ANALYSIS:Ireland is not yet Greece, but it still has to pay much higher bond yields than Germany – and the latest Moody's downgrade shows why, writes DAN O'BRIEN, Economics Editor

THE AUCTION of a rich country’s bonds was, until the very recent past, barely newsworthy. Raising money from investors was to governments what withdrawing a small sum from an ATM is to most people.

Now it’s different. Each time a fiscally weak euro zone country seeks to tap the market, there is a collective holding of breath for fear that investors will turn their noses up at the bonds.

Ireland, along with Greece, Portugal and Spain, is one of those weak countries. And today is one of those hold-your-breath days.

The National Treasury Management Agency (NTMA) will try to persuade investors to lend the government up to €1.5 billion.

The chances of failing to achieve the target are small but they are not trivial. As Chart 1 shows, yields on Irish government 10-year bonds are not far off their recent peak, reached at the height of the euro zone crisis at the end of the first week of May.

Despite the emergency measures and a massive rescue package agreed by EU leaders in the early hours of May 10th, the effects on sentiment were short lived. Yields began drifting up again almost immediately.

This happened in spite of direct intervention by the European Central Bank (ECB) to buy Irish government bonds in the market (it is worth noting that, while the ECB can buy bonds from private sources, EU treaties prohibit it purchasing them directly from governments).

In the context of today’s auction, a more immediate concern is the impeccably timed decision yesterday of credit rating agency Moody’s to downgrade its assessment of Ireland’s credit worthiness. All that said, it is very unlikely that the NTMA will fail to raise the money – even Greece managed to raise €1.6 billion last week.

The most immediate concern is the cost of borrowing. This day last week, Greece was obliged to offer a yield of almost 5 per cent on bonds that it will pay back in a year’s time. To gauge how extreme this is, consider that the country at the other end of the euro zone creditworthiness spectrum – Germany – pays just one-10th of this on equivalent one-year paper.

Thankfully, Ireland is not Greece (not yet, at any rate). But it is still in the danger zone. Chart 2 shows just how much higher yields are in absolute terms compared to most of the past decade, and relative to super-safe Germany.

It also shows how, over the course of the decade up to late 2007, investors made little distinction between euro zone countries’ debt.

All participants of the single currency enjoyed low and falling rates of interest on their borrowings.

There was always something of a mystery about this: any risk model indicated that the risk of high-debt countries – such as Italy and Greece – failing to repay was appreciably greater than the risk of lower-debt Germany. Whatever the reason, risk consciousness returned after the first rumblings of the credit crunch in the summer of 2007. Investors began to notice Ireland’s faltering economy. Yields began to decouple.

But it was not until the collapse of Lehman Brothers a year later in September 2008 that things changed radically. The difference between Irish and German yields ballooned, although as the chart clearly shows, this was caused by a fall in the yield for German bonds rather than a rise in that of Irish ones.

Even the controversially wide-ranging guarantee of the banks’ liabilities had next to no impact on the perception of Ireland’s default risk. The real change for Ireland came when Anglo Irish Bank was nationalised in early 2009, an event that had repercussions across all the weaker countries’ debt markets, not just Ireland’s.

Over the second half of 2009 and into early 2010, conditions calmed somewhat.

But then the Greek crisis erupted. Its consequences are still being felt today as the NTMA will have to offer elevated rates of interest to lure investors to buy its bonds. Hold your breath till midday.