Amid concern among investors that the government will fail to push through planned austerity measures, Irish bond yields, which govern the cost of borrowing, rose to record levels.
The yield on Ireland’s 10-year bond climbed 0.18 percentage points to 7.19% in early trading. The extra yield investors demand to hold Irish debt instead of German bunds, the euro region’s benchmark securities, widened by the same amount to 4.58 percentage points, according to Bloomberg data - the widest margin since the introduction of the single currency.
Colm McCarthy, an economist advising the government, said at the weekend he believed that if the budget planned for next month does “too little” to convince the financial markets, Ireland will be unable to finance itself and will be forced to accept a bailout by the International Monetary Fund.
Caught between the conflicting demands of investors for lower debt levels and higher growth, the Irish government has emphasised - in a similar way to the U.K.’s coalition government - the need to bring down debts through public spending cuts.
The finance minister, Brian Lenihan, said last month that proposed cuts of EUR7bn would need to be more than doubled to EUR15bn in a four-year plan.
The public deficit, he said, would hit 11.9% of GDP, while total net debt would reach 70%. The figures do not include the likely cost of bailing out Anglo Irish Bank, which could take the total debt figure past 100%, something the country has avoided since the 1980s.
Mr. Lenihan will put forward a revised budget next month despite criticism from opposition parties, which argue that the measures will undermine growth.
Protests have so far remained muted but are expected to become more vociferous. The health minister, Mary Harney, was yesterday pelted with red paint as she opened a mental health unit in Dublin, in one of the first violent acts by protesters angry at budget cuts.
Ben May of London research house Capital Economics said that falling house prices and prolonged deflation were adding to the country’s difficulties, which include huge private sector debt and a loss of international competitiveness.
“There are still uncertainties over how much the bank bailout will eventually cost, with a strong sense that there may be more to come,” he said. “Also, there is a view that the extra EUR7.5bn the government intends to cut over the next four years will not be enough to get the annual deficit down to 3% without more austerity or higher growth.” Nick Stamenkovic, a fixed-income strategist at the Edinburgh-based RIA Capital Markets, told Bloomberg: “The biggest worry about Ireland is the growth picture.
“Investors are fretting that the actual growth implication of these fiscal consolidation measures may make it more difficult for budget deficit targets to be achieved.” Ireland sold its most recent bond issue in September before declaring itself able to fund the deficit from existing funds until next year. However, if its bond yields remain at their current record highs, the government will be forced to pay higher interest rates on its debts, putting its escape plan in jeopardy.
Copyright: Guardian News & Media 2010
