All has changed utterly one year on as signs of recovery increase
As Ireland prepares for a return to the bond markets, there is some hope we might be getting back on track
What a difference a year can make. Last December Ireland remained mired in its bailout programme and faced dangerously high borrowing rates of 9 per cent, while a “Grexit” appeared to be fast approaching.
Now there are glimmers of hope that a recovery of sorts could be on the way in 2013 as Ireland gets ready for a return to the bond markets and fears of a break-up of the euro zone continue to dissipate.
“I think we’re in a better place than this time last year, mainly because of the actions of one institution [the ECB], which has given comfort to the markets and taken some of the tail risk away,” notes Dermot O’Leary, chief economist with Goodbody Stockbrokers.
While bond yields of the peripheral European nations started the year on highs, they have since fallen quite dramatically. Last January, for example, all the focus was on Italy, when yields on 10-year bonds exceeded 7 per cent and talk was of an imminent bailout. By December, yields had fallen back to below 4.5 per cent.
It is a similar tale in Portugal, where yields went as high as 17 per cent last January, but are now hovering close to 7 per cent, while Ireland has seen yields of its benchmark 2020 bond fall to below 4.5 per cent.
Germany, meanwhile, has also continued to see its cost of borrowing fall, as investors flocking to the safe haven of bunds have pushed yields into negative territory.
How did we get from there to here?
For Brian O’Reilly, global investment strategist with Davy Stockbrokers, the improving conditions began with the long-term refinancing operation of December 2011, which offered banks three-year loans at a discount.
Then came the ECB’s outright monetary transactions which began in the summer. And, of course, that speech.
In 50 years, July 26th might well be remembered for more than just being the eve of the London Olympics 2012. It might be seen as a pivotal moment in the euro zone sovereign debt crisis, the moment that finally signalled the beginning of the end of the downward spiral. It was the day European Central Bank president Mario Draghi told markets that the ECB was ready to do “whatever it takes to preserve the euro”.
His speech settled markets, paving the way for bond yields to fall and for talk of a Greek departure from the euro zone to subside. It also highlighted how central bankers such as Draghi are now willing to put their heads above the parapet to help resolve the crisis.
Outspoken criticism
Indeed, 2012 proved to be the year central bankers took their position in the spotlight. From our own Fiona Muldoon’s outspoken criticism of the domestic banks to the role of the aforementioned European Central Bank, central bankers have been keen to show the world that they mean business.
For Justin Doyle, treasury analyst with Investec Bank, this isn’t going to change soon.
“It’s all about central banks now. They’re going to be the most important factor going forward,” he says, adding that monetary policy decisions, such as the recent move in the US to tie interest rates to unemployment, will dictate markets in 2013.
