Bonds Still Spell Trouble for Ireland, Greece

Allied Irish announces losses; Greece suspends T-bill sales for December

Irish bonds fell Friday when Allied Irish Banks PLC announced that deposits had dropped 17% during the crisis.

As the European Union (EU), International Monetary Fund (IMF) and European Central Bank (ECB) continued discussions in Dublin on a possible Irish bailout, the news of depositor flight cut gains that Irish bonds had made on the bailout news. Since the beginning of 2010, the bank said, deposits have fallen by $17.8 billion, or 13 billion euros.

Allied Irish was not the only bank to report losses; Reuters said that last week the Bank of Ireland acknowledged a third-quarter outflow of corporate deposits to the tune of 10 billion euros, while bancassurer firm Irish Life & Permanent said its third-quarter losses amounted to 600 million euros. The size of any rescue package has not yet been decided.

Irish Prime Minister Brian Cowen said talks were “going well” on the planned rescue, details of which are expected to be revealed next week.

As experts cautioned that the bailout may not be enough to stop other countries such as Portugal from further suffering, spreads of Irish 10-year bonds moved down toward 5.4%, but then rose again to 5.6%. They carried Portuguese, Spanish, and Greek debt with them. Worries are high that contagion will spread from Ireland’s troubles to other nations in the euro zone.

Participants at the Sixth European Central Bank Central Banking Conference in Frankfurt were polled by Reuters about the issue, and three quarters believe an Irish bailout will not resolve the crisis. The financial weaknesses of other nations remain to be dealt with.

One possible stumbling block to an Irish rescue package is the country’s extremely low corporate income tax, which currently stands at 12.5%. Ireland is adamant thus far that retaining it is essential to holding foreign investment in the country. Member EU nations are pushing for its increase.

To add to Ireland’s problems, a by-election is scheduled for next week and the government’s parliamentary majority, already very thin, may suffer losses.

Greece, meanwhile, announced on Friday through its Public Debt Management Agency (PDMA) that it will not sell Treasury bills during the month of December, saying that investor interest is not sufficient during the holiday season.

The country has been selling short-term debt since September after being shut out of the bond markets. Although its borrowing costs had dropped for two months, worries about the euro zone drove them back up in November. Petros Christodoulou, the PDMA chief, said in a Reuters report, “In line with its policy of monthly T-bill sales, the PDMA will proceed to its next auction in 2011.” Christodoulou added that the lack of a December sale due to the holiday season had already been announced.

Adding to Greece’s concerns over its financial condition is German Chancellor Angela Merkel’s call for bond investors to share in the costs of bailouts. Weaker nations in the euro zone believe that has been responsible for at least some of the market turmoil over whether they will be able to stay afloat long enough to meet their obligations. In a Bloomberg interview, George Papaconstantinou, Greek finance minister, said a better way to share the risk of sovereign default than forcing bondholders to take losses would be to place levies on banks.

“I understand the concept of burden-sharing, but I think there are different ways of getting there,” he said in Frankfurt on Friday. “One way of burden-sharing would be to put more emphasis on things like bank levies or a financial activity or transaction tax.”

Merkel said on Friday that Germany and the Netherlands are drafting a permanent mechanism for crisis resolution. The Dutch government has sided with Merkel’s call to make private investors take on more of the risk of their investments.

Papaconstantinou said he is confident Greece will be able to keep to its new budget and cut its debt to 7.4% of GDP in 2011. He also said that “under no circumstances” would Greece consider debt restructuring.

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