State may return to global bond markets this week

THE REPUBLIC may return to international bond markets for the second time in as many months this week when the European Central Bank pumps hundreds of billions of euro into the EU’s ailing finance institutions.

The ECB will flood euro zone banks with cheap money this week in an attempt to boost the EU’s faltering financial system.

Estimates of the amount that Europe’s central bank plans to auction to euro zone finance institutions this week vary. But it is thought that the figure will be about €500 billion.

Speaking in Mexico, the secretary general of the Organisation for Economic Co-operation and Development, Angel Gurria, said he expected the ECB to allow European banks to borrow another €500 billion in the three-year long-term refinancing operation (LTRO).

“We’ve received excellent news about the funding from the ECB,” said Mr Gurria at a meeting of finance ministers and central bank governors from the Group of 20 nations. But he added that the ECB’s liquidity provision cannot act as firewall to shield the euro.

“It shows you how not normal things are,” Mr Gurria said. “The LTRO doesn’t substitute for the firewall. We still have to build the mother of all firewalls.”

The National Treasury Management Agency, which manages the Republic’s sovereign debt, may use the opportunity to refinance some of the State’s borrowings.

Last month, the agency swapped €3.5 billion worth of bonds due to be repaid in 2014 for bonds that now have to be repaid in 2015. It is understood that the agency has not ruled out completing another swap this week to coincide with the ECB’s liquidity initiative.

The agency did not comment yesterday. But following the last such swap, it said that it might look at similar exercises again in the coming months.

A swap would not mean that the agency borrows any extra cash on behalf of the State. Instead it would exchange existing debt for new bonds with a later repayment date.

This would help to spread the State’s debt repayment commitments. Before last month’s refinancing exercise, the Republic was due to repay €12 billion in 2014, but the swap cut this to a more manageable €8.5 billion.

The ECB plans to auction cheap three-year loans to euro zone banks in an effort to ease Europe’s financial crisis and prevent a credit crunch.

In December, in a similar so-called “long-term refinancing operation” the ECB loaned €489 billion to more than 400 banks across the euro zone, including Irish financial institutions. It is planning to repeat the exercise again this week. Reports suggest that the amount would exceed the €489 billion it issued in December.

A survey by news agency Bloomberg suggested that European banks were likely to bid for more than €490 billion in loans. Reuters predicted €500 billion, while other reports indicated that the final figure could be as much as €600 billion.

The aim is to provide the banks with a secure source of long-term funding. Irish and euro zone banks have been having difficulty raising money on global markets.

The ECB is trying to counteract this and hopes that the move will encourage banks to buy sovereign debt from euro zone countries.

Opinion is divided on whether the initiative had any impact on the crisis in December. Then the market reaction to the move was lukewarm.

However, last week ECB executive board member economist Peter Praet said that three-year loans have helped stabilise funding for a lot of euro zone banks.

At the weekend, Spain’s second biggest lender, BBVA, confirmed that it bid for €11 billion worth of funding in December’s auction and said that it intended seeking a similar amount this week.