Not everyone is buying the Irish bailout success story
Given our indebtedness and the state of our banks, sentiment towards Ireland could change quickly in the post-bailout world
Last week’s meeting of EU finance ministers: while the Government views the muted market response to the backstop announcement as a thumbs up to its “go it alone” stratagem many observers are dubious about Ireland’s prospects to go it alone post-bailout.photograph: francois lenoir/reuters
Barring an accident Ireland looks set to exit the bailout on a tailwind of positive sentiment. The Government has hit every fiscal target asked of it, bond yields are at record lows, and while concerns persist about the strength of recovery elsewhere, growth forecasts for Ireland are positive across the board.
To cushion its return to the markets, the NTMA has built up a war chest of some €21 billion in reserves – enough to last us until the first quarter of 2015 they say.
The muted market response to the backstop announcement will also be viewed by Government as further proof of its convalescence, and a thumbs up to its “go it alone” stratagem. However, if the crash has taught us anything, it is how quickly such sentiment can evaporate.
For Jeremy O’Friel, managing director of Belmont Investments – a New York-based hedge fund – there are still too many “what ifs” in the equation.
“What if the banks need more money? What if tapering [a cooling of the Fed bond-buying programme] starts and interest rates rise as the global economy recovers? What if Greece falls over?”
O’Friel bases his analysis on debt sustainability metrics that suggest Ireland – with a public sector debt of 125 per cent of GDP and rising – will need more than a modest growth rate just to cover the interest payments.
“So even with the following – European support, IMF support, record low global rates due to Quantitative Easing (QE), political stability – even with all of that, we are only just below the bubble.
“Yes, there is a possibility of growth, but just feed the numbers into the parameters and you will see that we need something extraordinary, to improve the tax take to a point where the situation starts to look safe again.”
Several European-based investors said the flood of central bank money was “aiding risk appetite” across the euro zone and prompting a surge in bond issuance from the periphery. Irish companies are taking advantage of what one observer labelled a “yield grab”, raising over €6 billion in debt in the year to date.
On Wednesday, AIB comfortably raised €500 million in its first “unguaranteed” bond issuance in nearly five years. Nonethless, there have been widespread reports of some investors in Irish bonds jumping ship and taking profits ahead of the bailout exit.
“Profit taking is likely the biggest motivating factor in these reported sales,” said Niall Quinn, head of international business at Eaton Vance, a $270 billion US money manager. “It may also be that, on a risk/reward basis, these investors believe that there are more attractive investment opportunities in other markets.”
Lee Cumbes, head of sovereign origination at Barclays, said, however, this was part of a natural maturing of the investor base whereby the initial wave of “credit investors” is replaced by more traditional “rate investors”.
On the outlook for Irish bond yields, he said: “I don’t think they’ll come back as peripheral yields for a variety of reasons, but mainly because of the country’s positive growth outlook and its moderate borrowing requirements.” He reckons Irish bonds will form part of a semi-core in the future, rather than on the periphery of the market.