Remember the euro-zone crisis? Front page news for weeks, and then…nothing. Could they have found the secret formula for eliminating an overwhelming debt load without hyperinflation or depression?
Nah. They were just taking a break, and now they’re back. Greece’s economy is contracting and Spain’s regional governments are being shut out of the debt markets. And tonight the Wall Street Journal reports that Irish banks are getting a bailout:
The European Central Bank has bought short-dated Irish government bonds over the past 24 hours in a bid to calm rising market volatility stemming from concerns on the creditworthiness of Irish banks, two people familiar with the matter said.
The move, part of the ECB’s current program of bond purchases which it launched in May in a bid to stabilize euro-zone government bond markets, came after volatility rose sharply in short-term Irish government bonds amid low trading volumes, the people said.
The ECB declined to comment on the matter, but will announce the amount of bonds it bought this week on Monday.
The benchmark two-year Irish government bond, a 3.9% security maturing in May 2012, saw its bid price drop to a low of 100.795 on Thursday, down from 101.585 at Tuesday’s close, equating to a yield of 3.35%, up from 2.837% on Tuesday, according to TradeWeb data.
The bond’s yield, which represents the cost of borrowing for the Irish government, rose further in early trading Thursday to a high of 3.426% although it has since dropped to 3.216% in mid-morning dealings, the data show.
The market ruction was triggered partly by the Bank of Ireland’s announcement Wednesday that its underlying pretax loss nearly doubled in the first half of 2010 amid high loan impairment charges. On top of that, the European Commission has cleared the Irish government to inject another €10 billion ($12.89 billion) of capital into Anglo Irish Bank beyond the €14.3 billion already provided.
These events suggest the government will continue to have to bail out the country’s banks, pressuring public finances and denting the outlook for Irish government bonds.
Investors are particularly concerned about the ability of some Irish banks to raise new financing when their existing government-guaranteed debt issues mature in September. They are also worried about an auction on Tuesday next week of two bond issues due 2014 and 2020.
The Irish National Treasury Management Agency managed to sell €1 billion of two series of treasury bills, receiving total bids of €3.38 billion, or 3.4 times the amount on offer.
The two people, who are bank dealing sources, said the ECB started soliciting offers for short-dated Irish government bonds on Wednesday in a move designed to restore confidence in the market and a few trades were then executed by the ECB.
“Because the volumes in the market were very low, it was enough for them [the ECB], to a certain extent, to just ask dealers for prices to remind everybody that they would step in,” said one person. “However, there were some flows so the ECB has definitely bought some bonds.”
The annual cost of insuring €10 million of Irish debt rose around €12,000 on Thursday, hitting €282,000, up from around €200,000 at the start of the week. The cost of insuring a similar amount of bonds issued by Anglo Irish Bank and Allied Irish Banks PLC were both around €50,000 higher on the week at €532,000 and €425,000 respectively.
The risk premium that investors are demanding to hold Irish government bonds is “ridiculous,” said Patrick Honohan, Ireland’s central bank governor, in an interview with the Daily Telegraph newspaper, published on Thursday. They aren’t giving Ireland credit for cutting its budget deficit, he said.
The ECB has been reducing its bond purchases gradually in recent weeks. It said Monday that it bought only €9 million in the first week of August, down from €81 million the week before and €176 million the week before that.