THE PREMIUM demanded by investors to lend to the Government reached a new high yesterday, despite the European Commission approving measures to help ease the pressure on Irish banks.
The commission is to allow the Government to continue to guarantee deposits taken by the Irish banks from large businesses until the end of the year.
These deposits are a vital source of funds for the banks and the guarantee is intended to give large depositors the confidence to leave their money with the Irish banks.
Fears about the strength of the Irish banks and the potential impact on the Government’s own finances contributed to the jump in the interest rate demanded by investors to hold Irish Government debt.
The interest rate or yield on Irish Government 10-year bonds passed 6 per cent yesterday before falling back in the afternoon, amidst rumours that the European Central Bank had bought Irish bonds. At its peak yesterday, the yield on Irish bonds was almost three times higher than that of the equivalent German bond.
Taoiseach Brian Cowen downplayed the developments, saying that they represented the “ebb and flow” of the market.
Higher yields in the bond market mean that each time the Government attempts to borrow money, it must offer higher interest rates to lure investors to take on its IOUs, putting further pressure on the Government finances .
The renewed fears about the state of the Irish public finances stem from concern about the cost of bailing out State-owned Anglo Irish Bank, which is set to exceed €25 billion.
This in turn is making it difficult for all the Irish banks to raise funds to repay some €25 billion of Government guarantee debt that falls due this month.
The extension of the controversial blanket guarantee by Minister for Finance Brian Lenihan should make this easier as it eases concerns that corporate depositors would also withdraw funds before the original two-year guarantee expires later this month.
The guarantee was introduced at the height of the global financial crisis in September 2008 amidst fears of a general run on Irish banks.
Mr Cowen said yesterday that when the original guarantee was introduced in September 2008, the Government was not told that Anglo Irish Bank had sought to be taken over by the Bank of Ireland, as claimed in the RTÉ documentary Freefallthis week.
The bank’s approach is seen as a indication of the serious nature of the difficulties Anglo faced. Anglo was subsequently included in the guarantee leaving the State liable for its losses.
Sources said last night that Bank of Ireland had informed the Government before the guarantee that Anglo had approached the bank with a proposal that it take Anglo over.
Speaking of the guarantee extension, Mr Lenihan said: “This is our judgment as a Government and it is also the judgment of the commission that this is what is appropriate for Ireland at this stage in the current state of financial markets”.
The extension comes as the commission finalises its review of a restructuring plan for Anglo, which is now likely to be wound down over a long period instead of being divided into “good” and “bad” banks.