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Thursday, 19 October 2017

Redemption and recovery

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  • A bare-footed pilgrim climbs up Croagh Patrick mountain near Westport in County Mayo, western Ireland

With eurozone attention focused on the south, Ireland has pushed through tough austerity reforms and resumed a normalised debt programme. It may take Portugal a little longer.

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While recent EU attention has focused on the Mediterranean, watchers may have missed the good news. In mid-March, Ireland, which had applied for a bailout in November 2010, was able to return to a normalised debt programme.

It did so in some style and with an element of showmanship. Ireland raised €5bn through the sale of a new 10-year bond, its first benchmark bond issue since the country’s controversial bailout by the EU. The 3.9% March 2023 bond, originally intended as a €2.5bn–€3bn issue, reached a book of a staggering €13bn.

“There is a scarcity value to the paper,” said Laurent Fransolet, head of European FICC research at Barclays, speaking of high investor demand. “Many investors had sold their Irish holdings. Positioning of investors is much cleaner now. After all, we are now four to five years into the crisis.”

Real-money accounts dominated the book which, in the end, comprised 82% international investors. Though the paper did not price at par and in fact yields 4.13%, Ireland was keen to make sure the paper had a 3% handle. But perhaps best of all, it managed to do so with no issue premium: the new paper went at MS plus 240bp, pretty much flat to the curve.

Bankers across the board were impressed. It is easy to forget that Ireland is still rated Ba1/BBB+/BBB+. “If that is what they can print, think what can happen when some investors [who are only allowed to buy investment-grade paper] are not excluded,” said a banker away from the deal.

Vote of confidence

Unsurprisingly, John Corrigan, chief executive of the National Treasury Management Agency, the county’s debt management agency, said the new bond issue demonstrated that Ireland has regained access to the international debt markets. “The size and breadth of the order book represents a strong vote of confidence by the international debt markets in Ireland,” he said.

Ireland will draw down around €11bn more under the Troika programme between now and the end of December. That, together with funds raised earlier in the year, means that funding for the Troika programme’s poster boy is pretty much secure until the end of 2014. As Corrigan said: “We are now well placed to give investors the comfort of having 12-15 months’ advance funding in place when the EU/IMF programme reaches it scheduled end. This visibility on our funding is vital.”

The transition to its exit from the bailout was eased in mid-April at the EU finance ministers’ meeting in Dublin when it was agreed to give Ireland up to seven more years to pay back its bailout loans. A funding hump in 2016 when many bonds matured and a number of loans were due has now been smoothed over. No wonder then that Jeroen Dijsselbloem, president of the Eurogroup and Dutch finance minister, was able to say at the meeting: “I think the outlook for Ireland is rather positive”.

Leading the pack

How has it managed this? In retrospect Ireland’s determination was clear from the beginning. As David Schnautz, director of interest rate strategy for Commerzbank, said: “Ireland has been leading the pack since January”.

It tested the water right at the start of the year, on January 8, with its first syndicated deal since the country was shut out of markets in September 2010. It played it safe by tapping its outstanding 5.5% October 2017 bonds for €2.5bn. It had no need for caution. The paper had €7bn of orders from 200 investors.

It is possible to be cynical and suggest that the demand and enthusiasm for Ireland has more to do with the coupon than with anything else. It is worth bearing in mind how low the German coupon remains. On March 20, Germany auctioned €3.3bn 10-year Bunds with an average yield of 1.36%.

Others point to the disastrous performance of Luxembourg which at the same time as Ireland was attempting to sell €1bn–€1.5bn 15-year paper. As one of the last remaining Triple A sovereigns in the eurozone the Grand Duchy might have expected to get the paper away without any problems. In the end it only managed to print an anaemic €750m transaction with an asthmatic book of only €800m for the 2.25% paper.

Those critics, however, miss the point. As Zeina Bignier, deputy head of DCM origination, head of sovereign, supras and agencies, at Societe Generale, points out, the Ireland deal goes beyond the search for yield. “Ireland, Portugal and Spain have shown that they can do reform, that they do it properly and that they are stable politically,” she said.

Reform payback

The economic advances should not be ignored. The Irish economy is among the better performers in the euro area with a slight increase in GDP in 2012 of 0.1% at a time when the euro area in general has re-entered recession. A particular strength has been the strong external sector thanks to increased competitiveness. Unit labour costs are down 17% since Q4 2008. As Mads Koefoed, head of macro strategy at Saxo Bank, said: “Ireland, unlike the southern peripheral countries, was quick to implement tough reforms, which are now paying off.”

In late March at a meeting of European policymakers in Finnish Lapland, Ireland’s minister for European affairs Lucinda Creighton said the country’s “tough medicine” had worked. “We’re really confident that we will get out of the programme this year,” she said.

Bignier points out how much work has gone on under the surface. “Ireland has been working non-stop for the past 18 months. It has not stopped communicating or meeting with investors. It has been several times to Asia and the US,” she said.

If Ireland has full access to the international capital markets, it does beg the question of whether Ireland is now eligible for the European Central Bank’s bond purchase plan, the Outright Monetary Transactions programme. As with all such things, no decision is going to be taken swiftly. At the March rates decision meeting in Frankfurt Mario Draghi, president of the ECB, said the decision would not be taken any time soon. Countries need to able “to issue along the yield curve, being able to issue to a fairly broad category of investors, and being able to issue certain quantities”, he said.

Eyes on Portugal

With Ireland, at the very least in the recovery room, even if it has not been discharged from hospital yet, all eyes have now turned to Portugal, which applied for its bailout in April 2011.

Much like Ireland, Portugal has prepared the ground well with some syndicated deals and some auctions. At the end of January it returned to the market, like Ireland, with a tap. For Portugal this was a €2.5bn tap of its 4.35% October 2017s. There was interest of €12bn and pricing tightened from initial thoughts of MS plus 410bp in to MS plus 390bp. The premium, in the end, was a comparatively modest 5bp. It is worth remembering that the peak yield on the Portuguese 10-year in the middle of the crisis was 18.3% while they have recently come down to 6.31%.

Will Portugal be able to sell a 10-year any time soon? There the answer is not quite as straightforward as it is in Ireland’s case. “Portugal always gets compared to Ireland,” said Commerzbank’s Schnautz. “It really should be compared to Ireland six months ago.”

A spanner was thrown in the works in early April when a Portuguese court ruled that the country’s austerity measures were in breach of the constitution. That move torpedoed the government’s 2013 budget. And although, like Ireland, EU finance ministers did agree to give Portugal a further seven years to pay off its bailout loans, in Portugal’s case it is contingent on the country keeping its €78bn bailout programme on track.

The elephant in the room at the moment remains the problem of Cyprus and to what extent continuing difficulties there might hinder future supply. Certainly there is no question of either Ireland or Portugal coming to market until eurozone stability has been re-established. But despite the storm, few bankers believe that the Cyprus affair is any more than a short-term irritation. “In even the medium term, Cyprus will certainly not derail the recovery,” said one banker. (For more on Cyprus, see “Cyprus heralds new chapter in eurozone crisis”, Page 10)

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