immediate potential danger that news feeds on itself and we see another spiral [in Europe’s peripheral economies].
Eurozone test over €25bn repayment,
By Jennifer Hughes in London and John Murray Brown in Dublin
Published: August 30 2010 22:09 | Last updated: August 30 2010 22:09
Irish banks are gearing up to repay more than €25bn of debt in the coming month, in what could prove an important test of investor sentiment towards the broader eurozone financial sector.
Bond markets will begin to re-open in Europe this week after the summer hiatus. The Irish redemptions have prompted concern over whether a slew of bonds from the country, to refinance the maturing debt, could weigh on the wider market and affect investor appetite for other bank borrowing.
“Everyone is expecting a big September and the market is already trading poorly in expectation,” one debt banker said.
European banks have struggled to consistently access the market this year. In May and June they were virtually shut out after the eurozone sovereign debt crisis created turmoil, sending government borrowing costs among the weaker economies soaring and pushing up bank borrowing costs.
Improving sentiment allowed a number of banks to sell bonds in July and early August, including successful issues from banks in weaker eurozone countries such as Spain.
But increasing concerns about the health of Ireland’s economy have raised the premium it pays over benchmark German borrowing costs to record levels, which will push up the price the country’s banks must pay to refinance their debt.
“There is a concern that there’s a lot of need to issue by Irish and Spanish banks this month [September], and when they do come to the market, what price they will have to pay,” said Rohith Chandra Rajan, an analyst at Barclays Capital.
“Like all banks, they’ll be also looking to extend the maturity of their debt and there’s a question as to what extent they can manage that.”
Last week Standard & Poor’s downgraded Ireland by one notch to AA- and left its rating on “negative outlook,” signalling further downgrades were possible.
Robert Crossley, interest rate strategist at Citigroup, warned that the spread, or premium, Ireland paid could widen further and drag others with it.
“The immediate potential danger is that the news feeds on itself and we see another spiral [in Europe’s peripheral economies]. The widening could easily spread in the current mood,” he said. Some European banks have been taking advantage of strong demand and low borrowing costs to sell bonds in the US, but bankers said that option was only available to the biggest institutions.
The Irish redemptions nearly match some of the sector’s future full-year repayment commitments and are a result of the Irish government’s two-year blanket guarantee, provided in the wake of the collapse of Lehman Brothers, which runs out at the end of this month. |
