Monday 18 December 2017

Borrowing costs fall as investors back the decision to go it alone

Donal O'Donovan

Donal O'Donovan

BORROWING costs for the Government fell on the markets after the decision not to seek a so-called financial "backstop" was announced.

That very positive initial reaction will come as a relief to ministers after they opted to make a clean break from the bailout next year and rely on the markets to fund the shortfall that still exists in the Government's finances.

The State did not borrow on the markets yesterday, but government bonds traded at a price that means investors would lend to Ireland at an interest rate of 3.53pc over 10 years.

That was down slightly compared to the previous day, and is a fraction of the 14pc investors were demanding from Ireland when the crisis was at its worst just over two years ago.

The interest rate on the markets is now almost exactly the same price that European rescue funds charge for our bailout loans.

It suggests there is no additional cost to taxpayers of leaving the bailout.

"This was well flagged as a possibility, there was no shock in the markets," said Ryan McGrath, a bond trader at Cantor Fitzgerald.

He had expected Finance Minister Michael Noonan to play it safe in the end by accepting a European overdraft, but said markets will not punish Ireland for going it alone.

"It is a vote of confidence by the Government in itself, and that is reassuring for investors," he said.

There could even be a read-across for investors to the banks, he said, because the decision suggests the Government believes that the main lenders will come through next year's stress test without needing more aid.

That sentiment was echoed abroad.

"The clarity of this is to be welcomed. There is no room for markets to misinterpret the Irish situation now," said Padhraic Garvey, a bond strategist with ING Bank in Amsterdam.

Markets had backed the move, he noted.

In contrast, there is very little clarity about what terms and conditions would apply if the Government had opted for a back-stop loan, he said.

There have been some fears that decision to go it alone probably cuts Ireland off from access to a special European Central Bank programme, dubbed Outright Monetary Transactions (OMT), that could help in any new crisis.

But Mr Garvey says OMT has never been tested, and it's by no means clear how it would be activated, even if Ireland qualified for the help.

If there is another financial shock it will be an issue for the entire euro area anyway, not just Ireland, he said.

Traders said they do not expect Ireland's new-found financial independence to lead to any change of policy in terms of meeting the targets already laid down for reducing overspending, another reason markets are prepared to support the exit.

Despite having €20bn set aside to cover the spending in 2014, the State needs to return to the markets to really establish its position, analysts warned.

"It is important to follow through, they need to get back to the markets and show they can issue bonds on a regular basis. This is not just about next year, it is about the next decade," Mr Garvey said.

Irish Independent

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