ANALYSIS:SINCE LAST Friday morning's decision in principle to Europeanise (some) national bank debt, and a subsequent large fall in Irish Government bond yields, the prospects of the State borrowing normally have improved a lot.

Strike while the iron is hot.

Yesterday, the Government’s debt agency announced it will try to borrow €500 million from the markets tomorrow, with the intention that the money be repaid in an investor-reassuring time frame of just three months.

Will it succeed?

The National Treasury Management Agency is certain to have sounded out its financial markets contacts to assess what sort of appetite there is among investors for IOUs with the Irish State’s harp stamped on them. Given the amount is small and the repayment time frame short, the NTMA can be all but certain that there will be €500 million more in its coffers tomorrow evening than tomorrow morning.

Failure is almost inconceivable, and if the agency did not manage to raise the €500 million it would make a second international bailout much more likely, despite the potential for many billions of euro to be lifted off the State’s balance sheet thanks to last Friday’s deal in Brussels.

Failure would also raise questions about the reliability of the yield data from the secondary market, in which previously issued IOUs are traded among private investors. These yields currently suggest that market participants want to try their luck lending to the Government. But, as trading is thin, it is possible that the price signals do not reflect real investor appetite.

Assuming the NTMA succeeds tomorrow, it will be only the start of a long and gradual return to the markets, with larger amounts being raised at each successive issuance of newly minted IOUs, and the time frame for their repayment being pushed out.

But full market re-entry will depend on many things. A calming of the wider euro zone crisis is a prerequisite. Fridays agreement amounts to the first real change of tack and, while it will not be enough on its own, the changed political dynamic in Europe offers hope that there is more to come.

Growth in the Irish economy will also be vital. If the economy does not expand, the State’s debt dynamics will slowly spin out of control. Next week, the economic growth figures for the first quarter of the year will be published. If the economy contracted in the first three months of 2012, it will be the third consecutive quarter of shrinkage.

That has not happened since the worst of the shake-out in 2008-2009. It would augur awfully for everyone and everything, including the prospects of re-entering the bond market and exiting the bailout.

Closely linked to growth is the wherewithal of the Government to pay its way. Yesterday’s exchequer returns show that while some progress is being made to close the gap between revenue and spending, there is a very long way to go. Ministers and officials talked up the figures despite the fact that the only new information published related to spending and revenue for a single month.

The numbers are not as good as suggested. As the chart shows,it is hard to see a trend of acceleration in tax revenues over the past 15 months. And that despite multiple tax hikes.