest test for the Government

ANALYSIS : It is clear at this point that the ECB will not exercise to the full its powers to intervene, writes DAN O’…

ANALYSIS: It is clear at this point that the ECB will not exercise to the full its powers to intervene, writes DAN O'BRIEN, Economics Editor

THIS CANNOT go on much longer. Ever rising bond yields and a rapidly growing debt stock are like nitrates and glycerine – let them mingle and agitate together and sooner or later they explode.

We are not far from that point now in the Government’s debt position.

If the bond market does not stabilise, and if it does not come to believe that Ireland’s fiscal position is manageable, the country is destined, sooner or later, to activate the EU-International Monetary Fund (IMF) bailout package established in May.

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Next Tuesday will provide the biggest test yet. The National Treasury Management Agency (NTMA) has committed to putting at least €1 billion worth of Irish Government bonds up for auction. If there were to be any serious problem with take-up, or if the rate of return offered were much above already high rates in the secondary market, real consideration would have to be given to seeking help.

Although it is by no means inevitable that a bailout will be necessary, the chances of that outcome eventually coming to pass have risen this week, and not only because yields have increased to levels that create an uncontainable debt dynamic.

It is clear at this point that the European Central Bank (ECB) will not exercise to the full its powers to intervene in the bond market. If it was going to use all its powers, it would have used them by now.

Although there were the usual trader rumours that the ECB was buying Irish debt yesterday, it was abundantly clear that the level of intervention was nowhere near enough, as evidenced by the yield blow-out.

I struggle to comprehend this. And not from an Irish point of view, but from the perspective of Europe’s interests.

Think of the May bailout as a dyke around the currency. It is big enough to hold back an inundation caused by Ireland, Greece and Spain failing. If all three countries need help, the water will be lapping over the top of the dyke and the pressure on it will be enormous.

As a bailout may well be the euro’s last line of defence, bond-buying by the ECB essentially protects that line of defence.

The fragility of the situation now is illustrated by the absurdity of how yesterday’s panic was triggered. On Thursday, a mixed, if relatively pessimistic analysis of Ireland’s prospects was published by Barclays Capital, the investment banking arm of the sprawling British banking group.

Yesterday, the Irish Independentput some of the content of the report on its front page. Just after midday, panic selling of Irish Government debt started. Traders screamed it was all down to newspaper coverage.

Consider all of this for a moment. Many hours after a newspaper report is published about a previous day’s bankers’ report, all hell breaks loose and one of the largest one-day moves in yields is recorded.

When this point is arrived at, all sense of proportion and reason has evaporated.

Thankfully, the Government is sitting on a very large cash cushion, so it won’t be forced into any decisions even if in the unlikely event that its usual bond customers don’t buy on Tuesday and in the months to come.

Things may be bad and getting worse, but there is still time and space to consider options.