CREDIT SWAPS:THERE WERE signs yesterday that the Government's decision to guarantee the Irish banking system was having a positive impact.
Credit-default swaps - a proxy measure of how easy it is for banks to borrow from other banks - for the Irish banks guaranteed by the Government declined sharply yesterday as the market took the view that they were now less of a risk.
This followed the Government's decision to provide a two-year guarantee of deposits and debts totalling €400 billion at six Irish banks.
Contracts on Anglo Irish Bank's five-year senior debt roughly halved from their levels on Monday to about 376 basis points or 3.67 per cent yesterday.
Anglo was seen as the Irish bank that would be most vulnerable given its exposure to commercial lending and its lack of a retail deposit base.
The rate had shot up on Friday and Monday as concerns about the health of Irish banks gathered momentum.
Similarly, rates for Irish Life Permanent, which relies heavily on wholesale funding, fell by about 90 basis points to 235 yesterday.
The rates attached to AIB and Bank of Ireland's contracts also fell sharply. AIB's was down at about 150 basis points, putting it just outside the rate attached to Spain's Banco Santander, considered to be one of Europe's best capitalised financial institutions.
These credit swaps are effectively an insurance policy on the banks defaulting on their debt.
They are designed to protect bondholders against default. They pay the buyer face value in exchange for the underlying securities or the cash equivalent, should a company fail to adhere to its debt agreements.
The higher the rate attached to the contracts, the greater the perceived risk.
The easing in prices yesterday was seen by Irish bank analysts as a reassessment by the market of the risk now attached to Irish banks defaulting on their debts.
"The funding structure is very certain now and these margins should continue to tighten," said Kevin McConnell, head of equity research at Bloxham Stockbrokers.
"The risk of a default is greatly reduced. In fact it's virtually disappeared, unless you think that the Irish State is going to fail."
This view was supported by Oliver Gilvarry, head of research at Dolmen Securities. "The decline in rates is due to the State coming in and backing up the financial market here," he said.
