Investors reassess Irish debt risk according to Bank of Ireland’s Monthly Bulletin

Significant fall in Irish bond yields. Debt ratio may now peak at level lower than projected

August proved a turbulent month for financial markets across the globe.  Investors pared risk in the face of a slowdown in global growth, notably in the major Western economies, and further uncertainty regarding sovereign debt in the euro area.  Ireland proved an exception however, with strong foreign buying helping to push Irish sovereign bond yields sharply lower, both in absolute terms and relative to the rest of the euro area, according to Bank of Ireland’s latest Bulletin which was published today, 7 September 2011.

Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said:“The yield on 2-year bonds is currently trading around 8%, having reached 22% in late July, and the 10-year benchmark yield is under 8.5% from 14%.  The latter move has taken the spread over Germany to 650 basis points, from over 1100.  Moreover, Irish 10-year yields are now well below that of Portugal, the other recipient of funds from the EFSF, having traded well above for most of the year.

A number of factors lie behind this implied reassessment of Irish risk by investors: the monthly exchequer returns continue to show the Budget deficit to be broadly on target, the interest rate on borrowings from the EU will now be lower than originally agreed and the cost to the State of the latest round of bank recapitalisations has been lower than generally expected.  Some €35bn of Ireland’s €85bn package agreed with the troika last November was earmarked for the banks but in the event €24bn was required; the State has injected around €17bn with the balance coming from private sector burden sharing or equity injection.  The net result is that the sovereign debt ratio may peak at lower levels than many projected, and the NTMA has stated that it now expects the exchequer to be funded to the end of 2013.

“Sentiment can swing sharply of course, and Irish yields have risen this week amid general risk aversion. The Minister for Finance has also stated that the risks to economic growth are on the downside.  We share the current consensus view that the economy will show marginally positive growth this year but the available data still implies that any growth will be driven by the external sector, as domestic demand still appears to be very weak with consumer spending clearly in the doldrums.  That dichotomy highlights that Ireland needs the current softness in global growth to be temporary rather than the precursor of a sharper downturn”, concluded Dr. Dan McLaughlin.

September Bulletin 2011


7 September 2011

For reference:

Dr. Dan McLaughlin                                  Anne Mathews

Group Chief Economist                             Media Relations Manager

Bank of Ireland Global Markets              Group Communications

Tel:  01 609 3221                                        Bank of Ireland

Tel: 076 623 4771 / 087 246 0358