Ireland's funding costs start rising again

 

IRELAND’S FUNDING costs are starting to edge upwards once more, due to a deepening of the European sovereign debt crisis and a potential easing of Ireland’s debt burden. In the short term, this may become an issue as the cost of borrowing for the European Financial Stability Facility (EFSF) is also on the rise.

Over the past three months, Ireland has been outperforming its European peers, as funding costs have remained stable. However, this has ended “rather abruptly in recent days” as Dermot O’Leary, chief economist with Goodbody Stockbrokers, noted yesterday.

Since Monday, the yield on the nine-year bond has jumped by about 150 basis points, rising above 9 per cent for the first time since August.

While volumes across European sovereign bond markets remain light, the scale of the jump is significant.

“It’s quite a big movement in a week despite the illiquidity,” Mr O’Leary said, ascribing the move to a combination of the decision of the Irish Government to contemplate further burden sharing with Bank of Ireland subordinated bondholders and reports that Ireland is looking for some easing of the sovereign debt burden in return for support for treaty changes.

While Ireland’s cost of borrowing is not an immediate concern – given that it is covered by the EFSF until 2013 – any upward movement takes it further away from its goal of returning to the markets. Moreover, a similar upwards movement in the cost of funding for the EFSF may be a more immediate concern.

While the Government may have renegotiated the interest rate it would pay on European borrowings earlier this year, no longer paying a margin on such borrowings, an increase in the cost of funding for the EFSF may negate the €1.5 billion savings estimated at the time.

Back in September for example, 10-year EFSF bonds were yielding 2.7 per cent. Yesterday however, they were as high as 4 per cent.

Mr O’Leary estimates that a 1 per cent rise in the cost of funding for the EFSF would cost Ireland about €200 million on the €22 billion which remains to be drawn down. A 2 per cent rise would cost €400 million and so on. Added to this increase in funding costs is a decline in investor appetite for European sovereign debt.

“The general pressure on sovereigns reflects the lack of confidence in European governments to sort out problems,” said Ciaran O’Hagan, head of euro rates research at Société Générale in Paris.

This declining appetite was seen earlier this month, when the EFSF had to postpone a bond auction to raise money for Ireland due to market conditions, and more recently this week when investors were underwhelmed by a German sale of bonds.

As Mr O’Hagan said, “you can have a yield at 4 per cent – but it’s another thing to get it sold”.

However, while the upward trajectory of EFSF bond yields may be of concern, Mr O’Leary pointed out that funding costs even at current levels are still below what was anticipated at the time of the original arrival of the troika a year ago.