Saturday 27 December 2014

Richard Curran: Moody's upgrade welcome but international picture bigger

Published 21/01/2014 | 12:16

Moody’s rating agency has given Irish bonds a big boost. A sizeable fall in yields on Irish debt has left us able to borrow five-year money at the cheapest rate in the 92-year history of the state.

The Moody’s upgrade even helped knock our ten-year rate down by 0.2pc to 3.24pc.

This is good news. But it is difficult to get excited about it. As recently as last week we had the head of the European bailout scheme, Klaus Regling in Dublin, telling us the lower cost of borrowing was a “reward” for not burning bondholders.

Run that one by me again Klaus! Ireland stumped up tens of billions in bank bond payments on bust banks, having been practically forced to do so by the ECB, and now we are enjoying a discount on the debt we raise?

Firstly, we have to raise more money to rollover the debts accumulated through that bailout. Secondly, the amount of the reward is worth a look.

Take for example, the €3.75bn raised by the NTMA earlier this month. They borrowed it at 3.54pc for ten years. That means they pay out €140.6m per year in interest and then the bullet payment at the end.

The impact of the Moody’s upgrade would have shaved that interest bill by about €11.2m per year. Over ten years that would have been a saving of €112m.

But it is difficult to question the wisdom of the NTMA in not holding off to raise the money. Equally, they built up a cash buffer last year which left us funded until 2015. They might have saved a lot of money by waiting.

However, it was only by raising that money last year they could assess the market and the risk of going it alone without a bailout contingency fund. It is also the psychology of the marketplace that by going ahead and raising money at lower rates, you bolster your case for getting an upgrade.

Back to Regling now. Irish five-year yields are even lower than the United States. That is not a reward for paying back bank bondholders. It is a “patsy price”. The market knows that Ireland will do absolutely everything it can to never welch on its debts. That is one of the reasons why we have such demand for our bonds right now.

We were forced into a situation which meant that had to happen. International investors now know we will pay out to anybody no matter what.

It is very welcome news that the Moody’s debt upgrade is translating into real exchequer savings almost immediately. Who knows, we may get a further upgrade and borrow at even lower rates.

But we don’t know what will happen to international bond markets. The US tapering of quantitative easing and any stall in the massive bond buying by the ECB in the future could change the goalposts.

The NTMA has to roll-over and borrow around €9.3bn next year and €12.7bn the following year. If the Moody’s effect alone remained as is, it could save us €44m per year, or €440m in interest payments over ten years.

That is helpful. But it definitely isn’t a “reward”.

 

 

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