Investors 'should buy Irish sovereign risk'

Investors should buy Irish sovereign risk, especially longer-dated bonds, after bank stress tests last week proved "credible", moving the focus to the country's economy, according to Morgan Stanley.

The bank's "preferred trade" is to buy longer-dated Government bonds, specifically the 5.4 per cent securities due in 2025 that closed on April 1st at 70 cents on the euro to yield 9.4 per cent, London-based strategists led by chief European economist Elga Bartsch said in a report titled Ireland - Time to Buy. Investors should also sell five-year credit-default swap protection on Irish debt.

The stress tests should stabilise the banking system and "allow the economic turnaround already underway to boost investor confidence in Ireland's medium-term debt sustainability," according to the report. Government debt should level off at about 120 per cent of the economy by 2013 and start to decline gradually over the next two years, they said.

"Of course, Ireland is still facing major challenges. But if there is one economy in the euro area that could meet these challenges, it is probably the Irish economy," Ms Bartsch wrote. "We continue to believe that Ireland is fundamentally different from the other peripheral countries in that it is a fully deregulated, fully liberalised market economy."

The Central Bank on March 31st told four lenders to raise €24 billion and announced plans to merge two of them after conducting stress tests. The Government is trying to convince investors at home and abroad that it's finally plugged all the holes in the banking system, whose collapse crippled what was once Europe's most dynamic economy.

The Government has already injected €46.3 billion into the financial services industry.

Bloomberg