Ireland faces paying punishing interest rates and paying out record amounts of money when it returns to borrow cash from the international debt markets in January, even after a harsh austerity budget, one of Europe's most influential sovereign bond experts has warned.
Luca Cazzulani, a director at UniCredit Bank in Milan who for over the past year accurately predicted the course of the crisis facing Ireland, Greece and Portugal, said overseas investors continue to be spooked by possible losses buried in the broken banks here. He said he would continue to recommend international buyers shun Irish bonds.
He told the Sunday Tribune that Ireland would be forced to pay interest rates near current market levels, which implies Irish taxpayers would have to pay record high interest rates of about 7%, amounting to annual service costs of €70m a year for the next 10 years for every €1bn the state borrows from early next year.
"There have never been problems at Irish auctions, so the issue is not in my view whether they will be able to go back to the market. I believe they will. The issue is how much it will cost. Market prices are suggesting that the cost will be substantially high – probably at where yields [interest rates] are trading now. And it is
a level which obviously cannot be sustained," he warned.
He said Irish taxpayers faced "a very difficult" time because investors' confidence would not be automatically restored by December's austerity budget. Investors, who were anyway expecting big deficit cuts, still needed reassuring about the Irish banks.
"The way I see it is that in January, February and March, the yields will still be very high which will probably cost Ireland a lot. They will have to work hard to restore credibility and to show that the troubles in the banking system have been addressed and maybe then they can walk on their own legs," Cazzulani said.
Last week sovereign bond markets once again drove up Irish interest rates to the highest levels yet seen since the introduction of the government's blanket guarantee for the Irish banks over two years ago.
On the credit default swap markets, which determine the cost to investors of insuring against losses on their bond purchases, Irish sovereign bonds again spiked above the cost of insuring Iraqi bonds issued by Baghdad.
"No one knows what will happen in January when Ireland comes back to the bond markets. But there is nothing that has happened in the last month that I have seen that has improved matters," said Karl Whelan, professor of economics at UCD.
Cazzulani in Milan said that he believed Ireland would avoid going into the eurozone's bailout fund. "The reason I am very, very cautious in buying Ireland is that I am still not sure that the troubles in the banking sector have been fully addressed," he said.