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Bond swap is the first step on a long, long road

Yesterday, 15 months after Ireland was ignominiously ejected from the international bond markets in October 2010, the National Treasury Management Agency (NTMA) successfully persuaded holders of more than €3.5bn of Irish government bonds maturing in 2014 to swap them for bonds maturing in 2015.

While the NTMA's move was merely a technical operation of the kind national treasury agencies engage in almost every day, it still represented the first major issue of new bonds by this country since the November 2010 EU/IMF bailout.

With the Government scheduled to stage a full return to the bond markets in 2013 it was vital that yesterday's operation proceeded smoothly. It is to the credit of the NTMA that it did.

Not alone did bondholders with more than €3.5bn of bonds agree to the swap but the yield on the new bonds, at just 5.15pc, was considerably lower than most analysts would have thought possible even a few weeks ago.

However, yesterday's bond swap was merely the first step on what will be a long road. While successful, it should of course be borne in mind that the NTMA was merely swapping old bonds, not issuing fresh debt. The NTMA also had to pay a slightly higher yield -- the old bonds were yielding 4.9pc -- to get the issue away.

More importantly, the market for longer-term bonds, those maturing in 10 years, is still effectively closed to us. Even if wasn't, the yields on existing 10-year Irish government bonds, just under 7.5pc yesterday, would make issuing new longer-term bonds prohibitively expensive.

What yesterday's bond swap shows is that, while investors are willing to accept new shorter-term Irish government bonds, a full return to the bond markets is still some way off.

In practice this is unlikely to occur until there is some progress on the thorny issue of bank losses, particularly the €31bn of Anglo promissory notes, which will cost this country €3.1bn a year, plus interest, for the next decade. Finance Minister Michael Noonan travelled to Frankfurt earlier this week to discuss the matter with ECB President Mario Draghi.

Will Mr Noonan be successful in persuading the ECB to cut us some slack on the Anglo promissory notes?

Since taking up his position last November, Mr Draghi has displayed some encouraging signs of greater flexibility than his predecessor, Jean-Claude Trichet. However, as the ECB's insistence that we repay the €1.25bn Anglo bond issue that fell due yesterday demonstrates, Mr Draghi still seems unwilling to see the ECB share the burden of Irish bank losses.

Unless that changes, and soon, yesterday's successful bond swap would well end up having been no more than a false dawn.

Irish Independent