NTMA caution on going after money is good housekeeping

The National Treasury Management Agency yesterday announced that it was suspending its fundraising activities on capital markets until "early 2014".

It seems the reason had less to do with the jitters caused by the row over the debt ceiling in the US and more to do with the fact that the NTMA already has about €25 billion in the kitty to fund the State.

Put this with the €4 billion odd yet to be drawn down from the EU-International Monetary Fund bailout programme and the State has enough funding in place to get us through to early 2015.

Prudent housekeeping in other words.

Suspending the Treasury Bills auctions, short-term debt that typically rolls over every three months, at this point of the year also ensures the existing bills in the market will have matured before the year end and won't be counted as part of the general government debt as measured by Eurostat.

This debt measure will be about €1 billion lighter at the year end as a result. Our general government debt was a hefty €192.5 billion at the end of 2012 so every little helps.

While it might seem like a good idea to stockpile as much cash as we can get our hands on right now – in case the markets change their minds about us – it comes at a cost. About €2.2 million each month for every €1 billion we hold in cash.

This is money that could clearly be better used by the exchequer for other purposes.

In that context, it seems prudent for the NTMA to pull back from markets for now. It’s worth noting that in “peace time” (before the crash in 2008), as it’s referred to in NTMA headquarters, Ireland typically kept about €6 billion on deposit at any one time. But that was a different era, when the spread between German and Irish bonds could be as small as 10 basis points. It’s about 200 now.

Many Irish taxpayers might wonder why we need a €3.1 billion adjustment in the exchequer finances in this month’s budget when we have so much cash lying around on deposit.

Well, by the year end, the balance will have reduced to about €21 billion while we have a bond redemptions in January of €6.8 billion. That’s the guts of €11 billion accounted for already before the NTMA goes back to the market.

Rainy-day buffer
With the country also due to exit the bailout at the end of this year, it's considered prudent to have about 15 months of cash on hand as a rainy-day buffer.

Besides, in spite of all the cutbacks to date, the country is still spending about €1 billion a month more than it is generating in taxes, which isn’t sustainable.

Ireland isn’t out of the woods yet, nor is the euro zone. Growth here is sluggish at best, unemployment remains stubbornly high and there is far too much indebtedness overhanging the economy.

The markets have been impressed by the Irish recovery story of the past three years, as evidenced by our improved bond yield rates, but they wouldn't be long changing their minds if another external shock were to knock us off track or if
the growth we're hoping for does not materialise.

The NTMA’s decision to pull back might also be influenced by the likelihood of the troika extending a precautionary line of credit to Ireland once the bailout ends.

This has yet to be confirmed, but it has been widely reported a line of credit of €10 billion or so might be extended to Ireland to provide some comfort to markets once we’ve been disconnected from the current €67 billion credit drip.

This would be a handy safety net for the country to have, while also potentially giving us access to the Outright Monetary Transactions programme, a mechanism whereby the European Central Bank will step into secondary markets to buy Government bonds in a bid to dampen distortions in sovereign debt markets.

You need to be in some form of a bailout programme to gain access to OMT.

Managing the nation's cash pile is a careful balancing act for the NTMA. In
the boom years, money was cheap and easy to come by. AAA-rated Ireland was considered a safe bet.

The economic crash left us effectively frozen out of the markets and having to go cap in hand to the troika for a dig-out.

Recovery message
Since then, the NTMA has been busy working behind the scenes to sell the Irish recovery story to investors abroad.

Its executives have racked up the air miles and conducted countless briefings to explain the actions being taken by the Government to refloat the economy and to put some clear blue water between Ireland and the other EU bailout countries, namely Portugal and Greece.

It appears to have worked.

Irish 10-year bond yields are currently hovering at about the 3.8-4 per cent mark, lower than in the boom years. The Portuguese, whose own exit from the bailout is scheduled for the middle of next year, are paying in excess of 6 per cent.

Timing is everything. So far, the NTMA has carefully engineered our re-entry to market funding. The next few months will involve another austerity budget, our exit from the troika bailout, and more tricky deadlines for the banks to meet on the crucial issue of mortgage arrears. That’s to say nothing of the next round of bank capital stress tests in spring.

There’s plenty ahead that could trip up the recovery. Time will tell if the NTMA has made the correct call by choosing to sit on its hands for now.