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Market Comment
Ireland re-enters bond markets
27 July 2012
Conall Mac Coille
Yesterday (July 26th), the National Treasury Management Agency raised €5.2bn of funding through an offer to switch €1bn of 2013 and 2014 bonds into newly minted 2017 and 2020 bonds; outright sales were €4.2bn. Excluding the switch out of 2013 and 2014 bonds, a total €4.2bn of new debt was raised. So a major obstacle has been overcome in securing access for Ireland to market funding at sustainable low costs. However, yesterday's bond auction is only a first step. The offered yields of close to 6% are still too high and will need to fall further to guarantee Ireland's debt sustainability.
Comments from ECB President Mario Draghi, hinting at a re-opening of the ECB's SMP bond buying programme, helped peripheral European debt prices yesterday .So the offer of a 5.9% yield on the 2017 Irish bond (and a 6.1% yield on the 2020 bond) looked ever more attractive as the day progressed. The Minister for Finance indicated that the majority of demand came from international investors. Clearly, a major obstacle has been overcome for Ireland in reducing its cost of funding. With the bid-ask spread on the 2018 bond now ranging from 5.6% to 5.9%, a rally in the 2017 bond seems likely today.
However, attractive as these yields are to international investors, they are still far too high from a debt sustainability perspective. The current deficit reduction plan is based on nominal GDP growth of close to 4.5% being achieved by 2014 onwards, sufficient to stabilise the debt to GDP ratio, based on an average interest rate of 4.9% on the stock of government debt. So the higher yields offered yesterday, close to 6%, are too high to stabilise Ireland's debt/GDP ratio.
In the near-term, plans by the NTMA to expand Treasury bill issuance and target up to €5bn of finance from domestic pension funds, through offering index-linked and annuity bonds, will help to plug the financing gap through 2013-2014. After yesterday's bond sales, the total amount of financing required through 2013-2014 has fallen from €31.8bn to €26.5bn.
But markets will now clearly focus on the quantum of additional support that Ireland may receive following the commitment by EU leaders to consider further measures to help Ireland's debt sustainability. At the very least, markets expect either extended ELA assistance (or ESM) funding to relieve the government of the €3.1bn funding requirement to pay down IBRC's promissory notes. Some investors may still even expect large-scale capital injections from the ESM into Irish banks sufficient to reduce a high proportion of the €64bn cost of recapitalising Ireland's banks. So risks remain that market expectations could be disappointed if significant additional support for Ireland's debt sustainability is not secured in October.