Wednesday 17 January 2018

Debts, deals, derivatives, defaults – all in day's work

Steering Ireland out of the present bailout and back to the markets, where countries raise their loans, is the next big challenge for treasury managers, writes Brendan Keenan

ASK Auntie May. That could well serve as the motto of the National Treasury Management Agency (NTMA), known in the markets as "Auntie May".

What began in 1990 with a simple enough response to the problem of experienced debt management staff leaving the Department of Finance and the Central Bank for more lucrative work in the private sector, has swollen into a kind of agony uncle for governments with particular problems.

The hundred or so people paid private sector salaries to manage the national debt back then have now swollen to 500, of whom less than 20 look after the debt.

The others are dealing with claims against the State, the national pension reserve fund, the development of public/private partnerships and the Government's "New Era", which so far consists mainly of selling Bord Gais – all now part of the agency's remit.

And of course, some 200 have been hired and seconded to work with the bad debt agency NAMA.

The claims agency is busy with the gigantic costs of the three tribunals of inquiry. Costs may have been awarded but the exact amount is a matter of negotiation and legal process. The Magdalene Laundries cases may not be far behind.

Now the NTMA must issue the bonds which will replace the hated promissory notes, and deal with the complex derivatives held by the former Anglo and whose exact worth is not known.

Its chief executive, John Corrigan, copes deftly with questions about derivatives, debt, defaults and deals, hardly ever needing to turn to the two executives accompanying him.

The only time he seems a bit nonplussed is when asked how the agency copes with these endless new tasks and expansions.

"If it is a 'market-facing' issue, it seems to be given to us," he says after a bit of thought and a noticeable silence from the two executives.


"It is not like a normal business, where you are doing strategic planning to decide what you want to get into. Some minister stands up and makes an announcement and you've got another task. It is difficult."

The original issue of salaries has not gone away and has been a regular source of adverse comment, although bankers now take most of the flak. Corrigan argues that the variety of tasks means they have to hire experienced people, not college graduates whom they could train.

"You're asking someone to walk out of a good job. That's difficult unless they have some particular or patriotic reason for doing it. NAMA has lost about 35 people since its inception."

It might be thought that at least the debt management job was a bit easier since the troika started providing the loans and until the secret plan to squash IBRC began to be hatched.

Corrigan will have none of that but it seems that is what international institutions thought too. They were taken aback when the NTMA kept contacting them even though the bailout meant it was not looking for any loans.

"There was some bemusement. Here were some guys in a small, busted Atlantic island stupid enough to be coming out and doing investor relations in the middle of a euro crisis.


"But our feeling was that we had lost the trust of investors because of what had happened, and we had to restore it .

"If you lose a client, it is hard to get him back. Sometimes it is easier to find a new one. We tried to do both."

One of the first responses came from lenders to emerging markets, who would not normally be interested in the low yields paid by European governments. "We said, we are not proud people: we will sell bonds to anybody."

But while it was busy repairing relations, the NTMA deliberately avoided actually selling bonds. The troika were among those who thought the agency should have sold more – the very short-term treasury bills which Portugal, and even Greece, continued to issue, but Corrigan defends the NTMA stance.

"They were just selling bills to their own banks, to lend on to the ECB. Our strategy began to bear fruit last year. You would not believe the amount of work which went into last month's €2.5bn bond issue.

"The ground had to be well prepared. Starting a transaction and then having to pull it would be monumentally negative.

"But now we are back talking to the 'real money' investors like insurance companies and pension funds. We didn't over-promise, and a deal on the promissory notes was not included in the pitch. That has really grabbed attention."

Ah yes, the deal, when Project Red turned into Project Dream. One hundred and eighty potential lenders joined in an NTMA conference call the next day – one of the largest ever.

"They seemed fairly happy with what came out," Corrigan says. "The main area of concern is how long the Central Bank will hold the new bonds before selling them on to the market (thereby adding to the amount in circulation).

"The fact that there is a minimum laid down gives clarity and we were able to say that the Bank would only sell more if financial stability allowed it."

That was also the agency's main concern in the planning of the deal, where Corrigan was one of the key players.

"Patrick Honohan had a big responsibility on his shoulders. He had to go into the Governing Council of the ECB and convince both the Executive Council and the national governors. That's a lonely place to be."

Unlike some, the NTMA has no qualms about the grandchildren carrying the repayment responsibility. "I was out with my two grandchildren at the weekend and they didn't seem to mind," laughs Corrigan.

Not amused

He is not so amused by the deliberate ignorance being fostered about how national debts work. Except for the very rare occasions when governments run surpluses, all of the national debt rolls on to the grandchildren, and great-grandchildren, and theoretically forever.

"I think we paid down €4bn of the national debt during all of the Celtic Tiger," murmurs one of the executives.

"The maturity profile (dates when loans have to be repaid and replaced) is a key factor, as well as the interest rate, for investors and the ratings agencies," says Corrigan.

"The deal has increased the average loan length from seven years to more than 10. That is a huge jump. The benefit to the grandchildren is €4bn in interest flows which leave the system. That's what matters."

Whatever the merits of massaging investor relations during the slump, the NTMA's next challenge is arguably the most important since its then boss Michael Somers averted an earlier bailout with days to spare. This is steering Ireland out of the present bailout and back to the markets, where proper countries raise their loans.

"The door is open," says Corrigan. He intends to open it wider by borrowing €10bn on the markets this year. Along with the sale of stakes in Bank of Ireland and Irish Life & Permanent, that could cover the deficit and debt repayments for 2014. The NTMA could then spend the first year back on the markets raising money for the following year.


He calls it "visibility." "We're nearly there, but they don't ring a bell to say that the bailout is over and austerity at an end. The world is an uncertain place.

So what should we look out for? "I would measure success by being able to return to regular bond auctions." To make that more likely, a working group has been set up in Brussels to look at postponing the first repayments of troika loans, where €5bn is due in 2015.

"We are looking for some agreement to avoid early repayment and to do so at AAA rates," he says. "There is agreement in principle and that would be a big plus."

Underlying all this is the question which has dominated Irish debate since the start of the crisis – is Irish public debt sustainable? Europe has promised to help, but so far that means easier terms and a possible interest rate floor from the ECB's bond-buying OMT scheme, not debt reductions.

Corrigan is inclined to suck it and see. "What would we gain by going for OMT directly? It's supposed to be there if needed anyway, and agreeing a new set of conditions might make it look like nothing has changed."

That will be music to the Government's ears but there is no doubt that it is all a very close-run thing.

"Bond yields are so low that the actual rates we are paying – 4pc for 10-year loans and less than 3pc for five years – are better than when we had a AAA rating," Corrigan notes.

But that can't last and those rates are around 2.5 percentage points higher than Germany's.

"We may never return to the pre-crash parity with Germany, but that spread has to narrow. Hopefully, it will meet about half way, as their rates go up and ours come down." Hopefully.

Irish Independent

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