Lenihan says economy stable as bond yields rise
Minister for Finance Brian Lenihan said today a recent surge in borrowing costs for some countries suggests there is a “concerted attack” on euro zone nations.
Speaking in Dublin today Mr Lenihan said the Government “will do everything that is essential to protect the common currency and put our own economic house in order”.
Data published yesterday showed the economy contracted 1.2 per cent in the second quarter and that growth in the first quarter was less than had been previously estimated.
Irish borrowing costs hit a new high of 6.546 per cent today and have been rising for the last month. The premium investors demand to hold 10-year Irish bonds rather than German Bunds rose to a new euro lifetime high of 451 basis points today.
In recent weeks the extra yield investors demand to hold Irish bonds over German bunds has surged to record highs due to investor concern about the State’s ability to manage the cost of its bank bailout and reduce the budget deficit.
Mr Lenihan said he was undeterred by the data and that the underlying trends indicated a remarkable turnaround for the economy.
"Tax revenues are stabilising, public expenditures are under control and our budget deficit will shrink next year," he said. "The recovery is still at a tentative stage and is likely to be uneven.”
Mr Lenihan also said it is "too early" to signal whether a tougher budget is required for next year.
The Government has agreed with the European Commission that it will cut the deficit to 3 per cent of gross domestic product (GDP) by 2013 from 14 per cent last year.
The growth figures were disappointing because the expectation from market analysts had been that the economy would continue to grow. This is essential if the Government is to meet the targets agreed with the commission by 2014. The Government has ruled out seeking an extension to this deadline.
"Neither international markets nor our EU partners will tolerate a slippage from our stated targets," Mr Lenihan said.
Mr Lenihan said today that he was concerned by the yields demanded by investors during the most recent bond sale.
Earlier this week the National Treasury Management agency (NTMA) – which manages the State’s debt – raised €1.5 billion in a bond auction but was forced to offer 1 percentage point more than during a similar auction a month earlier. However, the State has completed the borrowing programme required for this year.
John Corrigan, chief executive of the National Treasury Management Agency (NTMA), told reporters today concerns about Irish banks' funding challenges were overdone and authorities stood ready to make up any shortfalls. "We've characterised concerns around that like the millennium bug. We all thought the planes were going to fall out of the sky, the trains were going to stop, the clocks weren't going to work."
Peter Sutherland, a non-executive chairman of Goldman Sachs International, said the Government may need to cut more than €3 billion from next year’s budget.
"The figure of €3 billion has been postulated as the improvement to be sought in the next budget," Mr Sutherland said in a speech in Dublin today. "We are told that this is all that the political system can bear but if all the mainstream political parties accept that more is required and are prepared to say it, we can find a way."
One bright spot for the Government today came from a research note by Goldman Sachs Group which said Ireland was "very unlikely" to experience a financial crisis as severe as the one that forced Greece to seek an international bailout earlier this year.
"A repeat of the Greek debt turmoil in Ireland is very unlikely,” Michael Vaknin, a senior fixed-income strategist at Goldman in London, said.
"With Irish spreads already at all-time highs, we would argue that refinancing risks in the Irish debt market is aggressively priced-in already."
Additional reporting: Bloomberg/Reuters