ANALYSIS:The National Treasury Management Agency says international sentiment about Ireland has improved markedly. True: there has been too much scaremongering, writes DONAL O'MAHONY
IRISH ECONOMIC problems are many and varied but, for the moment at least, financing its yawning budget deficit is not one of them. On Tuesday, the National Treasury Management Agency completed a highly successful auction of short to medium dated government bonds, raising a further €1 billion in borrowings on the most favourable interest rate terms (absolute and relative) seen this year. Demand was robust, the €1 billion on offer being more than three times oversubscribed.
Ireland’s year-to-date borrowings in the sovereign debt markets now total €22.7 billion, or 89 per cent of the estimated €25 billion required for 2009 as a whole. With a pre-announced calendar of monthly auctions through to November, the requisite funding will be completed before the last of the hay is saved!
This is a noteworthy achievement for Ireland Inc in the midst of a very crowded marketplace for Euroland debt issuance – both governments and corporates. It is perhaps even more laudable in light of the misguided (nay, mischievous) comments regarding Irish default risk which blighted our landscape earlier this year. Some context is needed here. Much of the scaremongering regarding Irish solvency and liquidity risks during February and March was also being applied (albeit not quite so liberally) across our euro zone peers, given the systematic collapse in public finances and attendant fears of an EMU break-up. Such concerns have long since vaporised and, in tandem with a general revival in investor risk appetites, Euroland bond spreads are now fast reconverging on pre-crisis (Lehman Brothers) levels.
However, improving sentiment towards Irish government gilts also has a domestic dimension. For much of the past year, this market has laboured under a fog of uncertainty, linked to the potential scale of our banking and budgetary crises and, more critically, the “how” and “when” of any prescribed policy resolutions.
Now, that fog is slowly lifting – the Government having formulated its proposals for medium-term fiscal consolidation and banking sector revival. Brian Lenihan’s roadshow of five European financial centres in mid-May has proved an important ingredient in the sentiment uplift amongst overseas bond investors. His presentations were coherent, credible and very well received, begging the question as to why such a direct communications strategy might not also be successfully deployed in town-hall-styled gatherings back home.
In this context, any policy proposals that serve to placate global bond investors will ultimately account for little, without domestic “buy-in” and implementation. This is the stark challenge that Ireland now faces, its Government and citizens alike.
As a nation, we have tended to skirt around the enormity of our problems during the past 12 months, rather than collectively confronting them head on. A prime example of this has been the evolving public debate on Nama (National Asset Management Agency), where all attention has been paid to more secondary issues rather than on the primary objective of allowing credit channels in the Irish banks to reopen.
Initial responses to Colm McCarthy’s menu of public expenditure savings are in a similar vein, the debate framed more by where the snips should or shouldn’t fall, rather than on the absolute imperative to snip in the first place.
With the State borrowing €480 million a week just to make ends meet, it is the collective task of the Government, Opposition parties and social partners to ensure that the forthcoming reform of Irish public expenditure and taxation is not only fair and equitable, but also of sufficient scale to ensure fiscal stabilisation in the medium term.
Ireland’s stock of public indebtedness is still relatively low (73 per cent Debt/GDP in 2010 vs. 84 per cent euro zone average) and our debt affordability (interest costs as a percentage of GDP) remains comfortably aligned with the strongest credits in the euro system. However, we cannot rely indefinitely on the kindness of (overseas) strangers to sustain our borrowing needs if we are ill-prepared to safeguard our own credit quality.
The prize for Ireland is not inconsiderable here. Be aware that the decline in Irish sovereign yield spreads – the premium paid on our borrowing costs – from their mid-March peaks has saved the exchequer in the region of €700 million in annual debt servicing costs. Yet, current spreads remain significantly wider than those implied by our AA credit rating, thus betraying residual market unease regarding Ireland’s economic and budgetary outlook. With some hopeful signs of domestic economic stabilisation now unfolding, decisive action on the banking and fiscal fronts will elicit very favourable responses from within international rating agency and investor circles.
Irish government bonds are the best performing securities in the euro sovereign markets this month, a total return of 2.23 per cent* compared with 0.66 per cent for the euro zone aggregate, and an even more modest 0.35 per cent for the benchmark German market.
July is proving to be a pivotal month for the Irish market, given publication of those special reports on public expenditure and taxation reform, along with draft legislation on the establishment of Nama. In fleshing out their intentions for both the public finances and banking system, the Irish authorities have the chance to rollout a stabilisation programme that can succeed more rapidly and at a significantly lower fiscal cost than has been feared heretofore.
If so, a substantial rerating of Irish government debt relative to its peer group will necessarily follow. Together with the continued healing in financial markets as the global economy revives, an opportunity will readily present itself for a substantial pre-funding of Ireland’s 2010 borrowing requirement (€20+ billion?) before the current year is out.
Ireland may then look forward with increasing confidence to satisfying its public financing needs for 2010 and beyond, and at borrowing rates increasingly commensurate with the best credits in Euroland. This outcome is now ours to lose.
* to 22nd July
Donal O’Mahony is global strategist with Davy, the Dublin-based stockbrokers and financial advisers