IRELAND’S BORROWING costs hit a record high yesterday as concerns over Greek contagion mounted.
The premium that investors demand for holding 10-year Irish debt, instead of benchmark German securities, rose to 314 basis points at one stage yesterday, which represented a new high since the global economic crisis began. Irish bond spreads previously hit a high of about 285 basis points in March 2009.
“Ireland is vulnerable because our deficit is high,” said Simon Barry, chief economist with Ulster Bank. “That doesn’t mean we’re in the same position as Greece. There are some extremely important differences.”
The key difference is that the Irish Government has been tackling its fiscal problems for the last two years ago on a “consistent and determined” basis, he said.
Until recently the Government was enjoying the benefits of that, and its borrowing costs were coming down. Irish bond spreads had moved down as far as 140 basis points above the German bund within the last two months.
But Ireland has now become caught up in the market’s assessment of the Greek contagion problem. “Markets are no longer really moving on the basis of fundamentals but this kind of spiral effect which happens when you get a serious reduction in investor confidence,” he said.
“The irony of the situation from an Irish perspective is that if we look back over what’s happened in the last week, the economic news from Ireland has been really positive,” he added.
The latest PMI survey showed the service sector is expanding again. Tax revenues were better than expected in April and yesterday’s Live Register figures indicate the labour market is stabilising.
Somewhat counterintuitively, the cost of insuring Irish debt actually fell yesterday, reversing an increase on Thursday. Five-year Irish credit default swaps (CDS) widened on Thursday to about 270 basis points, but came back to 240 yesterday.– (Additional reporting Bloomberg)
