Nov. 24 (Bloomberg) -- Irish bonds led declines by the euro region’s most indebted members after a two-notch sovereign downgrade by Standard & Poor’s deepened concern the nation’s fiscal crisis will spread.
Spanish and Greek securities fell after Ireland’s credit was lowered to A from AA- by S&P, which cited the mounting cost of bailing out the nation’s banks. German bonds slid after demand weakened at a sale of new 10-year debt and stock markets rose. Portuguese bonds declined as workers walked out in the nation’s biggest strike for 22 years. Irish bonds stayed lower after Ireland announced a budget plan to stave off bankruptcy.
“There’s a lot of fear and concern,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “The key issue is if, or by how much, Spain will get dragged into this. Ireland and Portugal are manageable in terms of cost. The market is worried that, given the size of Spain, it’s a different animal.”
Irish 10-year yields jumped 48 basis points to 9.12 percent at 4:19 p.m. in London. The 5 percent security due October 2020 tumbled 2.52, or 25.20 euros per 1,000-euro ($1,337) face amount, to 73.85 Portuguese 10-year yields advanced 12 basis points to 7.18 percent.
Similar-maturity Spanish yields climbed 17 basis points to 5.09 percent, while German 10-year yields rose 10 basis points to 2.65 percent. The difference in yield, or spread, between Irish and German 10-year yields widened 31 basis points to 617 basis points, according to Bloomberg generic data, while the Spanish-German spread was one basis point wider at 235 after reaching a record 249.
The euro strengthened 0.1 percent to $1.3374, trimming this week’s drop to 2.2 percent. The Stoxx Europe 600 Index of shares climbed 1.1 percent. U.S. 10-year Treasury yields gained 11 basis points to 2.88 percent.
Ireland’s government said it will cut spending by about 20 percent and raise taxes over the next four years as talks with the International Monetary Fund and the European Union over a bailout of the country near conclusion.
Welfare cuts of 2.8 billion euros and income-tax increases of 1.9 billion euros are among the steps planned to narrow the budget deficit to 3 percent of gross domestic product by the end of 2014. The shortfall will be 12 percent of GDP this year, or 32 percent including a banking rescue.
The EU-IMF rescue package may be about 85 billion euros, Prime Minister Brian Cowen said today.
German Debt Sale
Germany sold about 4.8 billion euros of 2.5 percent bonds maturing in January 2021 at an average yield of 2.59 percent. Investors bid for 1.2 times the securities issued, the lowest so-called bid-to-cover ratio for a 10-year auction since February 2009.
“The auction in Germany and the strong negative tone in the U.S. Treasury market helped push up German yields,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in London. “There’s been some profit taking after yesterday’s strong rally.”
German bonds also fell as a report showed business confidence in Europe’s largest economy unexpectedly surged to a record in November. The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 109.3 from 107.7 in October. Economists predicted a decline to 107.5, according to a Bloomberg News survey.
S&P’s cut leaves Ireland’s debt five steps above Greece, which has the highest junk, or high-risk, classification. Ireland may be lowered again, the ratings company said. Moody’s Investors Service said two days ago that a “multi-notch” downgrade in Ireland’s credit rating was “most likely” because the bailout would increase the nation’s debt burden.
“The Irish government looks set to borrow over and above our previous projections to fund further bank capital injections into Ireland’s troubled banking system,” S&P said in a statement late yesterday. The fact the debt may be lowered again reflects the risk that talks on an EU-led rescue may fail to staunch capital flight, it said.
German Chancellor Angela Merkel wants buyers of new euro- region bonds to accept liability clauses starting in 2011, two years before a revamped crisis-management system kicks in, a government document shows. The “blanket” introduction of standardized collective-action clauses for all government bonds issued in the 16-nation euro region would be “unproblematic” and should begin next year, according to the Finance Ministry document, a copy of which was obtained by Bloomberg News.
Bonds of Ireland, Portugal and Greece have slumped since EU leaders agreed on Oct. 29 to consider Germany’s proposal for a permanent rescue mechanism as of 2013. The plan would involve debt restructuring, with losses for private investors in sovereign bonds.
“Day by day, we are getting fresh details of the German proposal and this is impacting the market today,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There is little reason to become more optimistic on the periphery at this point.”
Irish bonds also fell as the government prepared to inject more capital into Bank of Ireland Plc, the nation’s largest bank, a step that may make it the fifth lender to fall under majority state control in less than two years.
Shares in Bank of Ireland, already 36 percent owned by the state, fell 9.3 percent in Dublin, after sinking as much as 37 percent. Allied Irish Banks Plc, the second-largest lender, which already faces the prospect of more than 90 percent state ownership, slid as much as 24 percent.
Euro-region banks borrowed 38.2 billion euros from the European Central Bank in 91-day loans today, double the 19.1 billion-euros expiring. Economists expected them to ask for 29 billion euros, according to the median of eight forecasts in a Bloomberg News survey.
“The increase is probably due to the fact that Irish, Portuguese and Greek banks increased their positions, most likely, in our view, for precautionary reasons because of the current tough market situation,” Giuseppe Maraffino, a fixed- income strategist at Barclays Plc in London, wrote in a research report today.
Portugal led a jump in the cost of insuring against default on European sovereign debt, according to traders of credit- default swaps.
Contracts on Portuguese government bonds were at 481 basis points, down from 487 yesterday, according to data provider CMA in London. Swaps on Ireland were little changed at 575, Spain slipped 3 basis points to 298, and Greece dropped 43 basis points to 977.
EU policy makers must show “meaningful actions” to head off a “spreading disaster” in the euro region, said Mohamed El-Erian, chief executive officer at Pacific Investment Management Co.
Ireland is getting “uncomfortably close to a devastating banking crisis that would derail growth, employment and wealth creation for a whole generation,” El-Erian wrote in an article for the Financial Times.
--With assistance from Abigail Moses in London. Editors: Daniel Tilles, Keith Campbell