“Putting Ireland and the IMF in the same sentence can trigger palpitations in the credit markets”

According to an iol report, Irish Finance Minister Brian Lenihan is blaming German Chancellor Angela Merkel for the rising cost of Ireland’s borrowing.  Perhaps he’s been channeling Sarah Carey in today’s Irish Times?

Meanwhile RTÉ notes that

Elsewhere, the Minister for Finance has said the main reason why Irish bonds yields are rising is because of uncertainty surrounding European Union plans for future debt.

However, Brian Lenihan also said it appeared that the markets did not fully believe the bank recapitalisation figures published at the end of September.

The interest rate demanded by investors to lend money to Ireland for ten years was 9.14% at lunchtime.

But, as spotted by Garibaldy, last night The Guardian identified a more likely culprit

Fears that Ireland could be forced into a Greek-style bailout by the European Union or the International Monetary Fund swept through financial markets today after the beleaguered country’s borrowing costs soared to levels seen as unsustainable by investors.

Long-term Irish interest rates surged to their highest levels since the launch of the single currency amid growing evidence that repeated bouts of budget austerity have failed to convince international investors that the former Celtic Tiger economy can cope with the banking crisis caused by a boom-and-bust in its housing market.

Attempts by Patrick Honohan, the central bank governor, to reassure investors by stressing that the Irish government was already planning the tough fiscal measures that the IMF would insist upon backfired, and helped push yields on 10-year Irish bonds up 61 basis points to 8.7%.

“Putting Ireland and the IMF in the same sentence can trigger palpitations in the credit markets,” said Gavan Nolan, a credit analyst at Markit. “Speculation that the Irish government and the IMF have already reached an agreement was doing the rounds.”

Those would be the comments reported here.

Speaking at the International Financial Services Summit 2010 in Dublin, Prof Honohan said the type of policy package the IMF would want to see Ireland putting in place is “very much” the package of fiscal adjustments that the Government is implementing.

He said that Ireland’s low corporation tax rate of 12.5 per cent would unlikely be a matter of interest to the IMF, as its aim is to get economies growing again so they can repay their loans quickly.

“If we look through history, the IMF has been indispensable for stabilising countries that ,” he said.

And on Olli Rehn’s activities in Dublin he added

Prof Honohan did not think European commissioner for economic and monetary affairs Olli Rehn came to Ireland to exert influence on the Government. “I think his role here was to offer the views of the commission,” he said.

Even though, as the Irish Times noted, yesterday Brian Lenihan said he is “absolutely” sure the country will not need to seek a bailout from the IMF and European Union.

Today the paper reports

European Commission president Jose Manuel Barroso signalled the EU was ready to act should countries such as Ireland require assistance.

European officials said they were monitoring developments in Ireland closely, with the Handelsblatt newspaper quoting a German government source who said aid could be unlocked “very quickly” if needed.

“What is important to know is that we have all the essential instruments in place in the European Union and euro zone to act if necessary, but I am not going to make any speculation,” Mr Barroso said at a G20 summit in Seoul, when asked whether Brussels would need to act to support Ireland.

It’s at times like these that I generally turn to Miriam Lord in the Irish Times

The day ended with a mystery.

It has emerged that Olli Rehn has a mole in Merrion Street, a chap who reports daily to him on the state of play in Ireland.

Brian Lenihan was anxious to play down the idea that the EU has put a supervisor into his department, poo-poohing the notion of Olli’s Eyes and Ears.

Joan Burton didn’t.

“He’s a tall gentleman from Hungary with glasses,” she revealed.

Whatever, shrugged Brian. He doesn’t have a “permanent facility” and is not in situ “on a permanent basis”.

But he didn’t deny that this “EU national who advises the commissioner” is a fixture for the foreseeable future. We can see him now – wearing a trilby, a drab mackintosh and little round spectacles. He carries a briefcase and a rolled-up umbrella.

His name is probably Laszlo. Zither music plays when he approaches.

The inevitable novel will be called Tinker, Tailor, Soldier, Mandarin . We don’t know the ending.

Adds  Karl Whelan at The Irish Economy has some thoughts on the movement in the bond yields.

The four-year bond yield, which had been about 3% in early June, reached 5% in late October and, as I write, stands at 8.34%, not so far short of the 8.92% prevailing on the ten-year bond. This suggests that the market is pricing in a debt restructuring in the next few years. (See this earlier post for a discussion of the relationship between bond yields and default probabilities.)

Even more disturbing have been the movements in the two-year bond. The yield on this bond had been about 2% as recently as June. It started November at 4% and, as I write, has now soared to 6.66%. Given that pessimists are likely to be assuming that Ireland will be borrowing from the EFSF in two years time, the implicit pricing in of a high probability of a debt default
estructuring as early as 2012 strikes me as unwarranted. But it illustrates the scale of the current negative sentiment towards Ireland in the bond market.

As of yet, the government has not been able to turn this sentiment around. An optimist might argue that passing the budget, resolving the political uncertainty via a general election and the emergence of solid evidence of a return to sustained growth might, together, achieve the required improvement in sentiment. A pessimist would argue that it’s too late.

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  • Pete Baker

    Adds Karl Whelan at The Irish Economy has some thoughts on the movement in the bond yields.

    The four-year bond yield, which had been about 3% in early June, reached 5% in late October and, as I write, stands at 8.34%, not so far short of the 8.92% prevailing on the ten-year bond. This suggests that the market is pricing in a debt restructuring in the next few years. (See this earlier post for a discussion of the relationship between bond yields and default probabilities.)

    Even more disturbing have been the movements in the two-year bond. The yield on this bond had been about 2% as recently as June. It started November at 4% and, as I write, has now soared to 6.66%. Given that pessimists are likely to be assuming that Ireland will be borrowing from the EFSF in two years time, the implicit pricing in of a high probability of a debt default
    estructuring as early as 2012 strikes me as unwarranted. But it illustrates the scale of the current negative sentiment towards Ireland in the bond market.

    As of yet, the government has not been able to turn this sentiment around. An optimist might argue that passing the budget, resolving the political uncertainty via a general election and the emergence of solid evidence of a return to sustained growth might, together, achieve the required improvement in sentiment. A pessimist would argue that it’s too late.

  • drumlins rock

    Was just thinking, should the broder areas be preparing for an influx of refugees from the south next spring?

    Have been following developments on another site, looks a bit scarey atm. and have no idea how they will get out of this one.

  • wild turkey

    “His name is probably Laszlo”

    Actually I’d put my money on Keyser Soze

  • Aldamir

    By next spring we’ll probably be in the same boat……

  • Alias

    The farce will come to an abrupt conclusion when the de facto state-owned banks have to repay their next batch of eurosystem debt.

    What the markets are actually reacting to is the ECB monetization of debt, recognising that borrowing this discredited monetary tactic from the Federal Reserve will prove to be as disaterous here as it has proved to be there.

    Irish eurosystem banks borrowed 24 of the 55 billion they repaid in September, and the ECB increased its lending to the Central Bank by exactly the same amount. The rest came for government injections of capital. In other words, nobody in the bond markets is actually lending to Irish eurosystem banks. Indeed, all of the Irish government bonds have also been purchased by the ECB so nobody in the bond markets is lending to the Irish state either.

  • Alias

    The other obvious conclusion is that Irish eurosystem banks are insolvent, having to borrow more money to repay their maturing debt because they don’t have the capital to repay it.

  • Mack

    Lol.

    Highly unlikely DR.

    Taking Patrick Honohan’s statement at face value why would the Irish gov pay 9% on the open market and implement the same ‘reforms’ when they can activate the EU / IMF bailout implement the cuts and pay only 5%?

    Almost certainly because the package wouldn’t be the same. Corpo tax would probably rise significantly if we go the EFSF route..

  • HeinzGuderian

    surely Oirland,as a Sovereign State,has the right to run its economy free from any,outside influence ?? On the other hand……….Four fingers and One thumb !! 🙂

    ‘Brits and European Parliament out’