Tuesday January 31, 2012

Ireland Successfully Tests Bond Market Interest

Ireland dipped its toes back into the international bond markets last week for the first time since 2010, becoming the first country in Europe to avail of a rescue to do so.

The National Treasury Management Agency (NTMA), which handles the national debt, sold just over €3.5 billion worth of three year debt.

The new bonds were offered to investors who held bonds that were due to mature in 2014.

The switch to longer term bonds, not due until 2015, means Ireland has reduced the so called "debt cliff" that if faces in 2013 and that many analysts have said may require a second bailout.

"We are very pleased with the strong take-up of this switch offer. This exercise has demonstrated investor appetite for Irish government paper and will support our plans for a phased re-entry to long-term debt markets," the NTMA said.

Bondholders who availed of the switch - of which in excess of 80 per cent are said to be domestic Irish banks - have cashed in the 2014 bonds at 4.9 per cent and agreed to lend to the Government on 2015 bonds for 5.15 per cent.

It was a win-win for the government and banks - the banks are earning higher interest rates on the bonds, and the government is reducing its debt burden for 2013 at a time when yields on Irish bonds had reduced to about a quarter of what they were last year.

In addition, the banks can now use the government bonds as collateral in seeking more funding from the European Central Bank.

Donal O'Mahony, Global Strategist at Davy said: "The exercise is a very positive surprise for an Irish bond market that has seen no NTMA involvement since September, 2010.

"It reflects the sustained improvement in market sentiment over the past two months, which has lowered bond yields of all maturities into the 5-7% zone from 9-10% previously."

"The €3.529bn exchange of 2014 bonds into a new 2015 issue amounts to 30% of the refinancing needs for that year and is thus a considerable boost to the sovereign's cash management requirements.

"The new 2015 issue is now the obvious vehicle with which to pre-fund the remaining 2014 obligations, as market conditions normalize further during the course of 2012/13."

In other words, the NTMA can be expected to attempt to further reduce the refinancing needs for the year when the bailout is due to end by more of these kind of swaps.

The success on the bond market came at an opportune time for the government, who needed some good news on the same day that the controversial repayment of €1.25m to Anlgo bondholders went ahead.

The government is negotiating to refinance around €30 billion in Anglo promissory notes to spread the burden of repayment over a longer period and reduce the austerity on the Irish public.

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