Investor concern hits Irish banks as funding costs soar

 

INVESTOR CONCERN switched to the Irish banks yesterday as the cost of funding for AIB and Bank of Ireland rose to record levels and the credit-default swaps on Irish banks soared.

Credit-default swaps on subordinated debt of Allied Irish Banks were 60 per cent upfront and 5 per cent a year, meaning it costs €6 million in advance and €500,000 annually to insure €10 million of the bank’s debt for five years. CDS on the subordinated debt of Bank of Ireland cost 33 per cent upfront and 5 per cent a year.

Contracts on AIB’s senior debt soared 99 basis points to 1,008 basis points on Wednesday and were at 1,150 yesterday, while swaps on Bank of Ireland, which jumped 42 to 741 on Wednesday, were at 816.

Analysts attributed the rise in banking bond yields to comments which emerged from the EU summit last month that a condition of future bail-outs of euro-zone members would be that bondholders would shoulder some of the burden, as well as the fact that the Government was already enforcing burden-sharing on Anglo subordinated bond holders.

Banking shares were also hit yesterday. AIB finished almost 7 per cent lower at €0.331. Bank of Ireland shed 8 per cent to close at €0.384.

Meanwhile in London, Royal Bank of Scotland, which holds approximately £4.2 million of Irish government debt, sank 2.7 per cent to 41.02 pence, its lowest in four months, over concerns about the bank’s exposure to Ireland government bonds.

Meanwhile, both AIB and Bank of Ireland downplayed the significance of the decision by British clearing house LCC Clearnet to increase their margin on Irish government bonds by 15 per cent from yesterday.

Of about €90 billion of the current Irish sovereign debt in issuance, AIB holds approximately €4 billion, while Bank of Ireland holds about €1.2 billion.

It is believed that while both banks clear some of their Irish government debt through LLC Clearnet through a third-party “clearing member”, most of the banks’ dealings are with the ECB.

As the spread between 10-year Irish sovereign debt and German bunds continued to widen, pressure continued on short-term Irish debt issuance, although it eased slightly towards the end of the day.

The yield on Irish government two-year bonds peaked at 6.96 per cent before falling back to 6.70, while three year government bonds hit 7.94, closing at 7.75.