Ireland Prepares for Make-or-Break Debt Auction

Investors are anxiously waiting for Ireland's auction of longer-term government bonds later Tuesday to see whether demand for periphery euro-zone debt is still going strong despite fears that gripped markets Friday.

Dublin, Ireland
Tim Thompson | Stone | Getty Images
Dublin, Ireland

Ireland plans to reopen two bond issues, maturing in 2014 and 2018, to add between 1 billion euros ($1.3 billion) and 1.5 billion euros at the auction, according to the debt agency NTMA's Web site.

"I think today is a very important day for the bond market, we'll see what kind of covering Ireland gets," Gary Jenkins, head of research at Evolution Securities, told CNBC.

On Friday, the European Central Bank intervened to support Irish bonds, as credit default swaps hit new record highs on fears about bailing out the country's banks.

Investors are watching the central bank's reaction closely, to see whether it will prop up Irish debt.

The ECB has indicated that it will not let any euro-zone country default on short term debt, "but during a four and an eight-year, that's a completely different question," Jenkins said.

Some analysts drew a parallel with the Greek situation earlier this year, when vulture investors forced yields on sovereign debt to record highs and the country needed an emergency loan from the European Union and the International Monetary Fund.

Stabilization Fund

At the time, the issue of rescuing Greece dragged on because there was no coherent mechanism in place to lend money to a euro-zone member. But the EU recently created the European Financial Stability Facility (EFSF) to help euro-zone countries which face difficulties borrowing.

"For Ireland, if they cannot raise the cash… at least we have the stabilization fund in place now. So it's not a question of anyone failing now, it's a question of what kind of mess we'll see longer term," Jenkins said.

Ireland doesn't need to come to the market now, but "they want to keep ahead of the curve and they want to keep a liquidity buffer," Brian Devine, in charge of economic research at independent securities firm NCB, told from Dublin.

The government probably also doesn't want to be seen as walking away from the market, intimidated by the current yields, Eoin O'Callaghan, market economist at BNP Paribas, said.

"Ireland is in a good position coming into this auction because it's already pre-funded for this year," O'Callaghan said.

Yields on Irish eight-year bonds are around 6.13 percent on secondary markets while on four-year bonds they are around 4.87 percent, according to Reuters.

Ireland is in a very different position from Greece, because it has been proactive and financed itself ahead of its needs, O'Callaghan said.

But, he added, uncertainty about banks will not disappear until the fall in housing prices stops.

"House prices officially are down about 35 percent. Unofficially people are very much in agreement that they're down 40-50 percent in residential terms," O'Callaghan said.

This problem is also likely to drag on growth.

"Fiscally they're very much on track to meet deficit targets this year but next year's growth targets look optimistic," he said.