Business Irish

Sunday 17 December 2017

Debt fear eases as €1.5bn in bonds are sold off

Sign of relief at solid demand in internationally-watched sale

Willem Buiter, chief
economist, Citi,
delivering his paper
on 'Global Recovery –
Risk and Policy
Options' to a
conference at the Citi
Research Day for
customers in Dublin
Willem Buiter, chief economist, Citi, delivering his paper on 'Global Recovery – Risk and Policy Options' to a conference at the Citi Research Day for customers in Dublin yesterday

Emmet Oliver and Donal O'Donovan

Ireland successfully auctioned off €1.5bn of debt yesterday, helping to ease pressure on the Government -- but only after offering investors a yield of 6pc on the longer-term bonds.

The level of demand for the 2014 and 2018 bonds was strong at 3.6 times the amount on offer, with National Treasury Management Agency (NTMA) director Oliver Whelan describing demand as "firm".

The State is now fully funded for this year and has enough cash to get through the first half of 2011. Despite this, the monthly auctions of debt are expected to continue for the remainder of the year.

Average yield

The average yield on the 2014 was 4.7pc, while the yield on the 2018 funds was 6.02pc. The average yield across all the money raised this year is 4.7pc said the NTMA.

Once the auction results were announced, the live market prices for Irish bonds narrowed in and the spread over Germany reduced. The Irish 10-year bond yield fell 15 basis points to 6.38pc as trading closed in Dublin and London.

Portuguese bond yields also came down after the Irish auction and Portugal is due to sell some debt too.

Meanwhile, Citigroup chief economist Willem Buiter said Ireland is being forced to pay too much to borrow because the Government has been too kind to creditors of failed banks.

He blamed the Government's "ridiculous" commitment to protecting creditors of failed banks for the high cost of debt.

Buiter was reacting to yesterday's bond auction. He said the cost of bailing out the banks, not the domestic deficit, is driving up the cost of Irish debt: "There has been no surprise on the deficit, if the deficit came down faster that would help, but the issue that is alarming markets is this steady dribble of billion after billion of bank liabilities and there is a fear dawning in the markets that the residential mortgage situation could be as bad."

Speaking to the Irish Independent, Buiter said: "Ireland is fundamentally sound, even adding off balance sheet NAMA obligations to the national debt, but not if you load on the guarantee of debts owed by the bank."

He warned that if a formal guarantee of bank debt is extended again it could cripple Ireland.

Bank default

In contrast to the government line, Buiter dismisses arguments that a bank default would reflect badly on Ireland's credibility: "It reflects badly to make the sovereign into a sucker -- any government that allows itself to be taken advantage of is not protecting its reputation."

He said: "Putting the unsecured creditors at risk (in banks) is a hell of a lot better than the ridiculous situation where the taxpayer goes in, it's how capitalism works," he said.

He made the comments after Ireland agreed to pay yields of 6.023pc for €1bn of eight-year bonds priced yesterday, and €4.767pc for €500m of four-year bonds.

Despite the high cost of the debt, the NTMA said the sale of bonds had been a success. That's because the State's debt management authority was able to raise the maximum €1.5bn it was seeking, and demand from investors far outstripped supply.

According to the NTMA there was three times as much demand for four-year bonds as bonds available, and five times as much demand as paper for the eight-year.

Padhraic Garvey, ING Bank's head of developed markets debt and rates strategy, agreed the deal was successful.

"You can quibble about the level they are paying, but their job is to tap the capital markets and they did that," he said.

But he agreed that investors are demanding higher prices from Ireland because they see the bank guarantees adding to Irish risk. "Most investors would agree with that, its all state risk at the end of the day," Garvey said.

ING said they had seen good demand from Benelux and German pension funds, insurers and banks for the four-year bonds in particular. But they have also seen accounts selling off Irish paper.

In fact, the government bonds were sold overwhelmingly to international lenders, just 15pc was sold in Ireland.

Despite the high cost of borrowing, the NTMA said the average cost of debt raised this year is the same 4.57pc level as it was in 2009. It said it has now borrowed the €20bn it planned to raise from the bond market in 2010 but will continue with monthly auctions to ensure that the market remains open for Ireland.

Irish Independent

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