‘You don’t want to be running your economy and society for bond investors’

Ireland should prepare for a recession or crisis every decade, says NTMA chief

Conor O’Kelly, chief executive of the National Treasury Management Agency’s (NTMA), is under no illusions about his place in the €85 trillion-plus global bond market.

“It’s normally a planes, trains and automobiles job for us in the NTMA. A small country like ours has no choice. We’ve got to hit the road to keep bond investors informed – otherwise they’d forget about us,” says O’Kelly, chief executive of the agency for almost six years, noting that Ireland accounts for less than than 1 per cent of both the world’s gross domestic product (GDP) and most global bond indices.

But 2020 has been no ordinary year. And like the rest of the financial world, and beyond, the NTMA has had to enter the realm of virtual presentations – and simulating debt auctions from traders’ sitting rooms – during Covid-19 to keep investors buying Irish.

The target has also moved. The NTMA originally set out to borrow €10 billion-€14 billion this year, mainly to finance the repayment of maturing debt as the Government looked on track for a third broadly-based budget in a row. It was forced to double the target in April to help fund unprecedented wage subsidies and Covid-19 unemployment benefits, health spending and other supports to deal with the pandemic.

“I think it is the first real counter-cyclical fiscal response by the State in its history,” says O’Kelly, 60, of the use of stimulus to counteract the severe economic shock. “In the last crisis, we were putting our foot on the brakes. This time we have the foot on the accelerator. It’s a different beast – and it’s the same right across Europe.”

Could the last Government have done more in recent years to set aside money to help deal with an economic set-back?

While then minister for finance Michael Noonan first revealed plans in early 2016 to set up a rainy day fund, it was late last year before it was formally established. Its initial €1.5 billion pot was tapped last month to help fund the €17.8 billion budget expansion for 2021.

Recognising realpolitik

The Irish Fiscal Advisory Council said in May that the Government had squandered an opportunity by not setting aside some of the up to €6 billion of temporary "windfall" corporate taxes flowing into its coffers in recent years. Using the money has helped fund the likes of a widening of income tax bands, boosting of youth unemployment benefits, and putting off plans to increase property taxes that are used to part finance local authorities.

O’Kelly disagrees. “I think the Government did quite a lot. We were in pretty good shape coming into this crisis. [The Government] was running a surplus coming into this. It’s really the trajectory of heading towards budget balance that that bond markets want to see. But they recognise realpolitik,” says O’Kelly.

“And you don’t want to be running your economy and society for bond investors. That’s not a good idea, either.”

Still, O’Kelly said that Ireland needs to be prepared for a recession and some sort of a crisis every decade.

There will be few winners from Brexit. Ireland won't be one of them

“The question in Ireland that we should be asking is: what sort of shape are we going to be in when it comes around? We’re a small, open economy and we get buffeted. Looking at even the recent 40 to 50 years of economic history, it looks like once every 10 years, on average, we could get hit by something that we didn’t think of.”

“I think it’s worth remembering that in four or five years’ time. And that’ll be the reason that we want to get our house in order at some point in the future.”

The Minister for Finance Paschal Donohoe and Minister for Public Expenditure and Reform Michael McGrath have committed to outlining next spring how they plan to cut the budget deficit in the years ahead.

The main reason, of course, why bond markets haven't baulked at the runaway pandemic bills across Europe – either from national spending or the ground-breaking €750 billion EU virus recovery stimulus plan – has been the European Central Bank (ECB).

Under the leadership of Christine Lagarde since late 2019, the ECB committed this year to buying up to €1.35 trillion of bonds in the market as governments raise cash to fight the effect of Covid-19 on their economies and health systems. The bank has also provided ultra-cheap loans to banks to keep money flowing.

“The ECB are saying as specifically as they possibly can – and central bankers are usually notoriously obtuse – that they are here to underwrite the recovery, and to allow governments to pull hard on the fiscal lever,” said O’Kelly, adding that the central bank’s bond-buying drive is essentially matching the amount of debt that governments are raising across the euro zone.

“The net requirement of investors to purchase this additional supply is almost non-existent.”

This means that the normal market force of bond market investors – including pension and investment funds – demanding higher rates, or yields, to absorb a glut of bonds being sold has been short-circuited.

“[The ECB] are also essentially saying to governments, ‘We’re going to give you plenty of time to get your house back in order afterwards’. And that time is more valuable to sovereigns and governments than actual interest rates on their own.”


It’s just as well, as the Republic’s debt pile, which had come in from a peak of 123 per cent of GDP in 2013 to 57 per cent last year, is set to widen to almost 67 per cent in 2021, according to Government forecasts. That’s even with multinationals – led by tech and pharma groups, who have done well in the pandemic – propping up the GDP figure. The debt ratio relative to the underlying domestic economy is projected to blow out from 95 per cent in 2019 to almost 115 per cent next year.

It’s easy to get swamped by statistics discussing the NTMA. But some figures stand out. The ECB stimulus, on top of the bank’s existing multitrillion-euro bond-buying programme over the past five years, means that the State’s annual interest bill has fallen from a peak of €7.5 billion in 2014 to less than €4 billion currently as the average rate on national borrowings – currently at almost €225 billion – has declined from more than 4 per cent to just 1.6 per cent.

The €24 billion raised this year will cost €50 million a year in interest payments – a rate of 0.02 per cent. Compare that to when the yields on Ireland’s 10-year bonds peaked to more than 14 per cent during the global financial crisis.

O’Kelly declines to say how much the NTMA plans to raise in the bond markets in 2021, ahead of an official announcement next month. But the Government’s Budget 2021 plan to run a €20.5 billion deficit – based on no broadly-available coronavirus vaccine and a no-deal Brexit – provides a reference point.

'This was the early 1980s. You were going to get on a plane and go somewhere. It was just a question of where you were going'

As the stop-start talks over a future trade accord between the EU and UK enter a crucial stage this weekend, the Central Bank is forecasting that no-deal, resulting in a default to World Trading Organisation (WTO) tariffs on goods and other disruptions, would knock 2 percentage points off Irish GDP next year.

Even if an agreement is reached, there will be few winners from Brexit. Ireland won’t be one of them. Still, there is little doubt that the presence of the ECB in the market in recent years has dissuaded “bond market vigilante”-types from driving up Irish borrowing costs as they weigh the Brexit impact.

News in the past few weeks that two pipeline Covid-19 vaccines, being developed by Pfizer/BioNTech and Moderna, have proven more than 95 per cent effective in advanced clinical trials has prompted stock markets to price in a rapid economic recovery next year.

“The money is talking and saying that by halfway through 2021, whether it’s because of vaccines, or rapid testing, or medicine, or all of the above, that things will be in a better place – and that the economic impact of every future lockdown, if they happen . . . will be much less disruptive to economic activity,” O’Kelly says.

AAA rating

The NTMA chief signalled he has no plans to run down its cash reserves, which the Government projects will end the year at more than €12 billion. “I can’t see Ireland ever running down those cash balances to, say, four or five [billion euro] or running just-in-time access the bond market system, which maybe some triple-A countries, like Germany, do. We’re too vulnerable, too small and too dependent on overseas investors,” he says.

The Republic enjoyed an eight-year stint among credit ratings agencies as an AAA-rated country in early days of the euro in the noughties, but was downgraded across the board during the financial crisis, to hit as low as “junk” status for a period at Moody’s. It currently has a single-A rating among most of the agencies – putting it on a par with the likes of Poland, China and Iceland – though Standard & Poor’s raised Ireland to AA a year ago for good behaviour.

Will the State ever rejoin the exclusive league of trip-A nations that currently includes countries such as Canada, Norway and, for two of the top three agencies, the US.

“I don’t think we’re big enough or a powerful enough country to ever get to triple-A,” says O’Kelly. “But I’m much more interested in being triple-A with investors than I am with rating agencies. Our bonds trade closer to a double-A than a single-A. I think where we are now is a fantastic position for Ireland. When you think about where we have come from, it’s a pretty extraordinary story.”

O'Kelly's selection by Noonan for the NTMA gig in late 2014 surprised many in Dublin financial circles, as speculation had centred around figures like John Moran, former Department of Finance sectary general, and Brendan McDonagh, a long-standing official at the debt agency who had led Nama since its inception in 2009.

But O'Kelly spent much of his career in the bond or fixed-income markets. After graduating with a business degree from Trinity College Dublin in 1982, he left for Japan to learn the language for six months before undertaking a masters in Japanese commercial policy at Senshu University in Tokyo and joining Barclays local investment banking unit.

“This was the early 1980s. You were going to get on a plane and go somewhere. It was just a question of where you were going. Youth unemployment would probably have been 40 per cent at that stage in Ireland. It wasn’t as risky a move as it sounds. The opportunity cost was zero. And you’ve got to remember that Japan was an economic superpower at the time and when I came out of college the financial markets were just opening up.”

‘Ship has sailed’

O'Kelly left Japan after five years to work for Barclays in London and, for a period, in New York. In 1995, he returned to Ireland to run the fixed-income desk at stockbroker NCB, which had been sold the year before by its founder, Dermot Desmond, to Ulster Bank.

In 2003, O'Kelly, by then NCB's chief executive, led a management buyout of the country's then third-largest brokerage – a deal ultimately backed by the empire-building Sean Quinn taking an initial 20 per cent stake.

South African finance house Investec's Irish unit, led by Michael Cullen, took over NCB in early 2012 in a deal worth about €32 million, leaving O'Kelly with the official title of deputy chairman but little doubt that there could only be one boss. There was little to lose when he was asked to consider throwing his hat into the ring for the NTMA job to succeed crisis-era leader John Corrigan.

The NTMA's vastly-expanded remit since it was set up 30 years ago means that O'Kelly is also responsible for the likes of the State Claims Agency, the NewEra body that advises the Government on commercial semi-state bodies, Nama, and the Ireland Strategic Investment Fund (ISIF), a successor to the National Pensions Reserve Fund.

Today’s ultra-low interest rates environment may be helping the NTMA’s borrowing efforts. But it has been a big reason why almost €9.5 billion has been wiped off the value of ISIF’s investments in the State’s three surviving bailed-out banks over the past five years. The effects of Brexit uncertainty and the coronavirus have only added to the sector’s woes, leaving the value of the combined three stakes at a little over €3 billion.

Was the Government wrong in ignoring O’Kelly’s calls in mid-2018 to sell down the bank holdings? He pauses before choosing his words carefully.

“I don’t really want to comment on that. But, let’s say, that ship has sailed.”

For the foreseeable future, at least.