€1bn bond sale reduces 'funding cliff' facing Coalition

A FURTHER €1 billion was sliced off the “funding cliff” facing the Government at the end of the EU-IMF bailout programme as the National Treasury Management Agency sold a new type of debt to investors for the first time.

The borrowing by the Government yesterday, this time from domestic pension funds, came again at a high cost, with the average interest rate (or yield) on the amortising bonds being 5.91 per cent at an average maturity of 16 years.

That compares with the 3.5 per cent at which the State borrows from the troika and is near the rate at which €4.2 billion in new money was borrowed from mostly overseas investors last month on the sale of long-term bonds.

The NTMA conceded that the high cost of the borrowing was not desirable but said it was “part of the pathway” back to a full and sustainable return to the bond markets.

“It is a gradual process of re-entry into the market,” said Oliver Whelan, director of funding and debt management at the NTMA. “Each time you borrow, the yields will hopefully come down somewhat. The more money you have, the more willing investors will be to give you money.”

Dermot O’Leary, chief economist at Goodbody Stockbrokers, described the high interest rate on the bonds as “a means to an end”.

“They are unsustainable rates in the medium-term but not in the short term,” he said. “The more comfort Ireland can give the market on the amount of funding done, the better. That should lead to a reduction in yield as a result of the increasing confidence.”

The NTMA said the original “funding cliff” of €11.9 billion due on a bond maturing in January 2014, the first major payout by the State after the programme ends, had now been reduced by 80 per cent to just under €2.4 billion.

John Corrigan, chief executive of the agency, said the sale of the amortising bonds marked a diversification of the State’s sovereign funding programme.

Minister for Finance Michael Noonan said the sale of bonds yesterday and last month showed that the State’s “ability to emerge from the programme and return to a more normal funding cycle is building at home and abroad”.

Amortising bonds pay out an equal annual amount comprising interest and principal to investors whereas standard bonds pay investors interest every year and the principal when the debt matures.

Five bonds sold yesterday have maturities ranging from 15 to 35 years.

The NTMA expects further sales of amortising bonds as pension funds complete funding plans in line with changes announced by the Pension Board in June.

Pension trustees must show how they intend to tackle deficits in high-cost defined benefit pension schemes, which guarantee members a percentage of their final salary on their retirement.

The NTMA expects to raise up to €5 billion on amortising and inflation-linked bonds over the next 12 to 18 months.