independent

Sunday 20 April 2014

Signs positive but stakes high as we borrow on bond market

Ireland has nudged a step closer to normalising relations with the bond market, borrowing for five years at 3.2pc.

The next big test is convincing investors to buy 10-year bonds. The signs are positive, but the stakes are high.

If the past six months have been a game-changer for Ireland in the markets, the tables above show that big challenges remain.

Among the most alarming is the inexorable rise in debt-servicing costs since 2008.

That has been driven by the ballooning of the total amount of government debt associated with borrowing by the State to cope with the costs of bailing out the banks and to plug deficits resulting from the collapse in tax revenue.

Total debt-servicing costs hit €6.5bn at the end of last year, according to the latest Exchequer returns. From almost a standing start six years ago it is now a major part of the national budget.

In Ireland's favour is the relatively gradual pace when the actual debts fall due, known as the maturity profile.

Levelling off the maturity profile has been the main effect of the recent successful bond deals executed by the National Treasury Management Agency (NTMA).

That included shifting a large repayment that was due to be paid in early 2014 back to 2017, removing a worrying payment "hump" that might have created tension in the markets just as the country is due to exit the bailout at the end of this year.

More can be done: big payments fall due in 2016. Each of 2018, 2019 and 2020 features worryingly large re-demotions when both bonds owed to the markets and bailout loans fall due. We are now in 2013, it's not that far off.

There is scope for action though. Having successfully issued short-term and medium-term bonds over the past six months, the next real test for the NTMA will be a 10-year bond.

A new 10-year deal, which would fall due in 2022 would be a significant step in its own right.

There are fewer demonstrations of confidence after all than lending to someone on the basis of being paid back a decade hence.

There would be real practical benefits too, by filling out the current gap in the maturity profile with some of the bonds falling due in the nearer term.

An offer to "swap" some of the €10bn due to be repaid in 2016 for 2021 or 2222 bonds could be effective but without the psychological boost that will come by issuing of 10-year money.

The demand seen yesterday in the markets suggest Ireland could be getting 10-year money today, but at a price.

Poor credit ratings, and poor ratings outlook are key reasons investors are still getting a big premium for holding Irish rather than French or UK bonds.

Ratings upgrades have been elusive since 2009, in particular.

Chastened rating agencies are slow to upgrade credits like Ireland after they missed the advance warnings of a debt crisis.

Moody's may budge, but off a low rating.

A few more "As" on the ratings board could help increase the pace of redemption.

Irish Independent

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