Thursday 27 July 2017

S&P downgrade puts spotlight on €600m bond sale

International scrutiny grows after 'hammer blow' to economy

Emmet Oliver and Aine Kerr

Ireland faces its first test on the international markets today since being hit with a damaging downgrade by ratings agency Standard & Poor's (S&P), which sent its borrowing costs soaring.

Ireland will today try to auction off €600m in treasury bills as international scrutiny of the Irish economy and its banks continues. Yesterday Irish bond yields hit the highest level since May after S&P downgraded Irish debt from AA to AA-, triggering major market jitters.

The downgrade, while disputed by the National Treasury Management Agency (NTMA), pushed Ireland into the international headlines, prompting some commentators to compare this country with Greece.

The results of the auction today will show the kind of return investors are demanding to hold Irish debt. The treasury bills are set to mature in less than a year.

Criticism

Yesterday, the chief executive of the NTMA, John Corrigan, criticised the S&P downgrade, saying it was based on extreme conclusions that didn't put any value on the NAMA assets.

But the agency's report does put a value on the assets, saying the Irish Government will recover €16bn from the assets over the first five years.

However, the agency doesn't regard the NAMA assets as very liquid and believes it will be difficult and time consuming for NAMA to convert them into cash.

Ireland's rating with S&P is now at the lowest level since the mid-'90s and 10-year Irish bonds were trading up yesterday at 5.478pc, a rise of 22 basis points. The spread over Germany remains over 3pc, leaving Ireland facing crippling borrowing costs.

S&P believes the total cost, including NAMA, of the banking bailouts will come to €90bn, a figure rejected by the NTMA. A key point of difference between the two sides is the ultimate cost of Anglo Irish Bank, with the Irish authorities putting this at €24bn, whereas S&P put it at €35bn, although they revealed few details of how they arrived at this figure yesterday.

The yield on Irish two-year government bonds rose as much as 31 basis points to 3.127pc, the highest since May 7, ironically the day when EU leaders starting putting together a stabilisation fund for the eurozone.

Downgrading

The downgrading of Ireland's vital credit rating is a "hammer blow" to the economy and reveals the extent of the Government's failed banking policy, opposition parties claimed yesterday.

Fine Gael's finance spokesman Michael Noonan said confidence is being undermined due to uncertainty over the final costs of rescuing the banks and bailing out Anglo Irish Bank.

When the Government nationalised Anglo almost two years ago, Finance Minister Brian Lenihan estimated the cost at €4bn. That has now risen to around €24bn.

"The markets do not believe him. This huge amount of money, together with the recapitalisation costs of the other banks, as well as the overhang of NAMA, have spooked the markets and have caused the S&P downgrade," Mr Noonan said.

Labour's finance spokeswoman Joan Burton said the downgrading undermined the Government's entire economic strategy.

She said that all the austerity measures that people have had to endure in the past two years were aimed at establishing sufficient international credibility for Ireland to secure lower borrowing costs, so as to reduce the exchequer deficit and the huge cost of servicing the debt.

"We are now right back to where we started, with no discernible gain from all the pain inflicted," added Ms Burton.

Fine Gael's Simon Coveney said the downgrading was very worrying but not particularly surprising.

However, what was surprising, he said, was the reaction of the NTMA to the S&P downgrade because the trend had been "quite clear" in recent weeks.

Irish Independent

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