Record high yield on 10-year Irish bonds

THE YIELD on Irish sovereign debt swelled to a record high yesterday as a downgrade of Greece’s credit rating by Moody’s reverberated through European bond markets.

The credit ratings agency said a fresh downgrade of Irish sovereign debt was not imminent as it slashed Greece’s credit rating amid suspicion that it will default on its debts.

Moody’s said it was “monitoring” the attempts of incoming taoiseach Enda Kenny to seek better repayment terms on Ireland’s €85 billion financial rescue agreement with the European Union and the International Monetary Fund.

“I don’t expect the broad framework as laid out in the EU-IMF package will be changed,” said Moody’s credit analyst Dietmar Hornung.

“Certainly from an Ireland perspective, if there were changes to the interest rate that could reduce the debt burden somewhat.”

As fears increased that the euro zone could lurch into a new crisis, the yield on 10-year Irish bonds hit a record high of 9.52 per cent. This compares to a previous high yield of 9.35 per cent in November last year which occurred in the wake of the EU-IMF finance deal.

Pressure on the bonds of Europe’s debt-laden peripheral countries intensified as Moody’s cut Greece’s rating by three notches to B1.

The agency cited concerns about tax revenues and the risk that the Greek government may not be able to reach the budget conditions stipulated under its bailout agreement.

Moody’s analyst Sarah Carlson said the risk that Greece would default on its debt had now “materially increased”.

The ratings agency’s action was condemned as “incomprehensible” by the Greek finance ministry, which said Moody’s had not paid enough attention to the progress the country had made in cutting its deficit.

“Moody’s downgrading of Greece’s debt reveals more about the misaligned incentives and lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy,” it said in a statement.

The yield on Greek 10-year bonds rose to 12.32 per cent. It remains the highest in the euro zone.

European officials have yet to find a solution to the euro zone sovereign debt crisis that erupted last autumn. EU economic and monetary affairs commissioner Olli Rehn indicated yesterday that there was “a case to be made” for reducing the interest rates paid by Greece and Ireland.

A key test of sentiment in European debt markets will come tomorrow when Portugal plans to raise up to €1 billion in finance at its second debt auction this year.

The yield on Portuguese 10-year bonds closed at 7.55 per cent yesterday, shy of the 14-year record high reached in February.

There was some better news for Spain as investment bank Morgan Stanley declared its economy was “on the mend”.

“We believe the policy response that Spain has put in place on several structural fronts is under-appreciated,” its analysts wrote in a note to investors. – (Reuters/ Bloomberg.)