Ireland’s loan costs start climbing again

As reported in the Irish Times, Ireland loan costs are rising again due to the further deepening of the Eurozone debt crisis.

More and more states have trouble finding investors who are willing to buy their bonds. Even the European Financial Stability Facility (EFSF) has to deal with higher borrowing costs.

Dermot O’Leary, chief economist with Goodbody Stockbrokers, said that the stability in borrowing costs for Ireland ended “rather abruptly in recent days” after a 3 month period of relative stability.

This week for the first time since August, the 9 year bond yield grew to more than 9%. States, including Ireland, didn’t ask for a lot of money. And still they had trouble financing their deficits cheaply.

“It’s quite a big movement in a week despite the illiquidity,”

Ireland is not able to borrow billions of euro from private investors because of too high yields. Until 2013, EFSF is taking care of Ireland’s borrowing needs. But the raising of the yields makes it harder for Ireland to start again borrowing from private investors.

Earlier this year, the government negotiated the yields to be paid for the money borrowed from other European countries. Because of EFSF’s help, politicians supposed that they will save money if they borrowed from EFSF. This may no longer be the case. In September this year, the 10-year EFSF bonds sold at an yield of 2.7%. Friday, the same bonds were selling with yields higher than 4%. This represents a significant increase in just a couple of months. The yield almost doubled during this time.

“The general pressure on sovereigns reflects the lack of confidence in European governments to sort out problems.”
Ciaran O’Hagan, head of euro rates research at Société Générale in Paris.

This week the lack of confidence in the European governments was obvious in the case of the German bond auction. Germany was forced to sell only 60% of their bonds at a relatively low yield. The rest of the 40% was purchased by the Germany’s main bank.

Dermot O’Leary approximates that the for each 1% increase in the cost of funding for EFSF, Ireland has to pay about €200 million for the €22 billion it still has to drawn out. For example, a 5% increase will skyrocket the Ireland’s borrowing costs by €1 billion.

Mr O’Hagan added: “you can have a yield at 4 per cent – but it’s another thing to get it sold”. The overall situation doesn’t look well. But the current scenario is better than it was anticipated 1 year ago. After the 50% haircut of the Greek’s bonds, investors no longer believe that investing in bonds guarantees that they will get their money back.

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