Ireland, Portugal Debt Insurance Costs Drop

By Mark Brown

LONDON – The cost of insuring the sovereign debt of Ireland and Portugal continued to drop Friday, after central banks bought both countries’ bonds Thursday to steady euro-zone sovereign debt markets.

Ireland’s five-year sovereign credit default swaps fell 10 basis points to 540 basis points, while those for Portugal dropped eight basis points to 440 basis points in early trading, according to Markit.

Spanish, Belgian, and Italian CDS prices were broadly unchanged.

Irish and Portuguese CDS prices fell 20 and 32 basis points respectively Thursday, as the yield premium investors demand to hold Irish and Portuguese bonds over bunds narrowed dramatically in response to central banks stepping up their bond purchases.

CDS are derivatives that function like a default insurance contract for debt. If a borrower defaults, sellers compensate buyers.

A fall of one basis point in the cost of five-year CDS equates to a $1,000 fall in the annual cost of protecting $10 million of debt for five years.

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European Markets Give Ireland Deal a Lukewarm Welcome

By Mark Brown and Katie Martin

LONDON–The Irish rescue package announced over the weekend has generated a lukewarm reaction in the European currency and debt markets, with choppy moves in the euro and only a modest recovery in bonds.

The 16-country currency initially rallied strongly in Asian trading hours after the €85 billion aid package was revealed, jumping 0.8% to hit $1.3355. It quickly dropped back again, however, hitting a two-month low at $1.3182. It followed a similar pattern against the Swiss franc.

As European trading got underway, the euro started climbing again, but market watchers are uncertain about where it is heading next, or how the Irish aid package will affect it in the long term.? “The package provides an indication that European policymakers are willing to act, and in size if necessary. This could help stem the rot in the euro,” said Daragh Maher, a senior currencies analyst at French bank Credit Agricole in London.

However, Maher also said he was “reluctant to talk about an immediate relief rally” in the currency, noting that investors remain nervous about Portugal.

The euro recently traded at $1.3255. It was at 1.3277 Swiss francs, having recovered from a two-month low of 1.3221 francs.

Sovereign bond markets saw a similarly modest and uncertain reaction. The yield-spread between Irish, Portuguese and Spanish 10-year bonds and 10-year German bunds tightened by between 0.04 and 0.06 percentage points in each case. Ten-year bund yields were up 0.053 percentage points at 2.748%.

“Bond markets haven’t really done much,” said one analyst. “They are digesting the package, but [market participants] don’t detect a great deal of difference in the overall [euro-zone sovereign] picture from the end of last week.”

The Irish aid package will consist of €67.5 billion from EU, and IMF funds and bilateral loans from the U.K., Sweden and Denmark. The Irish state will also contribute €17.5 billion, which come from the country’s National Pension Reserve Fund and from other domestic cash resources.

Ireland will pay an average interest rate of 5.8%, if the facility is completely drawn down.

(Neelabh Chaturvedi, Nick Andrews, Ainsley Thomson, Quentin Fottrell and Nick Winning contributed to this article.)

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Irish Bank Shares Fall; Government May Raise Stake in Bank of Ireland

By Vladimir Guevarra

LONDON–Irish bank shares continued to slide Wednesday on mounting expectations that the Irish government is likely to take a majority stake in the Bank of Ireland as part of a rescue package worth close to €85 billion from the European Union and the International Monetary Fund.

Shares in the Bank of Ireland were down 10% at €0.27. Allied Irish Banks PLC, whose government ownership will rise to around 95% after a planned rights issue, was down 19% at €0.27. Irish Life & Permanent, which so far hasn’t received any state aid, fell 0.4% to €0.75. The Irish ISEQ Financials index has fallen around 36% since Friday.

The Irish government is trying to stem its losses from the banking sector, which are largely the result of overlending in a decade-long property boom that crumbled in the financial crisis, while getting the banks to reduce their reliance on European Central Bank funding. A majority stake in the Bank of Ireland would leave Ireland without a significant lender free of state control.

Irish bank shares have been under pressure since the Irish government said Sunday that it had formally applied for tens of billions of euros in aid from the EU and IMF. Both have indicated that the money will be forthcoming, pending negotiations on the steps the government will have to take to restructure its debts and cut its budget deficit.

The government currently owns 36% of Bank of Ireland, but that could rise to 80%, based on an equity injection of around €3.5 billion, which would raise Bank of Ireland’s trough core Tier 1 ratios to 12%, said NCB Stockbrokers analyst Ciaran Callaghan.

MF Global analyst Simon Maughan also said it was likely the government would take a majority stake in the Bank of Ireland. However, Mr. Maughan says that prospect is a “suboptimal situation” and “it’s better for BoI bondholders to do a debt-for-equity swap and keep the government as a minority shareholder” in order for the Bank of Ireland to be a more independent bank. Maughan kept his sell rating on the Bank of Ireland.

The Financial Times reported that the Irish government is in talks to take a majority stake in Bank of Ireland, citing government officials.

Credit analysts at Moody’s Investors Service on Monday said they expect another €8 billion to €12 billion to be injected into Ireland’s banks, and that it would take around €0 billion to increase the core Tier 1 capital ratios of Bank of Ireland, Allied Irish, EBS and Irish Life & Permanent to 12%, above the central bank’s current 8% target.

Prime Minister Brian Cowen on Sunday said the 8% target probably wasn’t enough to appease markets. He said banks would also have to shrink their operations and sell off non-essential business lines and assets to return to health.

A spokesman from the Bank of Ireland declined to comment. A spokesperson for the Irish government couldn’t be immediately reached for comment.

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