NTMA faces headwinds in return to the bond markets
THE BOTTTOM LINE:TWO CONCERNS are said to be occupying the minds of potential investors in Irish Government bonds ahead of the State re-entering the debt markets before the EU-IMF bailout expires at the end of 2013.
They are worried that a vote against the EU fiscal compact in next month’s referendum will remove an important insurance policy – that the Government can tap the EU bailout fund – and that there is another unquantified black hole in the banks’ Irish mortgage books.
The bailout programme ends in 20 months, and it is regarded as good practice to plan the refinancing of borrowings at least 18 months in advance of a major debt falling due.
Until then, the Government is expected to draw €21.7 billion in EU-IMF funds this year (on top of €35.7 billion borrowed in 2011), leaving €10.1 billion in 2013 if all €67.5 billion of the external bailout funds is used.
For a post-bailout world, the Government must find €18.5 billion in 2014 to cover its needs and €17.5 billion in 2015, including €6.9 billion to repay EU-IMF loans. The 2014 figure includes €10.2 billion to bridge the gap between what the State expects to collect in taxes and how much it will need to run the country. The remainder is the €8.3 billion Government bond due on January 15th, 2014 – the first major post-bailout hurdle.
The National Treasury Management Agency trimmed or “top-sliced” this bond in January by pushing out €3.5 billion of the debt until February 2015 with a new bond.
It was hardly a fanfare return to the markets, as most participants were Irish banks, which are partly or almost fully owned by the State. However, pushing out the repayment of some debt makes sense and there are plans for a similar move again.
The NTMA is planning to start dipping toes in the markets before it can dive right in again with a major debt issuance.
The technology is in place for the NTMA to start selling, via insurers, sovereign annuity products tied to Government bonds for up to 35 years. A legislative change and sign-off from the pensions industry is still required, so this will take a bit of time.
These products will only make a dent in the €36 billion the State requires for 2014 and 2015. They could bring in between €2 billion and €5 billion over 18 months, so it will be a slow rather than a spectacular burn.
The NTMA plans to start selling Treasury Bills – short-term loans lasting four to six weeks – on longer terms of up to three months from June or July, following the referendum.
This could bring in €5 billion-€10 billion, and would be interpreted as a more confident move, but would still only push out the timing of repayments marginally.
A deal on the Anglo Irish Bank/Irish Nationwide promissory notes could shave a further €6.1 billion off the State’s funding requirements for 2014 and 2015, so this would leave €15 billion left to raise for the two years.
The real test of returned confidence will be a big syndicated bond issue where the State’s debt managers can determine the level of investor interest and the cost of the borrowing through a group of banks before going public.
An auction is too risky a route to go down on the first major borrowing attempt. A failure to land enough investment – or at the right price – would be disastrous for the State.
The last syndicated bond sold by the State was in January 2010, so selling a large chunk of debt this year or early next may be helped a little by the length of time since the last issue.
For this to happen, the euro zone stars must be aligned and, given the growing uncertainty, this is well out of the Government’s hands.
French president Nicolas Sarkozy may stir up tensions by pushing pro-growth policies with the European Central Bank to win over more right-wing voters following his poor showing in the first-round ballot, while the fall of the Dutch government over austerity measures and fears about Spain’s finances throw two more spanners in the works.
At home, a rejection of the fiscal treaty will rule out drawing on an EU bailout fund again and few investors would want to buy Irish Government debt without this guarantee.
The confusion around the effect of the personal insolvency legislation on mortgage write-offs creates yet more uncertainty, while arrears are still mounting. Bank of Ireland said yesterday that arrears on Irish mortgages continued to rise since the start of the year.
In light of all this, pushing debt repayments out bit by bit may be the best result ahead of the State’s big-bang return to the markets, the timing of which still remains so hard to call.