European observers brace for Irish bond issue

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An Irish foray into the bond market Tuesday is being closely watched, and commented on, across Europe amid fears that a new chapter in the debt crisis has begun.

As Dublin goes to market to raise 1.5 billion euros (1.96 billion dollars) in four- and eight-year bonds, the problem of eurozone debt that many hoped was being resolved has instead resurfaced.

"The country most at risk is, in our view, Greece, followed by a sizeable gap and then a small cohort of countries including Ireland, Portugal, and Spain, followed by another large gap and then Italy, Belgium, Austria, Japan and, at horizons longer than five years, the US," Citi analysts Willem Buiter and Ebrahim Rahbari wrote.

They said it was "unlikely that there will be a sovereign default during the next five years by more than a couple of advanced economies," but disagreed with an International Monetary Fund (IMF) comment that a sovereign default in advanced economies was "unnecessary, undesireable and unlikely."

"We conclude there is no such thing as completely safe sovereign debt," the Citi economists stressed.

Greece and other European countries can rely on European Union and IMF rescue packages that have a combined worth of more than one trillion dollars.

And EU and IMF representatives travelled with Greek Finance Minister George Papaconstantinou to London, Paris and Frankfurt last week in a trip aimed at bolstering private equity confidence in Athens' debt.

UniCredit chief economist Marco Annunziata wrote in the Wall Street Journal Europe on Monday that if investors continued to shun Greek bonds, the EU and IMF might have to extend existing loans to Athens, noting that could be "politically tricky."

On Monday, the rate of interest Greece would have to pay for 10-year loans stood at 11.442 percent on bond markets, far above the benchmark German bund at 2.438 percent.

Irish bonds stood at 6.376 percent meanwhile, while those from Portugal were at 6.338 percent, illustrating high levels of scepticism now prevailing on financial markets with respect to debt from those countries.

"We think there is a measurable risk that Ireland (and Portugal) will access the EFSF (European Financial Stability Facility) and IMF," Goldman Sachs chief economist Erik Nielsen said.

European Central Bank purchases of government bonds from commercial banks crept higher last week to 323 million euros, a relatively small amount but one that has been rising steadily in recent weeks.

Since the start of the ECB's controversial Securities Markets Programme in May, the central bank has bought a total of 61.5 billion euros in public debt.

Meanwhile, problems accessing financial markets are also affecting commercial banks in what are known as peripheral eurozone states.

Commercial bank borrowing of central bank funds in Greece, Ireland, Portugal and Spain now accounts for about 61 percent of the European Central Bank's total lending of some 600 billion euros, the Financial Times reported.

Those countries account collectively for just 18 percent of eurozone output.

© 2010 AFP

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