Irish borrowing costs dip after debt-crisis plan

[October 01, 2010]  DUBLIN (AP) -- Ireland's cost of borrowing slid on bond markets Friday as investors took a positive view of the country's latest efforts to take control of Europe's worst deficit and a titanic bank-bailout effort.

The interest rates, or yields, on 10-year Irish bonds fell in early trade to 6.4 percent, a two-week low and 4.2 percentage points above the yields of benchmark German bonds. Earlier this week the Irish treasuries were at a euro-era high of 6.9 percent and 4.7 points above their German counterparts.

Oliver Whelan, the director of debt management at Ireland's treasury agency, said it was clear that investors were relieved to have new commitments and figures -- albeit shocking ones -- from the Irish government that pledges to chart a path out of its debt nightmare.

Thursday's announcement from Finance Minister Brian Lenihan confirmed that Ireland would take majority ownership of Allied Irish Banks and pump at least euro12 billion ($16 billion) more into a bailout effort at five banks that has already cost euro33 billion ($45 billion).

Lenihan also pledged that Ireland in November would publish a four-year budgetary plan for slashing Ireland's deficit -- projected this year to reach a post-war European record of 32 percent -- back to below 3 percent of gross domestic product by 2014.

This will mean another round of tax hikes and spending cuts far beyond the euro3 billion chop that Lenihan had already promised for 2011.

"The markets know now what the minister's going to do. That element of uncertainty has been removed," Whelan said. "The markets are accepting that they have a framework within which the government will be making its decisions. And it's a fairly rapid framework also."

Ireland's borrowing position was further bolstered by International Monetary Fund reassurances that it considers Irish finances strong enough to pull the country out of its debt crisis with only background support from the European Central Bank.

Dominique Strauss-Kahn, managing director of the Washington-based IMF, said he didn't expect Ireland to tap the euro750 billion ($1 trillion) rescue fund for indebted eurozone countries.

"The Irish government has already taken a series of solid measures on the fiscal side and in the banking sector," he was quoted as telling the German business daily Handelsblatt.

In recent weeks Ireland's government has been rejecting persistent market rumors that the country is on course to face bankruptcy unless, like Greece, it dips into the EU-IMF fund. That last-resort facility loans money at a 5 percent rate, whereas this month's most recent Irish government 8-year bond auction required rates exceeding 6 percent to attract buyers.

Whelan said Ireland's National Treasury Management Agency would postpone any further bond auctions until the interest rates being demanded by buyers of its bonds come down further. The agency officially canceled its plans for October and November auctions, citing the excessive rates imposed on its debt issues this month.

"Towards the end of the year we will sit down and assess, in consultation with our banks and the markets, the appropriate time to come in but we would expect that it would be fairly early in 2011," Whelan said.

Aggressive bond auctions earlier this year have secured Ireland enough funds to pay its bills through mid-2011.

Ireland's own government may not last that long, according to recent opinion polls.

One survey published Friday in The Irish Times found that 61 percent of the public wants Prime Minister Brian Cowen to quit now. Just 29 percent want him to stay until the next general election.

The same poll of 1,000 people across this country of 4.5 million found that Lenihan was the most popular choice to succeed Cowen as leader of the government and the long-ruling Fianna Fail party. The poll had an error margin of 3 percentage points.

Lenihan is credited as a much stronger media performer than Cowen with a more obvious hands-on command of the financial crisis, but Lenihan also has been battling cancer for the past year.

The timing of the next election is a point of daily speculation in Ireland. Few expect Cowen's coalition government to survive its full five-year term to mid-2012.

Most analysts forecast that the country will face an election at least a year early, in part because the government expects to lose three by-elections for empty parliamentary seats tentatively scheduled for March. Already, Fianna Fail's coalition government with the environmentalist Green Party requires support from independent lawmakers to survive.

[Associated Press; By SHAWN POGATCHNIK]

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