After an absence of two years, Ireland has returned to the bond market for trading – the first time since it received an €85bn bailout in 2010.
Yesterday, the country raised €500m in a short-term debt auction. The response was surprising and the National Treasury Management Agency said it was “encouraged” by the level of interest. The agency auctioned three-month Treasury bills at a yield of 1.8%.
John Corrigan, chief executive of the treasury agency said: “We are encouraged by the strong demand, the competitive interest rate and the presence of significant international interest in today’s auction.”
Of course, this does not mean that all is fine and dandy. There is a long way to go yet. The short-term bond issue was only the first step towards achieving full access to the capital markets.
In contrast to Greece and Portugal, Ireland had not sold any short-term debt in the aftermath of its eurozone bailout. But the 1.8% average yield was lower than the 2.36% average yield on Spanish three-month debt, reflecting the Republic’s relatively superior economic situation. Whether or not that translates into lower interest rates once Ireland returns to mainstream bond trading, remains to be seen.
Meanwhile, Spain managed to auction €3 billion in medium-term debt but at a higher cost, in the first such sale since an EU summit last week that’s been generally supported in the markets. But investors exacted a price – the interest rate on the 10-year bonds rose to 6.43% from 6.04% at the last such auction on 7 June. That rate is perilously close to the 7% benchmark which is deemed unsustainable.
The summit last week was perceived as a victory for Spain and Italy because euro leaders agreed to allow the permanent bailout fund to recapitalise troubled banks directly, rather than through governments, which would add to their debt burdens.
Meanwhile, as the European Central Bank cut its interest rates to 0.75%, the Bank of England yesterday backed another 50 billion pounds injection into the ailing British economy as it kept its main interest rate at the record low of 0.5%.
Under the so-called quantitative easing programme, the Bank purchases British government bonds, known as gilts, from banks, in the hope that they will use the money to lend to businesses and consumers. The new purchases are expected to take four months to complete.
Britain is officially in recession, defined as two consecutive quarters of negative growth. Many analysts expect the recession to extend into a third quarter as Britain continues to be buffeted by the debt crisis afflicting the 17-country eurozone. Though Britain is not part of Europe’s single currency, the eurozone is the country’s main trading partner.
It is becoming increasingly more clear – as Cyprus also requests a bailout – that contagion is much wider than originally feared. Cyprus is a typical example – its banks held Greek debts which could not be paid and therefore, the country has had to resort to a loan from its European partners – and Russia – but that is another story.
Malta also has to be careful – and here, we are talking about banks. If one or more of the banks which operate here get caught up in the mire, it would mean that the whole country would be taken down with it – just like Cyprus. The fact that Malta is small allowed our banks to weather the crisis through micro management, but that can also work the other way round; if something were to go wrong, then the country’s economy would be put under severe strain. There’s a long way to go yet, before Europe and the eurozone are out of the woods.