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26th Sep 2022

Irish turmoil reignites eurozone debt crisis

  • Government support for Anglo Irish Bank has placed a huge strain on the country's public finances (Photo: William Murphy)

Fresh turmoil in the Irish and Portuguese debt markets has reignited the eurozone's fiscal crisis, with record borrowing costs in the two states sparking bail-out expectations and concerns over possible contagion.

Irish borrowing costs on benchmark 10-year bonds jumped half a percentage point to a euro-era record of 8.64 percent on Wednesday (10 November), a weighty 6.19 percent higher than their German equivalent.

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The dramatic rise followed a sell-off of Irish bonds by investors after LCH.Clearnet – one of Europe's biggest clearing houses – upped the amount of deposit it requires on all Irish positions to 15 percent.

Ireland's debt is now judged to be as risky as Greece's this spring when member states scrambled to agree a bail-out for Greece, with Lisbon also forced to pay record amounts during a bond issuance on Wednesday.

The Portuguese government successfully raised €1.2 billion in additional funding, but only after paying a record 6.8 percent yield on 10-year bonds.

The country's finance minister blamed the high rate on investor nervousness over the future shape of a permanent European rescue mechanism, with Lisbon last week ruling out any call for EU-IMF assistance after parliament agreed a new austerity package.

But a Goldman Sachs research report on Wednesday said Irish and Portuguese troubles had increased bail-out chances. "The likelihood of Ireland and Portugal entering an IMF-designed adjustment program funded by the European Financial Stability Fund has, in our view, increased," said Francesco Garzarelli, chief interest-rate strategist at the bank in London.

Attempts by Ireland's central bank governor, Patrick Honohan, to calm markets appeared to make matters worse after he raised the prospect of IMF intervention. "I would assume that the IMF view on the policies that have been proposed by [the Irish] government and the policies on banking [would be acceptable]," he said.

Dublin recently announced a €15 billion four-year austerity package, front-loaded to include €6 billion in revenue-saving measures next year. The deeply unpopular Fianna Fail-Green coalition is progressively losing its grip on power as dissenting MPs reduce the government's narrow majority in parliament.

Central to the country's current difficulties is the crisis at five once-sleepy Irish banks, with an estimated €50 billion bail-out for the troubled institutions leading to existential questions over how long the government can continue to pour in money.

Now analysts are predicting that a fresh wave of Irish home loan defaults will hit the country's lending institutions, after billions in commercial property loans turned sour and forced Dublin to nationalise four of its leading banks.

"The next act of the crisis will rehearse the same themes of bad loans and foreign debt, only this time as tragedy rather than farce," Morgan Kelly, a University College Dublin professor who has predicted much of Ireland's earlier problems, wrote in the Irish Times this week.

So far, house repossessions in the Emerald Isle have been low, but this is expected to rise as more and more homeowners find their mortgages exceeding the value of their homes, a situation known as 'negative equity'.

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