News Analysis

Friday 22 August 2014

Thomas Molloy: Noonan whistles past graveyard as IMF raises spectre of bond markets

Published 26/10/2012 | 17:00

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FINANCE Minister Michael Noonan allowed himself to dream out loud about the future yesterday rather than dwelling on the past.

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Most of us are worrying about the forthcoming property tax, new water charges and cuts to child benefit but a sunny Mr Noonan soared far above these petty concerns to predict that the country will wave goodbye to the troika's bailout programme late next year and return control of the economy to our elected representatives.

By predicting an end to the bailout programme with or without a deal on bank debt, Mr Noonan has allowed himself to be far more optimistic than most of the economists who look at the economy.

Most independent economists believe that Ireland won't be able to return to the bond markets until 2014 because economic growth here and overseas is too sluggish and confidence remains fragile.

The International Monetary Fund is among the most prominent doubters.

An hour after Mr Noonan told the world that the bailout was coming to an end next year, IMF official Craig Beaumont said he did not believe this was possible without a deal on bank debt.

There is no right answer. Trying to predict what the bond markets will let you do in 12 months' time is a mug's game.

What we do know is that the return is unlikely to be smooth.

Mr Noonan gave us some insight yesterday into what the Government's preparations will look like.

The European Commission, which will lead the process, is already drawing up a plan for Ireland's withdrawal from the bailout programme. That plan will be finished by Christmas and will list the steps that need to be taken.

High up on that list will be the creation of a big pile of cash to protect the country in case borrowing costs rise unexpectedly. A country, just like an individual, cannot live from day-to-day and must build up a rainy day fund.

Mr Noonan suggested yesterday we need as much as €17bn. That's a lot of money for a country that has not ventured on to the bond markets in any meaningful way for two years.

The National Treasury Management Agency will have to intensify its efforts to sell bonds overseas.

The agency is already on a charm offensive with senior officials holding investor conferences in London, Frankfurt, New York and further afield to soften up investors. Reports from these meetings suggest investors are receptive but cautious.

Two things will make it easier for the NTMA to market these bonds. The first would be a deal that reduces the cost of our bank debt.

The second thing would be a statement from European Central Bank boss Mario Draghi confirming that the ECB was prepared to buy Irish bonds. Such a statement would bring down the price of borrowing significantly.

Spain also wants Mr Draghi to extend the same guarantee to their bonds and analysts believe it would reduce the cost by two percentage points. A bonus along these lines for Ireland would mean that a return to the bond markets would result in cheaper credit for Ireland than the credit we currently get from the troika.

Ireland will be under the microscope like never before as we plot an exit from the bailout. So far, the world has been happy to take many of the Government's assertions about the economy at face value.

Investors have no skin in the game and are not looking at the small print right now, which means they are happy to believe the recovery story.

Anybody planning on investing a few hundred million in Irish bonds will start to do a bit more digging and they may well not like what they see. The Government's economic plans rely on optimistic forecasts for growth that Mr Noonan still has no intention of changing.

Our industrial relations climate is more fraught than many people outside Ireland believe and the jury is out when it comes to the radical changes to the personal insolvency laws which might yet trigger all sorts of problems.

We simply don't know what will happen in 12 months' time, but we do know that the best way to predict the future is to create it. Mr Noonan seemed to take a step towards creating the future yesterday.

Let's hope it works.

Irish Independent

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