IMF bailout report rejected
The Department of Finance and the International Monetary Fund sought to calm markets today in the wake of a newspaper report on the possibility of an IMF bailout for Ireland.
Today the cost of insuring Irish sovereign debt against default hit a record high and the Irish/German spread reached a euro lifetime peak after the report said Ireland was "perilously close" to calling in the IMF and the EU.
The Irish 10-year bond yield climbed to highs around 6.36 per cent earlier today driving the yield premium that investors demand over German Bunds up to almost 400 basis points, and a euro lifetime high.
However, following the intervention by Minister for Finance Brian Lenihan and the IMF, this had fallen back slightly by the time the Dublin markets closed this evening with the yield hovering at around 6.29 per cent after 5 pm, and the spread between Irish and German bonds at 388 basis points.
Irish bond yields have risen in recent weeks as concerns persist over the rising cost of bailing out the banks.
The IMF dismissed an article in the Irish Independent - which claimed the State may require the assistance of the IMF- saying it did not foresee that its financial assistance would be needed for Ireland and praised the Government’s efforts at tackling the banking crisis.
The IMF said Ireland had taken "assertive measures" to deal with its banking crisis and fiscal deficit. "With the most recent policy measures, the authorities continue their support of the banking system and help maintain financial stability," a spokesperson added.
The Department of Finance was equally dismissive of the article. "There is absolutely no truth to a rumour concerning external assistance. It is based on a local misinterpretation of a research report," a spokesman said.
The newspaper used a report from Barclays Capital as the basis for the article. Barclays said Ireland's liquidity position was comfortable but if unexpected banking losses emerged or economic conditions deteriorated outside help may be needed.
Mr Lenihan insisted today the Government is not facing difficulty raising funds. He said the Barclays report noted that “the Government was taking the right steps at the right time."
A combination of costly bank bailouts, anaemic growth and the worst budget deficit in the EU have stoked fears of a full-blown debt crisis and Mr Lenihan is under pressure to increase efforts to get the finances in order.
"The report is a lot more measured than what has been reflected in the newspaper," said Geraldine Concagh, a senior economist in Allied Irish Banks. "The market is very nervous at the moment."
"The market is built on trust," said Bloxham sales trader Ian Huggard, "and Ireland is a recognised basket case in peripheral Europe. It doesn't take a lot to trip the switch."
However, Mr Huggard said he didn't think Ireland would default on its debt, and speculated that the rise in bond yields could be opportunistic selling ahead of a planned auction later this month.
NCB stockbrokers said the widening spreads appeared to be have been driven by “noise” surrounding Anglo.
“The key question, if Anglo were to default on its bonds, is whether this would positively affect sovereign yields by lessening the amount of capital required to be injected into the institutions by the State, or, will this be perceived negatively as a State institution defaulting. We believe that it should be perceived positively – the State would have cut loose a dead weight,” economists Brian Devine and Ciaran Callaghan wrote.
“The underlying fiscal situation, when one steps back from the noise, is not pretty but talk of the IMF is far too premature.”
Earlier this week, Mr Lenihan said a €3 billion fiscal adjustment target for the 2011 budget was a minimum. The Green Party want that to be the maximum, setting them on a potential collision course.
"We hope that it will be kept to €3 billion and we will be doing our very best (to keep it at €3 billion)," Green Party deputy leader Mary White told RTÉ today.
Analysts say this year's budget deficit could reach about 25 per cent of gross domestic product (GDP) including the one-off costs associated with bank bailouts. Even without the one-off bank bill, the shortfall is still expected to be about 10 per cent next year on an underlying basis, over three times an EU limit of 3 per cent, according to the latest Reuters poll.
Davy said the Government had already pre-funded this year's Exchequer requirements and part of next year's. However, it warned that Ireland still faces many challenges, including communicating the reality of its stabilisation efforts to a sceptical audience at home and abroad.
The National Treasury Management Agency (NTMA) said today it planned to sell up to €1.5 billion of bonds in an auction on September 21st.
Green Party leader John Gormley warned that renegotiating with Anglo Irish Bank bond holders could widen the country's bond spreads. "You could be cutting off your nose to spite your face," he told RTÉ Radio today. "You have to act very cautiously because you could find then that the spreads increase."
However, Fine Gael said the Government should negotiate with Anglo's bond holders on a “fair and equitable” arrangement.
"The opposition is now unified behind Fine Gael's policy that bond holders should share in the burden of winding down Anglo Irish," said deputy finance spokesman Kieran O'Donnell.