WHILE THERE is a “very high risk” of Ireland asking for external aid, Nobel Prize-winning economist Joseph Stiglitz does not expect the country’s crisis to spread across the eurozone.
“The fact that the bubble was worse in Ireland obviously has no direct implications for the management of the banking system, fiscal policies in other countries,” Prof Stiglitz said. “You have to look at each of them separately, but the market doesn’t always do that in a careful way.”
Prof Stiglitz also warned that efforts by European governments to push down budget deficits were threatening to undermine the region’s economic recovery and hurt investor confidence.
Ahead of today’s crucial auction of Government debt by the National Treasury Management Agency, some analysts predicted the issue would be well backed.
German bunds fell yesterday in advance of today’s Irish bond sale and an auction of up to €1 billion of Portuguese bonds tomorrow.
This was interpreted as showing that demand for securities from the eurozone’s so-called “periphery” nations remains robust which, in turn, curbed demand for the safest assets.
“The fact the bund is opening lower tells us the auctions will be fine,” said Pádhraic Garvey, head of developed-market debt strategy at ING in Amsterdam. “The paper will be taken down by the market.”
The yield on the German 10- year bond rose 4.4 basis points to 2.47 per cent by the close of trade in London yesterday.
The bond auctions by Ireland and Portugal offer investors “good buying opportunities” after the debt’s recent declines, according to analysts at Nomura International.
“The concessions that are likely to be built into the curves ahead of this week’s auctions may create good buying opportunities, given the recent tendency for actual peripheral sales to be smooth,” a team of European interest-rate strategists led by Nick Firoozye in London wrote in an investor note.
“We remain constructive on Ireland relative to current pricing.”
It also emerged that Pictet Asset Management has ended bets that Irish bonds will underperform. “At the very end of August, we closed our short position in Ireland,” said Mickael Benhaim, who helps oversee $60 billion of fixed-income investments at Pictet in Geneva.
Separately, a Bloomberg News poll of the biggest dealers in German bonds has found that they expect the yields on government bonds of Greece, Spain, Ireland and Portugal to fall to within 2.2 percentage points of the benchmark German bunds on average in the next two years from 4.61 percentage points last week,
The survey of 15 banks that trade directly with Germany’s debt agency finds they believe the worst is over for the region’s most-indebted nations. Bond dealers are confident that austerity measures will be enough to dampen speculation the 16-nation currency union is in jeopardy of falling apart.
“All the policy backstops have put a floor under the downside risks for peripheral euro-region bonds,” said Michael Vaknin, a fixed-income strategist in London with Goldman Sachs. “Spreads are near their records, but the EU and International Monetary Fund have pledged their support and opportunities are starting to emerge.”
HSBC and Goldman Sachs recommend Greek 30-year bonds as the price languishes at about 50 per cent of face value. Société Générale advises buying three-year Greek notes, betting a rally in two-year debt will extend to longer-dated securities. Norway’s $450 billion sovereign wealth fund has purchased Spanish, Portuguese and Greek securities. – (Bloomberg)
