Kenny Takes Irish Debt Fight to Alps as Investors Rush In

Ireland’s Prime Minister Enda Kenny took the fight for debt relief to the German Alps as investors today rushed to buy bonds in the country’s first syndicated sale in three years.

The Dublin-based National Treasury Management Agency sold about 2.5 billion euros ($3.3 billion) of its 2017 bonds, after getting around 7 billion euros of orders, it said in a statement. The bonds were priced to yield 3.316 percent.

“While we made progress, our economic situation is fragile and needs on-going support and European solidarity,” Kenny told reporters after meeting Christian Democratic Union lawmakers at Wildbad Kreuth, southern Germany.

Kenny wants other European leaders and the European Central Bank to help lower the burden of a 64 billion-euro ($84 billion) bank bailout bill, as the nation seeks to exit its bailout program by the end of the year. Irish Central Bank Governor Patrick Honohan said today investors aren’t giving the country enough credit for its efforts to narrow the deficit, as the state remains tied to its banking system.

While Irish spreads no longer reflect a risk that the nation exits the euro, “at 300 basis points at the long-end, they do seem to reflect a credit risk premium that is poor reward, so far, for what has been a sizeable fiscal adjustment effort,” Honohan said in a speech in Basel, Switzerland.

Damaging Loop

The extra yield investors demand to hold Irish 5-year bonds instead of their German equivalents rose to more than 1,500 basis points by July 2011 from 15 basis points on January 10 2008. The spread has since fallen to 282 basis points.

The spread may reflect concerns about Irish taxpayers’ exposure to the nation’s banks. The state now controls five of the country’s six biggest domestic lenders after a real estate bubble burst in 2008, pushing the country’s financial system close to collapse.

“The pernicious feedback loop from banks to sovereigns and from sovereign to banks that re-emerged in the crisis remains strong and damaging,” Honohan said.

In the wake of a June 29 pledge by European leaders to break the link between governments and banks, Irish Finance Minister Michael Noonan said he may seek to sell stakes in Ireland’s surviving banks to the European Stability Mechanism.

The government is also seeking an accord with the ECB to refinance so-called promissory notes used to rescue the former Anglo Irish Bank Corp. So far, an agreement has proved elusive.

Celtic Tiger

“The support committed by Europe must be followed through in order to make it easier for Ireland to exit our program,” Kenny said today. He said he hopes for a conclusion on the Anglo talks “as quickly as possible.”

Kenny’s campaign may be starting to bear fruit.

“A positive development of Ireland is not only in the interest of Ireland but is also an important signal for Europe as a whole,” Gerda Hasselfeldt, the Bundestag caucus leader for the CSU, said at the press conference. The “discussion brought a lot of understanding among my colleagues for the special situation of Ireland.”

Industrial production figures released today indicated that a return to the Celtic Tiger era won’t happen anytime soon. Output fell 2.1 percent in November from the previous month and 6.8 percent on the year.

The figures “show the largest three-month contraction in output since 1980,” driven by a number of drugs coming off patent, said Conall Mac Coille, chief economist at Dublin-based securities firm Davy.

Market Return

Still, in July, the government returned to international bond markets after almost two years with the sale of 4.2 billion euros of new debt.

Building on last year’s moves, the country’s debt agency hired Barclays Plc, Danske Bank A/S, Davy, Royal Bank of Scotland Group Plc and Societe Generale SA to carry out today’s bond sale. Overseas investors took up 87 percent of the bond, with U.K. accounting for 36 percent, Nordic countries, 12 percent, while U.S. and Asian investor together made up less than 4 percent, the NTMA said.

In July, the government returned to bond markets after almost two years with the sale of 4.2 billion euros of new debt.

Yields on Ireland’s 2017 bond fell 11 basis points to 3.22 percent today. A basis point is 0.01 percentage point. The five-year yield reached more than 17 percent in July 2011.

“We think the correct tactic for the NTMA now is to set up a new 10-year Irish bond,” Harvinder Sian and Michael Michaelides, analysts at RBS in London said in a note today, adding that the NTMA may consider such a bond in March.

“Our client conversations point to demand -- beyond the current New Year coupon-hunting frenzy -- and a bond with some duration is likely to see good demand,” they said.

-- With assistance from Joseph de Weck in Wildbad Kreuth and Cormac Mullen in Dublin. Editors: Dara Doyle, Fergal O’Brien

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