7.33% Highest Interest Rate Yet; as Cost of Our Sovereign Debt Soars, Disaster Looms Next Year When We Must Go Back to Borrow More

Daily Mail (London), November 3, 2010 | Go to article overview

7.33% Highest Interest Rate Yet; as Cost of Our Sovereign Debt Soars, Disaster Looms Next Year When We Must Go Back to Borrow More


Byline: Senan Molony Political Editor

THE cost of the State's borrowing yesterday surged higher than the levels that forced Greece into EU and International Monetary Fund administration.

The interest rate demanded by traders selling Irish sovereign debt hit 7.33 per cent for ten-year money, substantially higher than the 6.5 per cent agreed in the last official placement by the National Treasury Management Agency.

Department of Finance officials downplayed the significance of activity in the 'secondary market', which involves the selling-on of Irish paper. But the nightmare new rate holds a warning for when this country attempts to re-enter the wholesale money markets next year.

This further alarming slide in Ireland's economic credibility came after the Financial Times highlighted the worsening outlook for Irish and Portuguese bonds.

Borrowing costs for Ireland and Portugal shot up as the market took fright at European proposals to force investors to take a greater share of losses in future State bailouts, according to draft rules agreed at last week's EU summit in Brussels.

The moves in the bond markets this week follow agreement by member states to indulge France and Germany's demands for a protective mechanism to resolve future sovereign debt crises. Ireland has now seen the premium we pay above German benchmark rates rise by more than four and three-quarter percentage points.

The yield for ten-year bonds has risen by one-third of 1 per cent in just a week, reaching an interest rate that is effectively unsustainable for any country. And it shows that existing institutional holders of Irish bonds are willing to take cuts in their profits in order to offload debts that are looking increasingly risky.

Both the Irish premium on German rates and the interest rate itself have set new records again this week.

'People do seem shocked about the idea of a future eurozone debt restructuring - but this should not have been a surprise unless you really believed that the German taxpayer would always underwrite everything,' said Goldman Sachs European economist Erik Nielsen to the Financial Times.

The rise in rates for so-called peripheral nations in the eurozone, such as Ireland, appeared to fulfil a forecast by European Central Bank president Jean-Claude Trichet that the proposed rescue system would increase borrowing costs for member states.

There is a danger that even talking about debt restructuring 'could become a self-fulfilling prophecy,' the Financial Times quoted a trader as saying. …

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