BRUSSELS (MNI) – Irish bond spreads hit a fresh record high on
Thursday after a newspaper reported that investors in the country’s
troubled Anglo-Irish Bank might not get all their money back.

The report exacerbated fears about the ultimate cost of the
country’s banking sector and the government’s large debt burden — fears
that have gripped the market relentlessly in recent weeks. Spreads have
been widening steadily as market agents speculate that Ireland won’t be
able to repay its debts and deal with its banking sector losses.

Adding to Ireland’s woes Thursday was a worse-than-expected GDP
report showing that the economy contracted 1.2% q/q in the second
quarter, compared with expectations of a 0.4% rise. That news, however,
seemed to have little impact on Irish bonds, whose spreads had already
risen sharply before the data.

The 10-year Irish bond spread rose as much 25 basis points Thursday
morning to hit a fresh record high of 433 basis points above the
benchmark German Bund. It later narrowed back slightly to +431 basis
points, still sharply up on the day.

The widening came ahead of an auction by Ireland’s National
Treasury Management Agency of two lines of T-bill issues maturing
February 2011 and April 2011 for between E300-E500 million. But the main
reason was ongoing anxiety about the country’s banks.

The total public cost of bailing out the banking sector, which fell
on hard times as a 10-year property bubble burst, is still unknown. The
Irish government has already committed more than E25 billion to cleaning
up banks, most of that going to Anglo-Irish, the country’s most
problematic institution, which is now state controlled. Investors fear
more public money may be needed.

Earlier this month the government said it would split Anglo-Irish
Bank in two and wind down or sell of part of it.

The daily Irish Examiner Thursday reported that some Anglo-Irish
bondholder’s might not get their money back, and that a total of E5.9
billion worth of bonds are at risk.

The newspaper said opposition party leaders want the government to
renegotiate terms on E1.7 billion worth of dated subordinated bonds so
that the lenders don’t get all their money back.

Finance Minister Brian Lenihan confirmed that the subordinated
bonds, along with E4.2 billion of senior bonds, will be removed from
country’s state guarantee scheme at the end of this month, but he “was
at pains to stress senior debt was treated differently and the country
would not default on its obligations in this area,” the Examiner said.

On top of the banking sector debts, Ireland is working to reduce
its budget deficit — currently around 12% without the banking debts —
to below the EU’s 3% limit by 2014.

Lenihan has hinted that an additional E3 billion of savings will be
needed in next year’s budget.

The NTMA carried out an auction on Tuesday, raising E1.5 billion.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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