THE GOVERNMENT’S borrowing costs hit a record high again yesterday after two credit rating agencies warned that Irish State debt faces further downgrades.
The cost of State borrowing jumped as the yield or interest rate on 10-year Government bonds jumped by a quarter of a percentage point to 6.72 per cent.
The bond yields are now trading at levels similar to Greece at the start of April – only a month before the Athens government sought international support.
The yield premium investors demand to hold Irish 10-year bonds instead of benchmark 10-year German bonds reached a record 453 basis points (4.53 percentage points) before narrowing to 448 basis points.
The increasing debt costs came despite reports of bond purchases by the European Central Bank to help stabilise the markets amid investor fears about the mounting cost of Ireland’s bank bailouts.
The ECB purchases focused on securities with maturities of as long as five years, the reports said.
The mounting pressure on State borrowing comes as the Financial Regulator and the Department of Finance prepare to announce a final estimate of the final cost of bailing out State-owned Anglo Irish Bank.
The bill is expected to surpass the current estimate of €25 billion, rising to about €28 billion to €29 billion with the possibility of the cost increasing further under a stress case but not above the €35 billion estimate of credit rating agency Standard and Poor’s.
Minister for Finance Brian Lenihan will announce plans to meet tougher capital targets at Anglo, including a restructuring of part of the bank’s bond debts.
A voluntary buyback of subordinated debt at Anglo is being planned but the Department of Finance has ruled out any possibility that investors in the bank’s senior bonds will not be repaid.
The end of the two-year blanket Government bank guarantee from midnight tonight has increased the nervousness of the markets.
Some €4.2 billion of senior debt at Anglo and €1.8 billion of dated subordinated debt will not be guaranteed from tomorrow, which has led to market concerns that the Government will seek to share the bank’s losses with these investors.
The €4.2 billion of senior debt has an equal ranking with a further €2.4 billion of similar bonds at the bank which remains guaranteed until the end of the year.
Ratings agency Moody’s downgraded Anglo’s unsecured senior debt by three notches on Monday, citing a small risk that the Government might not support this debt.
SP analyst Trevor Cullinan estimated that the bill could rise above €35 billion in an interview broadcast on RTÉ yesterday but recorded two weeks ago. He said that any increase above this figure would lead to further downgrades.
Almost €23 billion of State capital has been injected or pledged to Anglo with the bill set to rise further due to higher loan losses and large discounts on €35 billion in loans moving to the National Asset Management Agency.
The Government is coming under pressure to assure the financial markets that it can afford the cost of the banking rescues and cut the biggest budget deficit across the European Union.
Taoiseach Brian Cowen said that the Government would be providing details shortly of “a manageable way forward” of how Anglo will be dealt with in the long term. “We are determined to do what’s necessary to achieve international confidence and build domestic confidence,” he said.
He denied that the country was close to a “tipping point”.
The cost of insuring Irish sovereign debt against default soared to a record 519 basis points (5.19 per cent) from 488.5 yesterday.
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