Ireland's cost of borrowing moved higher again today on international bond markets, having fallen back after last week's Government decision to split Anglo Irish Bank.
The interest rate demanded by investors to lend money to Ireland hit 6.15% late this afternoon before dropping back slightly to 6.11%. The cost of borrowing for Ireland has remained high over recent weeks.
Speaking in Brussels, Taoiseach Brian Cowen said today's bond movements had affected a number of countries including, France and Spain, and were a reaction to the demand in the bond market.
There are two reasons for the high costs. Investors are concerned about the final cost of Ireland's banking crisis and there are also worries about the country's public finances.
Traders said there was weak demand in Irish Government debt today as many buyers were planning to purchase at an auction scheduled for next week.
But aside from the technical reasons, investors are still awaiting a final cost for bailing out Anglo Irish Bank. The Government has promised that before the beginning of October.
Do a deal on Anglo debt - Barclays
Meanwhile, Barclays Capital has said the Government should look at doing a deal with bondholders in Anglo Irish Bank, including a form of debt-for-equity swap, in which those owed money by the bank would be offered a stake in the bank in return.
In a research note, Barclays says the high cost of fixing the banking system and the effect of a weak economy on bank's loans are unsettling bond markets.
It adds that the 'colossal' effort needed to tackle the public finances in the coming years leaves little room to deal with any further unexpected losses in the banks. 'This is a source of market instability,' it adds. Barclays believes further injections of public money into Anglo Irish Bank can not be ruled out.
Barclays argues that though the market is right to have pushed up the cost of Irish debt, a default is unlikely, due to the Irish Government's track record, the willingness of the EU to help Ireland; and the amount of funding already raised in the bond markets, which gives Ireland a cushion of about €24 billion.
The note says Ireland does not need to draw on assistance from the joint EU-IMF fund set up earlier this year.
'Yet should further unexpected financial sector losses materialise or macro-economics conditions deteriorate beyond our baseline forecasts in the coming months, the government may need to seek outside help,' it says.
Meanwhile, Spain raised €4 billion with a 10-year and 31-year-bond issue today, the maximum target for the auction and at a lower rate than previous auctionsy, the Spanish treasury said.
The Spanish government auctioned €1.28 billion of 31-year bonds at an average yield of 5.077%, compared with 5.908% at the last sale on June 17, it said.
It also sold €2.72 billion of 10-year bonds at an average yield of 4.144%, down from 4.83% from the previous auction on July 6.
