Irish bonds fall as fears grow over debt crisis

THE VALUE of Irish bonds on the secondary market fell yesterday, leading declines in the debt of Europe’s high-deficit nations, amid speculation that weaker economic expansion and vulnerable banks in the region may hamper a resolution of the euro zone debt crisis.

Benchmark 10-year Irish yields rose the most since July 6th as credit-rating company DBRS said slower growth in the US and Europe will probably damage Ireland’s prospects for recovery.

The yield, or interest rate that investors require to hold Irish debt, has fallen steady since its peak at over 14 per cent in July, when speculation about Irish sovereign default reached its height.

Italian securities fell in advance of its planned sale of bonds maturing between 2016 and 2025 later this week.

German bonds were little changed before Slovakian lawmakers vote on the retooled euro-area bailout. Greek notes gained on optimism that the country will get its next aid payout.

“Ireland has been the star performer in the European government bond space over the past months,” said Norbert Aul, a European interest-rate strategist at RBC Capital Market.

“Negative news flow, for instance from rating agencies and around the pending Slovak vote, could have caused a correction. For Italy, the upcoming supply has been weighing on the five- and 10-year sectors.”

The yield on 10-year Irish bonds was 47 basis points higher at 8.21 per cent at 8pm yesterday, according to Bloomberg data. It earlier rose 73 basis points, the most since July 6th.

Ireland may face a delay in stabilising its debt load amid sluggish international growth, according to DBRS, which has an A (Low) rating on Ireland with a “negative” trend.

Risks from the sovereign debt crisis are increasing rapidly and have put Europe’s banks in the danger zone, Jean-Claude Trichet, the president of the European Central Bank said yesterday.

“Over the past three weeks, the situation has continued to be very demanding. The crisis is systemic and must be tackled decisively,” Mr Trichet said.

The concerns have prompted leaders to ask the European Banking Authority (EBA) to carry out swift revised “stress tests” so it can better assess potential trouble spots. The EBA wants banks to hold a minimum core Tier One ratio of at least 7 per cent under a recession scenario, and those who fail will be told to bolster their capital position, two banking sources told reporters.

Other sources with knowledge of the process said no final decision has been taken on the pass mark, with some citing a range of 7 to 10 per cent.

Talks also continue on a definition of the capital that can be included, an element that proved divisive in the EBA’s last test in July.

“A significant number of banks are expected to fail the stress tests,” one source said.

EU policymakers will use the data to determine how some banks must recapitalise in a bid to restore confidence in the battered sector.

Meanwhile, José Manuel Barroso, president of the European Commission, said he will propose a bank recapitalisation plan today, even though there is no agreement yet on where the money will come from. – (Bloomberg, Reuters)