Ireland is funded through 2013 – Bond rally raises possibility of issuance

Under the terms of the Troika programme, Ireland can borrow up to €62.5bn from the EU/IMF with just under €5bn pledged in additional bilateral loans from a number of countries including the UK. By end-2011 the NTMA had drawn down €34.5bn and some have argued that Ireland will eventually need additional funds from official sources (a second ‘bailout’) while those that envisage a return to the debt market do not foresee this before mid-2013. It is premature to be definitive on this issue, however, as uncertainties abound – indeed, the precipitous fall in Irish yields of late have prompted speculation that Ireland may return to the market much earlier than anyone expected, according to Bank of Ireland’s latest Bulletin which was published today, 8 February 2012.

Author of the Bulletin, Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland said: “The forecast funding arithmetic is clear enough. Ireland is projecting a total exchequer deficit of €33bn over the next two years, which is exactly equal to the remaining sum available under the current programme. In addition €11.5bn of outstanding bonds are due for redemption (€5.5bn in March this year and the balance in April 2013) and some €4.5bn in short term debt, giving a total of €16bn. The NTMA had accumulated just under €18bn in cash balances as at end-December 2011 and another €3bn or so would normally flow in over the two years via State savings products. This implies that the exchequer is funded until end 2013 but that cash balances would be severely depleted and additional funding would therefore then be required particularly as an additional €12bn of debt was due for redemption in January 2014, although the NTMA has now switched €3.5bn of this into 2015.

“The projected exchequer deficits over the next two years include around €6bn in Promissory Note funding and the Government is seeking to reduce this annual payment, which if successful would obviously reduce the annual borrowing requirement. The deficits are also unlikely to emerge exactly as planned, given the experience of the past decade, and the latest consensus GDP forecast is now below that of the government’s, although the January exchequer returns do show a strong start to the year. The attitude of investors to Irish debt is key, of course, and in that respect the past few months have seen a very significant change, – the Irish 2-year bond (the 4% 2014) traded at 10% in November (and 22% last July) but is now offered in the market at just over 4%, compared to the 4.77% yield when the NTMA last issued these in September 2010. The NTMA may offer more switch terms into the 4.5% 2015 if demand allows or indeed issue the latter, although Ireland’s success in securing a lower interest rate on EU loans make it less attractive to borrow in the market at current rates.”, concluded Dr. Dan McLaughlin.

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