THE GOVERNMENT’S debt manager will test the bond markets next week for the first time since the Greek economic turmoil intensified and the EU agreed a €750 billion fund to stem the euro zone sovereign debt crisis.
The National Treasury Management Agency (NTMA) has decided to proceed with its monthly auction next Tuesday after saying last month that it may not proceed with its May bond auction if the market volatility sparked by the Greek debt crisis persisted.
The turmoil in the bond markets eased considerably since the EU announced the creation of the emergency fund last weekend to help euro zone countries unable to pay their debts. However, stock markets in Asia and Europe fell yesterday, and the euro dropped from Monday’s highs after the initial euphoria following the creation of the fund subsided.
Greece sought a first payment from the international bailout fund, leading to fears that the fund may not fully quell the debt crisis and lingering concerns about the euro zone’s weakest economies.
The NTMA plans to offer a 4 per cent bond maturing in 2014 and a 4.5 per cent bond maturing in 2020 at auction on Tuesday. It will announce how much it intends to borrow on the bonds on Friday.
The planned sale was “a positive sign”, said Alan McQuaid, economist at Bloxham Stockbrokers. “The NTMA wants to make hay while the sun shines and capitalise on the goodwill that’s out there.”
Since the beginning of the year the NTMA borrowed between €1 billion and €1.5 billion selling bonds in monthly auctions on the third Tuesday of every month.
The risk associated with Irish Government debt eased further yesterday as the spread or difference between Irish and German borrowing costs narrowed, with the cost of insuring against an Irish sovereign default also falling.
The difference in the cost of Government borrowing on 10-year debt over the German equivalent – the benchmark used to gauge risk – fell to 160 basis points, or 1.6 percentage points, from a high of 306, the highest level during the 11-year euro zone era. The spread more than doubled since mid-April amid fears that some euro zone countries may struggle to repay debts.
The cost of insuring against default on five-year debt fell to 181 basis points from a recent high of 272 basis points on so-called credit default swaps last week when the Greek debt crisis reached a peak.
This means that for every €100 of Irish debt it would cost €1.81 to insure investors against default.
“We are rapidly going back to where we were, so there is no reason not to proceed with the auction as normal,” said Anthony Linehan, deputy director of funding and debt management at the NTMA. The auction would not have proceeded had last week’s volatility continued, he said.
The NTMA has since tested strong demand for short-term and 10-year debt, said Mr Linehan. Irish debt was regarded as less risky because the NTMA has raised 63 per cent of the State’s borrowing requirement for the year and holds cash reserves of more than €20 billion.
The NTMA has raised €12.6 billion of the €20 billion required by the Government this year to meet the deficit in the public finances.
Some €6.7 billion has been raised in four monthly auctions and a further €5 billion on a syndicated bond sold through banks.
Mr Linehan said the NTMA’s borrowing so far this year meant monthly auctions could be skipped if necessary. “That option is open to us – it doesn’t mean we cannot fund; it just means we can step back for a month.”
He said the NTMA has just €3.4 million in debt maturing this year, with the next tranche of debt due in November 2011 when some €4.4 billion must be repaid.