THE BORROWING rate on Ireland’s 2020 bond fell to its lowest level in more than two years as markets were encouraged by credit ratings agency Moody’s saying that a deal on the bank debt may remove the threat of a downgrade for Ireland.
The ratings agency is the most pessimistic on Ireland’s economic prospects and is the only one of the main ratings agencies to have downgraded the country to junk.
Ireland has been placed on negative outlook by the agency since last year, meaning the credit rating may be downgraded again.
Moody’s analyst Dietmar Hornung said a deal on reducing the burden of the €64 billion bank bailout cost would be positive for Ireland’s rating but would not automatically lead to an upgrade.
Euro zone measures to support Ireland and use of the euro bailout fund, the European Stability Mechanism, to recapitalise Irish banks “would certainly be a credit positive for Ireland”, he said.
“But we are monitoring discussions at EU level here, and it is too early to anticipate what kind of solution European policymakers will eventually agree on,” Mr Hornung told the Wall Street Journal.
The agency was monitoring “many different elements”, he said, including economic outlook, a possible resolution of banking sector issues and regaining sustainable access to the markets: “It is not one dimensional.”
He warned that the poor outlook for the Irish economy remained a concern, that domestic demand was still weak and economic growth forecasts have been revised slightly lower recently.
The interest rate, or yield, on the Government’s nine-year bond fell by a 0.17 percentage point or 17 basis points to 4.76 per cent after touching 4.74 per cent, the lowest level since June 2010.
Stephen Lyons, analyst at stockbrokers Davy, said the generally low volume of trading in Irish government bonds meant a few big trades on any positive news could push bond yields lower. “Our view is that this is not really a new story but a positive headline in a buoyant market has given them a bit of zest,” he said.
Minister for Finance Michael Noonan wants a deal on the bank debt but has downplayed the possibility of a deal this month, pointing instead to the next €3 billion payment on the Anglo debt in March.
Spain’s borrowing costs fell to their lowest levels in almost a month on speculation that the country is poised to ask for a government bailout that will trigger the European Central Bank’s purchases of its bonds.
The rate on Italy’s two-year bonds fell the most in more than a week after Germany’s finance minister, Wolfgang Schäuble, said that Europe has made “significant progress” in overcoming a crisis of confidence in the euro.
New figures from the Central Bank showed that Irish bank borrowing from the ECB and the Irish Central Bank’s emergency lending facility remained relatively static in September at €120 billion.
Banks in Ireland, including international banks, had borrowed €79 billion at September 28th, down from €79.1 billion at the end of August, while emergency loans, most of which are to the former Anglo Irish Bank, declined to €40.6 billion from €40.8 billion.
Meanwhile, Royal Bank of Scotland’s deal to sell 318 branches to Spain’s Santander has collapsed in a disastrous twist for the part-government-owned lender. RBS has been working for over two years on the sale, ordered by the European Commission as one of the penalties imposed for the UK’s £45 billion state rescue.
People close to the transaction said Santander had pulled the plug on the deal, initially valued at £1.65 billion.
The collapse of the deal marks the start of what is likely to be a difficult few months for RBS and Stephen Hester, its chief executive. The bank is braced for a large penalty from regulators over its involvement in the alleged manipulation of Libor, the interbank borrowing benchmark – possibly topping the £290 million fine handed to Barclays. – (Copyright The Financial Times Limited 2012/Bloomberg)
