Ireland restoring reputation on credit

This time around, John Gormley slept soundly in his bed, but not so Uachtarán na hEireann, whose nocturnal dash from the Eternal City to sign the death warrant for IBRC was reminiscent of similar midnight capers along the corridors of Irish power four years previously.

The demise of IBRC means the pendulum has swung fully on the State’s involvement with this rogue lender, from the denial chambers of the blanket government guarantee in late September, 2008 to the funeral pyre of a KPMG liquidator.

The attendant replacement of the Irish sovereign’s promissory note obligations with ultra-long dated issuance to the Central Bank of Ireland has patently not been to everyone’s taste.

However, it has found the full favour of the government bond market, where yields have collapsed by a further 40 basis points across all maturities since the ECB “unanimously took note” of the Government’s decision last Thursday.

Bond investors have rightly responded to both the solvency and liquidity boosts to Irish debt sustainability, the former via NPV markdowns to the real debt burden of IBRC (€6 billion – €8 billion) alongside reduced debt servicing costs (€1 billon a year), and the latter via removal of a weighty €21 billion market borrowing requirement from 2014 onwards.

Buoyant market

A buoyant bond market is fertile terrain for a renewed funding exercise by the NTMA. However, the agency is already substantially pre-funded, with approximately €22 billion cash balances sitting on deposit (with negative carry!) in the exchequer accounts.

And this year’s slated €10 billion borrowing requirement is now effectively nullified by promissory note savings (€6.2 billion), the Bank of Ireland CoCo disposal (€1 billion) and that early-January “tap” of an existing five-year bond (€2.5 billion).

With the sale of Irish Life Assurance seemingly imminent (bringing in around €1.3 billion), the NTMA could arguably sit on its hands for the rest of this year.

That it will choose not to do so can be explained by a desire to reinforce the optics of sustained bond market re-engagement, thus cementing Ireland’s smooth exit from the Troika’s funding programme at the end of this year.

A new benchmark 10-year bond offering (of between €2 billion and €3 billion in size) may well materialise before the end of March, after which the NTMA will likely release a calendar of monthly bond market intentions for the remainder of 2013.

In so doing, the NTMA will finally restore normality to this State’s interaction with bond market investors, being the final ingredient of a bailout exit, and perhaps without the necessity of a precautionary ESM credit line (nor ECB OMT activation) to boot.

While the Irish authorities ponder eschewing the gift horse of a precautionary funding backstop for the post-bailout era, the burden-sharing bowl remains firmly stretched out to Europe in other areas.

This week, the Dutch finance minister (and new Eurogroup chairman) confirmed that their early-March meeting will discuss “how best to support Ireland”, the expected outcome being a significant term extension of troika loans (from an average of 12 years to 30+ years) for both Ireland and Portugal in the manner already afforded the struggling Greeks.

Retrofitting Irish banks

Meanwhile, Michael Noonan reminded us that discussions regarding the retrofitting of ESM capital into the viable Irish banks are “at an early stage”, the ultimate upshot of which being a potential clawback (€16 billion – €17 billion) to the State of the €33 billion injected, of necessity, into AIB, Permanent TSB and Bank of Ireland.

The enormity of such concessions are only now beginning to dawn on bond market participants, if not yet the public at large.

The term loan extensions and interest costs soon to be appended to Ireland’s combined promissory note and troika obligations imply that €90 billion, or 50 per cent of outstanding net debt, will be set at ultra-low coupon payments (3-3.25 per cent) and ultra-long maturities for capital redemption (30-32 years).

Suffice to say that the Irish sovereign has never enjoyed such beneficial funding terms, not even during those halcyon days of a AAA-rated Tiger.

Furthermore, while Ireland’s gross debt/GDP ratio is expected to peak this year at around 120 per cent, this falls to 106 per cent net of those burgeoning cash balances in the exchequer accounts.

If a deal is ultimately struck to dispose of the State’s “investments” in Irish banks to the ESM (or perhaps to some third party flushed out by proceedings), Ireland’s net debt/GDP ratio can peak at around 96 per cent of GDP, within touching distance of the 94.5 per cent average forecast for the euro zone as a whole in 2013.

This, remember, at the culmination of a near six-year catastrophe which severely blighted the nation’s banks, real economy and public finances.

With the average credit rating for euro zone sovereigns in the A+ zone, and Ireland’s prospective debt servicing burden substantially lower than most (given the bonhomie of our troika financiers), it is plain that Ireland’s depressingly low credit rating is now on an upward trajectory. Fitch’s decision last November to upgrade Ireland to “stable” outlook as a BBB+ investment grade credit was the first positive overture towards any euro zone sovereign since the debt crisis began.

This week, SP has followed suit.

It is now aligned with Fitch in its assessment of Ireland’s improving creditworthiness.

This leaves Moody’s as an increasingly anachronistic outlier, three notches lower than everyone else in their sub-investment grade obduracy.

Its prior basis for such an assessment (viz haircut threats to private creditors) is no longer tenable.

Moody’s was obliged to publicly acknowledge the “credit positive” nature of last week’s promissory note deal, the latest in a very long line of “credit positive” developments that have as yet, and somewhat mystifyingly, failed to trigger a ratings upgrade. That day will come, and soon.

In the interim, let us marvel at such entirely appropriate nomenclature for this Washington-based rating agency!

* Donal O’Mahony is global strategist at Davy