Ireland’s cost of funding could fall further, says NTMA chief
10-year debt could trade at 60 basis points more than German debt, says John Corrigan
National Treasury Management Agency chief executive John Corrigan: “Ireland, as a BBB-rated credit, can now borrow 10-year money on terms which we could not access as a AAA credit.” Photograph: Colm Mahady/Fennells
Ireland’s cost of funding could decline further as the country’s government debt falls and economic growth prospects increase, chief executive of the National Treasury Management Agency (NTMA) John Corrigan has said.
When Irish general government debt is considered on a net basis and is based on the current fair market valuations of AIB and Bank of Ireland, it comes in at about 94 per cent of GDP, Mr Corrigan said at the Annual CPA Ireland business lecture in Dublin yesterday evening. This is “not a million miles away” from Belgium’s, at about 84 per cent of GDP, he said.
Given that Belgian 10-year bonds are trading at a spread of about 60 basis points over Germany, “an optimist could make an argument for Ireland to trade not far above that in current market conditions”, Mr Corrigan said.
Referring to how dislocated markets are at present, “Ireland, as a BBB-rated credit, can now borrow 10-year money on terms which we could not access as a AAA credit”, Mr Corrigan did however discount “filling our boots” by increasing the level of funding the NTMA is undertaking to lock into these low rates. He said he doesn’t expect any movement in ratings between now and October’s Budget.
“Firstly, because general government debt is a gross measure the unintended consequence would be to push up our debt-to-GDP ratio just when it has peaked and started to decline. Secondly, there is a cost of carry involved with maintaining cash balances since the deposit rates are lower than the cost of the funds.”
The NTMA has already funded 70 per cent of the country’s €8 billion requirement for this year, and Mr Corrigan said it is now considering how it will manage a bond redemption of about €10 billion at the beginning of 2016. It may offer investors the opportunity to switch part of their holdings into a longer dated bond as it did with the large January 2014 redemption, he said.
Mr Corrigan said a “particular priority” for the NTMA will be the conversion of the National Pensions Reserve Fund into the Ireland Strategic Investment Fund, which will invest on a commercial basis to support economic activity and employment in Ireland.
Noting that it won’t be beginning from a “standing start”, Mr Corrigan said the NPRF has already invested €1.3 billion in areas of strategic importance and that legislation will facilitate the remaining € 5 billion plus of the NPRF’s discretionary resources being invested in Ireland.
Already, the ISIF’s fund managers, which include Better Capital and Blue Bay, have reviewed more than 400 investment opportunities and issued 45 term sheets, which has resulted in 13 completed transactions.
Mr Corrigan said the creation of the fund is an important developmental step in “moving away from a bank-dominated model towards a more balanced system of business financing”.
Also on the agenda this year is the replacement of the several entities encompassing the NTMA – including NewERA and the NDFA – with a single, overarching board to oversee all of the NTMA’s functions, other than NAMA.