NTMA has done well but let’s not get carried away

What a difference nine months can make. Yesterday the National Treasury Management Agency raised €3.75 billion through the trade of a 10-year bond at a rate of 3.543 per cent.

This was after receiving orders of €14 billion from investors around the world, mostly in Europe and the United States. The buyers were described as "real investors" – fund managers, pension funds and insurance companies – not speculators out for a quick turn.

Capital markets
NTMA chief executive John Corrigan also revised downwards the estimate of how much the debt management agency will raise this year from an upper limit of €10 billion to "nearer" €8 billion. It raised €7.5 billion last year through auctions.

It was our first foray into the capital markets since exiting the EU-IMF bailout programme on December 15th and would seem to vindicate the Government’s decision late last year not to seek a precautionary line of credit for the State on leaving the Troika programme – though that raised a few eyebrows at the time.

Only last March, ratings agency Moody’s expressed its view that Ireland would need a second bailout. It expected Ireland would face challenges regaining market access in 2013 and would need to rely on the European Stability Mechanism, at least partially, when the bailout programme ended.

Moody’s is the only main international ratings agency to still have Ireland at sub-investment grade, something that rankles with the NTMA. This may change on January 17th when Moody’s publishes the results of its review of Ireland’s rating but it’s not a given.

Moody's wasn't alone in thinking Ireland would need another bailout or perhaps a precautionary line of credit to act as a safety net in the event that another external shock to the euro zone might lock us out of capital markets. Plenty of commentators were willing to predict that Ireland would need a second programme.

Warm glow
The issuance yesterday appears to have been well timed. The NTMA chose to dive in while there was still a warm glow off Ireland's exit from the Troika bailout and before other European sovereigns go into the market, notably Spain and Italy. Portugal, another EU bailout country, could also return to the markets this week. Ireland might have suffered a knock-on effect if any of those countries ran into difficulties with their issuances.

There was even a “smidgen” of interest from the Middle East and Asia, which have been largely no-go areas because of Moody’s negative view of our sovereign bonds.

The NTMA will run additional auctions later in the year to generate the €4.25 billion in additional funding that it plans to raise for 2014.

It could have raised the €8 billion in one fell swoop yesterday but, as Corrigan noted, that wouldn’t have been good for liquidity, something investors crave.

It is also now turning its thoughts to a €10 billion bond redemption due in April 2016. While that is still more than two years away, the NTMA will be looking to “top slice” that €10 billion redemption by offering “switching terms” to the holders of the bonds. This would avoid the redemption having to be taken in one gulp.

Interest bill
The downside to all this fundraising is that it adds to our interest bill.

At present, the NTMA and the Minister for Finance Michael Noonan are minded to maintain sufficient cash balances to fund the State for 12 to 15 months.

That’s understandable given our recent experiences with capital markets and the fact that an event, completely outside our control, could come along and rock confidence in the euro zone and limit our ability to raise funds.

Ireland will have €19.5 billion in the kitty when the money from yesterday’s transaction is banked and a cheque for €2.8 billion is handed over to redeem a bond that matures on January 14th. That’s about €1 billion more than at the close of last year.

This is not free money and Mr Corrigan acknowledged yesterday that the NTMA would prefer to “taper” our cash balances to the point where they could fund the country for nine to 12 months. That would be prudent housekeeping. The interest costs on Ireland’s national debt amounted to €8.1 billion in 2012. Roughly speaking, that’s equivalent to the expected exchequer deficit for this year.

In other words, strip out the debt costs and the State would be able to fund its day-to-day activities from the taxes and other income it generates.

Trim expenditure
Instead, the Government will have to continue to trim exchequer expenditure while raising additional taxes (water charges and the full-year property taxes among them).

There’s also the possibility that the Irish-owned banks might need more capital when the euro-wide stress tests are completed later this year, a concern raised yesterday by Fianna Fáil’s finance spokesman Michael McGrath.

While Bank of Ireland could probably raise funding from private investors, in the cases of AIB and Permanent TSB, the State would be the most likely port of call in such a scenario.

The NTMA deserves credit for securing Ireland’s smooth return to capital markets. But we shouldn’t get too carried away.

There’s a lot of work still to be done to repair the national finances before we can hang out the flags.