EUROPEAN COMMISSION chief José Manuel Barroso warned that the coming months will be “very challenging” for the euro zone generally as the EU’s executive branch raised the first €5 billion for Ireland’s EU-International Monetary Fund bailout.
The commission said last night that the issuance spread on the loan was fixed “at the tight end of the initial price guidance” at mid-swap plus 12 basis points, meaning it will pay an annual interest rate of 2.59 per cent for the money.
The commission will lend on the money to Ireland on a back-to-back basis. The addition of its 2.925 per cent surcharge when lending the money on to Ireland means the Government will pay some 5.51 per cent for this part of the bailout.
The bond sale yesterday was seen as a key test of market sentiment towards the Irish bailout as the EU authorities embark on an ambitious borrowing programme.
The commission’s rescue fund – known as the European Financial Stability Mechanism (EFSM) – plans to raise a figure as much as €17.6 billion for the Irish rescue this year. And the euro zone fund – known as the European Financial Stability Facility (EFSF) – plans to raise some €16.5 billion.
“The investors’ interest was very strong and, within less than one hour, the book was oversubscribed by more than three times. Investor demand came from around the world and from all types of investors,” the commission said.
“This is a sign of confidence in the euro area and a recognition of the EU as a prime issuer.”
However, the decision of the Swiss National Bank to stop accepting Irish bonds as collateral pointed to a lack of confidence in Ireland, and a sharp rise in the Portuguese borrowing costs reflected continued tension in sovereign debt markets.
Mr Barroso told reporters in Brussels that EU leaders were prepared to contemplate new measures to reinforce the currency.
“We have at European level the instruments to act and, if needed, we’ll adopt even other instruments to ensure financial stability in the euro area.”
This will not be an easy year, he said.
“Sometimes it will be painful also in economic terms, but we are not firefighting for financial stability.”
Although the European Central Bank continues to accept Irish bonds as collateral in money market operations, the Swiss National Bank said it came to its decision because Irish paper “did not meet the quality criteria”.
Even though the protection of the EU-IMF bailout fund means Ireland can remain outside private debt markets for at least two years, the Swiss manoeuvre is likely to weigh on sentiment.
The lack of confidence in Ireland was reflected in a declaration by Denmark’s biggest pension fund, ATP, that it would not buy Irish or Greek paper because it believes the risk to be too great.
Portugal returned to the market yesterday to sell €500 million in six-month money but at a rate – 3.686 per cent – considerably higher than the 2.045 per cent seen in a comparable sale last September. The comparable rate was only 0.592 per cent a year ago.
With Portugal set to raise €20 billion this year, Morgan Stanley predicted that the premium investors’ demand to hold Irish paper over Portuguese paper will narrow.
Earlier this week, the yield on Irish 10-year bonds was 2.5 percentage points higher than on Portuguese bonds.
