Irish c.bank: debt, bank plans fail to win over markets

DUBLIN (Reuters) - Ireland's central bank governor conceded on Wednesday a huge bank recapitalization program had failed to reassure investors as borrowing costs soared on fears its new fiscal plan would not be enough to avoid a bailout.

Ireland's tottering government is struggling to prove it does not need a Greek-style bailout to help it reduce the worst budget deficit in Europe, with markets concerned it will struggle to pass the first of four austerity budgets next month.

The European Union's monetary chief reiterated that Ireland had not requested any financial aid but the premium investors demand to hold 10-year Irish bonds rather than German benchmarks widened at the same speed Greece's spread expanded shortly before it sought its bailout in May.

Finance minister Brian Lenihan reiterated late on Tuesday that he believed measures the government was taking would ensure it could repay its debts and Central Bank Governor Patrick Honohan said those measures would not change even if external help was sought.

"My take would be the sort of policy package the IMF would want to see Ireland doing is very much the sort of policy package that the government is putting together on the fiscal side," Honohan said.

The governor was speaking in reply to a question but did not say anything about whether he thought Ireland would need help.

The 10-year Irish/German government bond yield spread rose by around 60 basis points to a record high of 635, breaching the 600 mark for the first time as clearing house LCH.Clearnet hiked margin requirements for Irish debt.

"So far, not least because of the rest of the fiscal burden remaining such a challenging problem, investors are not yet fully convinced," Honohan told a conference, referring to the country's bank bailout.

Ireland shocked investors in September when it said the final bill for purging its banks of years of reckless lending could top 50 billion euros, compounding skepticism about the country's ability to get its fiscal house in order.

Markets have since turned their attention to Dublin's planned 15 billion euro four-year fiscal adjustment and whether Prime Minister Brian Cowen's wafer-thin parliamentary majority will last long enough to pass 6 billion worth of spending cuts and tax hikes next month.

Many now think only a general election that would give the opposition a workable majority will calm jitters.

However with Ireland fully funded until mid-2011, analysts said despite the likelihood of the government now needing help, it would try to put that call off as long as possible.

"It's difficult to say in terms of a timeline as the government is going to do everything they can not to take it," Brian Devine, chief economist at NCB Stockbrokers said.

"In terms of how likely, I think it's pretty likely at this stage."

SPREADS WIDEN

LCH.Clearnet, which clears Irish government bonds on behalf of its investment bank clients, said before the 0800 GMT market open on Tuesday that it will increase the margin required to trade Irish sovereign debt by 15 percent as of Thursday.

It had said on October 5 that it had introduced a new policy that would enable it to request the extra margin from members in the event that the yield on a European government bond exceeded 450 basis points compared to the German bund.

"I'd be surprised if any change in the Irish government bond yield is attributable to our decision because we informed members of our approach a month ago," John Burke, head of fixed income at LCH.Clearnet, told Reuters in a telephone interview.

The European Commission also approved the extension of Ireland's guarantee of bank liabilities until June 30 next year, underlining that the banks are dependent on government and indeed ECB support to survive.

The guarantee means that the fortunes of the country and the bank are tied and higher sovereign yields translate into higher funding costs for the banks, which in turn lead to higher borrowing costs for consumers and lower economic activity.

Honohan said the central bank would take a closer look at banks' residential mortgage books, stoking fears that Ireland may yet have to do more to bolster its discredited banks, left deeply in debt when property and construction markets imploded.

A slump in commercial property prices brought the banks to the brink of collapse last year and residential mortgages are seen as the next big threat. Irish house prices have fallen 36 percent from their peak at end-2006.

(Reporting by George Matlock, Paul Day, Michael Holden and Luke Jeffs; Writing by Jodie Ginsberg and Carmel Crimmins; Editing by Catherine Evans/Ruth Pitchford)