Investors back Ireland not to default on debt
Published 02/02/2012 | 05:00
There is little chance that Ireland will default on its debts over the next five years, if the actions of international investors are to be judged.
They are placing big bets in the bond markets that Ireland will repay its loans on time.
Bonds were trading yesterday at the same price as the Government has promised to pay in five years' time.
Money managers that bought Irish government bonds cheaply at the height of the crisis are sitting on huge profits.
The positive sentiment is driving the value of government bonds back to pre-bailout levels.
Yesterday, €6bn of Irish government bonds due to be repaid next year were trading at 1pc above face value.
In July last year, the same bonds were being trading at a discount of quarter of their face value.
This means investors who bought then are in line to get back trading profits of almost 40pc, in addition to the 5pc interest that the Government pays on the bond.
Bond trader Ryan McGrath said it highlighted the dramatic recovery in investor sentiment for Ireland.
"(The) Irish bond had a fantastic run all through January, sentiment is very positive and buyers are more aggressive than sellers," he said.
The bond due to be repaid next year totals €6bn and it is a large, liquid investment.
A second bond due to be repaid in 2014 is also performing strongly. It is changing hands at prices above 99pc of face value, a level last seen in September 2010.
In July last year, the same bonds were being traded at 68pc of face value.
At that time, investors believed there was a very high likelihood that the government would be forced to default on its financial commitments.
The recovery is the clearest sign that there is real confidence in the markets in the State's ability to repay its debts in full, and on time.
Government bonds due to be repaid five and nine years from now do still trade at significant discounts to face value, though the gap there is also closing.
The Irish bonds are benefiting from a general upswing in confidence in the past week -- unlike the other two euro bailout countries, Greece and Portugal.
Greece, Ireland and Portugal are all in international bailout programmes but investors are now betting that only Ireland can recover from the debt crisis without a default.
At the same time, the cost to investors of insuring Irish government bonds they own against the risk of a default dropped to the lowest level since April.
Insuring bonds against default dropped below 6pc per year for the first time since April.
Owners of Portuguese bonds are paying more than 17pc per year to insure against default.