State's borrowing costs fall amid EU talks on debt easing

THE State’s borrowing costs fell significantly yesterday as discussion on the possible easing of bank-related public debt took place with senior EU officials.

Five-year Irish Government bond yields fell below 6 per cent for the first time since the State was bailed out in November 2010. At the beginning of January the yield was 8 per cent. In July of last year it had soared to almost 18 per cent.

A level below 6 per cent on five-year bonds is considered sustainable territory for a government to finance itself without bailout funding from other states and international organisations, such as the IMF.

Minister for Finance Michael Noonan held separate talks yesterday on the Irish bank bailout with European Central Bank president Mario Draghi and EU economics commissioner Olli Rehn. Speaking after the meetings, he said it was too early to say whether he was making progress in his campaign to ease the cost of the €63 billion rescue of the banks.

“It’s a question of laying out our difficulty as we see it and having non-binding discussions on possible approaches to a resolution,” he said as he left the ECB headquarters in Frankfurt. The troika will complete a detailed evaluation of the Government’s request for a concession within weeks, he added.

“This working group will come up with a proposal or a set of proposals some time towards the end of February or towards March.”

At issue is whether the Government can replace the expensive Irish promissory notes it is using to recapitalise the former Anglo Irish Bank with bonds issued by the European Financial Stability Facility rescue fund which would have a lower effective interest rate.

Although the European authorities have publicly adopted a non-committal stance, senior figures in the troika are understood to have formed the view that the plan is worth pursuing. Within the troika the initiative is seen to have potential benefits for Ireland’s debt dynamics.

For EFSF involvement, however, unanimous agreement among all euro zone member states will be required.

A spokesman for Mr Rehn said the commission shared the Government’s objective of returning to private sovereign and bank debt markets by next year.

The chances of this improved yesterday as the effective interest rates on most Irish Government bonds narrowed substantially, continuing a sharp lowering of borrowing costs in evidence since the end of November.

A spokesman for the National Treasury Management Agency, the entity which raises funds for the State, described the movements as “very positive”. “There has been significant demand – internationally and domestically – for these Irish Government bonds in recent days” he said. Earlier this month the agency said it would try to begin borrowing from the bond markets by mid-year.

The continued rally in the Irish Government bond market took place despite a gloomy prognosis for the world economy published by the IMF yesterday.

“Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated” the Washington-based organisation stated in its biannual World Economic Outlook report.

The weaker forecasts are “largely because the euro area economy is now expected to go into a mild recession in 2012” the report states. The assessment comes despite the relative calm in the euro area crisis in recent weeks.

The European single currency and stock markets across the continent weakened upon publication of the IMF report yesterday morning, but recovered later in the day.

Separately, new figures published by the Central Statistics Agency yesterday on house prices showed yet another sharp monthly fall in December.

Nationally, residential property prices fell by 1.7 per cent on November and by 16.7 per cent on December 2010. From the peak of the property bubble in 2007 to last December, the price of the average home in the State declined by 47 per cent.

The average cost of a home outside of Dublin now stands at €165,000, while the average cost in the capital is just over €198,000.