£17bn debt restructuring plan

The National Treasury Management Agency is to begin a major restructuring of the national debt and is planning to launch an exchange programme for up to £17 billion in Government bonds, according to Dr Michael Somers, its chief executive.

The programme will involve offering investors new Government bonds in place of old bonds they currently hold and is designed to improve the marketability and liquidity of the national debt.

The Government bonds involved were issued some years ago when interest rates were a lot higher than they are now. This means that they were issued as, typically, £100 bonds with interest rates of more than 8 per cent. With long-term interest rates now falling well below this level, the price of these bonds has now risen above their original "par" or issue value. For example, investors would now have to pay more than £140 for one of the £100 securities.

This relatively high price tends to make it more difficult to buy and sell the bonds. It also means that the bonds are not easily compared with bonds issued in other EU markets, which are now typically issued at much lower interest rates. Re-issuing the debt at lower interest rates would make it easier to market to investors and would make comparison with other EU markets much easier.

According to Dr Somers, the move would make economic sense and would ensure a continuing demand for Irish Government paper. However one problem is that reissuing the bonds would, for technical reasons, add to the level of Government debt. This would also temporarily increase our debt to GDP ratio from what it otherwise would have been.

As a result, Dr Somers said that the NTMA may have to re-buy the stock gradually, rather than all at once. But the move would go some way to answering the authorities' worries that once we become a denomination of the euro, interest in Irish paper could diminish, making it far harder for any future Government to raise cash. The agency has been working hard to ensure that Ireland has won good credit ratings, which are seen as a key to persuading investors into the bonds. Irish bonds have also been included on a number of key indices, which are tracked by major investors.

"Even if we only make up 1 per cent of the index, funds are still likely to buy that much paper rather than take on the risk," Dr Somers noted.

On top of the £17 billion exchange programme, the NTMA will also be looking to fund between £3 to £5 billion next year. This will be made up of raising replacement money for a £2 billion issue which is due for redemption in April - of which about £1.4 billion is left in issue - as well as taking slices off the top of other loans through proprietary trading.

According to Dr Somers, international banks are still interested in Irish bonds, judging by the amount of meetings he had in Washington. However, many are also worried about our infrastructure problems, particularly road congestion and the long-term impact of this on the economy.