THE COST of State borrowing rose sharply yesterday on the back of a downgrade of Irish debt by Standard and Poor’s (S&P), a credit rating agency. This pushed the interest rates on Government bonds to their highest level since a huge financial rescue package was put together by the EU in early May.
The S&P rating of Ireland is now at its lowest level since 1995, but remains higher than six of the other 16 euro area countries, including Italy, Portugal and Greece.
National Treasury Management Agency chief executive John Corrigan, whose organisation manages the State’s debt, publicly criticised the downgrade, describing it as “flawed”.
Such an intervention by the agency, or indeed any national treasury agency, in unusual.
“This [the S&P downgrade] has rattled the markets,” said Oliver Mangan, bond economist with AIB Global Treasury, adding that unlike previous downgrades by S&P and other rating agencies, this downgrade took the market by surprise.
In response to the criticism, Trevor Cullinan, the London-based lead analyst with S&P on Ireland, pointed out that despite the downgrade, Ireland still had a “very strong credit rating, and the capacity of the Government to meet its financial commitments is still very strong”.
S&P not only downgraded Ireland’s credit rating by one notch, but it maintained its “negative watch” on the State, indicating that it may look to downgrade Irish government debt in the future. “The negative outlook reflects our view that the rating could be lowered again,” the agency said.
The two other main international rating agencies – Moody’s Investors Services and Fitch – have Ireland on a “stable” outlook.
Both reiterated yesterday that given the stable outlook they have previously attributed to Ireland, a change to the State’s rating is most unlikely over the next 18 months.
Despite the S&P downgrade on Tuesday leading to higher yields yesterday, the National Treasury Management Agency does not expect to face problems this morning when it seeks to borrow €400 million to €600 million in short-term debt.
Given the generous premium the agency will be obliged to offer investors for the increase in perceived riskiness of lending to the State, there should be “no shortage of demand for Irish bonds”, Mr Mangan said.
David Schnautz, an interest-rate strategist at Commerzbank in London, said that while peripheral debt markets may remain in turmoil, the situation is nonetheless not as bad as it was last May, before an EU-level € 750 billion bailout was put in place.
“The market has improved to price individual markets individually. Last May the markets were at a point of questioning whether any buyers would turn up at an auction. A ‘buyer strike’ is not on the horizon at this point,” he said.
But the “litmus test” for Ireland in terms of its borrowing ability will be when market activity picks up steam in September, said Mr Schnautz. At that point, a host of European government and corporate bonds will mature and new borrowings will need to be sourced.
Following the S&P downgrade, the difference in yield that investors demand to hold Irish 10-year bonds, compared with those of safe-haven Germany, jumped by 24 basis points to 344 basis points, having reached as high as 347 basis points during the day, setting a record for a second straight day.
For yields to narrow and Irish funding to become cheaper, two things are seen as essential: a final figure for the banking sector bailout; and proof that the State’s budget deficit is being reduced.
Yesterday’s developments also raised the hurdle for the Republic’s beleaguered banks, which must repay about €30 billion over the next month.
In order to do this, they will have to raise fresh funds in the markets. This may now be more difficult and more expensive because banks’ funding costs are usually based on government bond yields plus a premium.
Irish bank bond credit default swaps (CDS), which insure against banks defaulting on their borrowings, rose yesterday, with Bank of Ireland CDS up by 10 points to 358 and CDS on Anglo Irish Bank increasing by 13 points to 581, according to data provider CMA.
Yesterday fellow “peripheral”nation Portugal sold €1.3 billion of 2016 and 2020 bonds, at marginally higher yields than previously.