Ireland sells fewer T-bills as Anglo doubts remain-UPDATE 2

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Thursday September 09, 2010 01:19:11 PM GMT

* Finance minister says Anglo decision not a "silver bullet"

* Believes bond markets will wait for final costs

* Dublin sells 400 million euros of T-bills, low end of range;

* "Substantial bids" for Allied Irish's Polish unit-Fin Min

(Adds treasury bill auction results, analyst's comment)

By Andras Gergely and Padraic Halpin

DUBLIN, Sept 9 (Reuters) - Ireland sold 400 million euros of treasury bills on Thursday, the low-end of its target range as it sought to keep the costs down by restricting supply while it works out the final cost of bailing out its banks.

A day after presenting a compromise plan to deal with nationalised Anglo Irish Bank, Dublin sold 150 million euros of five-month treasury bills and 250 million euros of seven-month paper, at the bottom of the 400 million to 600 million target range.

Average yields of 1.925 and 2.19 percent marked a lower cost than at an auction two weeks ago. Bid-to-cover ratios also stayed strong at 9.4 and 5.4 respectively as Ireland gradually reduces the amount of debt it has sold from the total 1.2 billion euros at its July auctions.

"They restricted the supply slightly to make sure they had good bid-to-cover ratios and to ensure lower yields to show that confidence in Ireland is still solid," said Brian Devine, economist at NCB Stockbrokers.

"As clarity comes through the banking sector things should improve further on the yield front," Devine added.

Earlier on Thursday, Finance Minister Brian Lenihan said the government would produce definite figures on the cost of gradually winding down Anglo Irish before the start of October.

Dublin rushed into outlining a compromise solution for the troubled lender on Wednesday as tension on its debt markets continued to rise, but it failed to put either a price or an exact timeframe on burying the fiscal and economic deadweight.

The state's troubles with Anglo have re-ignited fears of a full-blown Irish debt crisis and weighed on the euro and other European sovereign borrowers in recent weeks.

"We are all working together to ensure that definite figures will be produced before the beginning of October," Lenihan told national broadcaster RTE.

With treasury bills mostly bought by domestic investors, analysts said the T-bill auction was insufficient evidence of a real improvement in international sentiment towards Ireland.

"What we need to see is a return of demand from overseas and 80 percent of bonds are held internationally," said Alan McQuaid, chief economist at Bloxham Stockbrokers.

NO SILVER BULLET

The premium investors demand to hold Irish 10-year paper over German bunds dropped by three basis points to around 376 basis points, just 13 bps off a euro lifetime high hit on Tuesday.

Lenihan acknowledged that Wednesday's decision did not give complete clarity to investors but he believed bond markets would wait for the final bailout bill to be worked out.

"Of course yesterday was not a silver bullet but it's an important step in building up confidence," he said.

"We will deal with this matter in a matter of weeks and I believe taken together with the announcement on the guarantee of funding that the bond markets will wait weeks as well."

Yielding to political pressure, Lenihan has ditched Anglo Irish's ambitions to carve out of what is left of the bank a functioning niche lender when it transfers 36 billion euros in property loans to Ireland's state-run bad bank.

Instead, Anglo's remaining loans of around 38 billion euros will be housed in an asset recovery bank, where they will be worked out over a period of time or sold off while its deposits will be put into a state-backed bank.

Analysts debated how the cabinet's plan differed from a full winding down that had looked increasingly likely in recent days.

"I prefer to use the word workout but you can call it a wind down if you like," Lenihan said.

Irish bank stocks were largely unchanged after Wednesday's announcement but shares in Allied Irish Banks rose on Thursday after Lenihan said sales of its assets in the United States and Poland were at an advanced stage.

Ireland's second-biggest bank needs to raise 7.4 billion euros in capital before the end of the year and Lenihan said bidding for its 70 percent stake in Polish lender Bank Zachodni WBK had closed with a number of substantial bids received. (Additional reporting by Carmel Crimmins; Editing by Patrick Graham, Greg Mahlich)

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