The cost of Irish borrowing rose today ahead of the National Treasury Management Agency (NTMA) auctioning two bonds to raise €1.5 billion.
The premium investors demand to hold Irish 10-year debt rather than the German benchmark widened by 6 basis points to 299 basis points today, bringing it closer to the euro-era intraday record of 316 points reached on May 7th. The NTMA is due to sell 4 and 10-year bonds tomorrow.
The increase is being linked to concerns over the more than €24 billion cost of the bailout for Anglo Irish Bank, a sum that Central Bank governor Patrick Honohan today described as "costly but manageable".
Speaking at a Hong Kong conference, Mr Honohan accepted the bailout was a "shock to the system" but added that
plans to recapitalise the bank were well on track and had little impact on the Government's overall deficit plans.
He said the total cost of bailouts of all Ireland's banks and financial institutions would be around 20 per cent of GDP.
Mr Honohan said last week the net cost of the recapitalisation would reach 15 to 16 per cent of economic output, though the final bill would depend on the price Anglo got on sales of loans to Ireland's bad bank scheme.
"It's a very high deficit measured this year because we're taking the hit, we're acknowledging the losses in the banking system and those losses which are being paid for by the Government have to be included in the deficit," he said.
He told the conference Ireland's deficit will grow this year because it has been transparent in recognising the full amount of its loan losses. "Ireland will have a more stable future," he said.
Mr Honohan also said that he would prefer to see the bank guarantee phased out sooner rather than later, despite calls from banks to extend it.
The scheme was introduced at the beginning of the global financial crisis in September 2008 and the European Union has approved an extension until the end of 2010 debt of over three months' duration. However, the guarantee period for shorter-term debt finishes at the end of September.
"I'm not in a rush to remove the guarantee but I don't want it to be in a period longer than quarters, rather than years, because if they've done the job properly that won't be necessary," he said.
The NTMA has raised 90 per cent of its planned €20 billion of borrowings this year with four regular monthly auctions to spare and the country's debt agency has said its funding needs are covered into the second quarter of next year.
Mr Honohan, who is a member of the European Central Bank's governing council, said today he sees very little risk of a double-dip recession and said the ECB holds a similar view.
Analysts also played down the market's fears, with Davy Stockbrokers describing them as "misplaced".
"Market jitters are once again fixated on the Irish sovereign/ banks nexus, with headline risks being resurrected on both solvency (the State’s recapitalisation burden) and liquidity (imminent redemption hump for bank guaranteed funding) grounds," analyst Donal O'Mahony wrote in a note. "Such investor concerns are both misjudged and misplaced."
He said ongoing name confusion of Anglo Irish Bank with Allied Irish Bank by reputable external media was doing little to alleviate the current tensions.
"Funding of the 2010 deficit is not really the issue. The price at which this money is borrowed at certainly is," Dermot O'Leary, chief economist at Goodbody Stockbrokers wrote in a note.
"While the public finances are not far off initial projections, it is clear that the as yet unknown cost of recapitalising the banking system is pushing up the cost of Irish Government debt."
Bank of Ireland fell 1.8 cents, or 2.3 per cent, to 77 cents at the close in Dublin trading, while Allied Irish Banks declined 4.3 per cent to 80.2 cents.
Additional reporting: Bloomberg, Reuters