Irish access to low debt costs reflects market confidence

In one respect at least, a national debt office is a bit like a central bank. When times are calm, the work of such institutions is the preserve of specialists. It’s only when things go awry that everyone else looks on.

This is the world we’re in now. If we had not been through the crash, the National Treasury Management Agency would do its thing without much ado.

But Ireland’s bailout in 2010 was precipitated by the loss of access to private debt markets after huge undertakings to prop up the banks. Market access was regained last year when Ireland emerged from the EU-International Monetary Fund programme, with a greatly elevated national debt.

At the end of last month, net debt stood at €182.82 billion. The cost of servicing the debt in 2014 was €8.21 billion, an onerous burden on taxpayers. Busy days for the NTMA.

So how is it all going? Having conducted regular bond auctions last year for the first time since 2009, the agency’s 2014 annual report shows it raised €11.75 billion at a weighted average yield (interest rate) of 2.8 per cent with 12 years’ maturity on average. In the first six months this year, the agency raised €11 billion at a weighted average 1.5 per cent yield and 18 years maturity on average.

“The statistic I like to use on this – it’s not exactly accurate, but it’s very, very close – is that that funding has been done at double the maturity of last year and at half the yield,” said Conor O’Kelly, the former stockbroker who took command of the NTMA in January.

The first objective was to differentiate Irish debt from that of other crisis-struck countries in the single currency. Ireland cannot borrow at the rates prevailing for “core” euro zone countries such as the Netherlands, Austria, France, Belgium and Finland, which pay modest premiums over German yields to sell debt.

Yet the premium Ireland pays is well below comparable sums for “periphery” countries such as Italy, Spain and Portugal. This week, for example, the spread or interest differential between Irish and German 10-year debt was 0.67 percentage points. The equivalent spread for Finland was 0.38 points and it was 0.32 points for Belgium. Italy’s spread was 1.19 points, Spain’s 1.32 points.

‘Semi-core’ economies

Thus Ireland is cast as a “semi-core” debt issuer. The objective these days is to pursue the kind of rates enjoyed by core countries, a sales drive essential for a particular kind of national product. Dublin has not joined the ranks of the core, but the NTMA takes heart from the fact that Irish borrowing costs were unperturbed in recent ructions over Greece.

Note, however, that Ireland is not a priority for markets at the moment. It follows that Irish debt does not take the first hit in a time of turmoil. While the turmoil abated in the end, it would be foolish to think Irish costs would not have risen if the volatility continued.

Two major forces are at work in the present standing of Irish debt.

First is market confidence in the Irish recovery story, with economic growth at the fastest rate in Europe and a steady improvement in the public finances. This has encouraged credit agencies to upgrade their assessment of Irish debt, but Moody’s rating remains below those of Standard & Poor’s and Fitch. Even though the election brings an inevitable element of uncertainty over the political outlook, current borrowing costs suggest the market believes the central thrust of fiscal policy will not change after the poll.

The second factor is the European Central Bank’s titanic quantitative easing campaign, which boosts demand for sovereign debt in the euro zone, reduces the price the market demands to hold it and weakens the euro. All this is greatly to Ireland’s advantage.

Market bonds

This is the backdrop against which the Government – via the NTMA – refinanced €18 billion in expensive IMF debt with cheaper market-sourced bonds. The new bonds have an average lifespan of 15 years, compared to the average four-year maturity on the IMF loans. Interest savings are forecast to exceed €1.5 billion over five years, according to the NTMA. The NTMA sold a 30-year bond in February for the first time. It raised an initial €4 billion at 2.088 per cent and raised another €1 billion at 1.3 per cent, a feat which is unlikely to be repeated any time soon.