Don’t Mention Ireland’s Debt on St. Patrick’s Day: Euro Credit

As Irish ministers promote the nation’s economic revival on St. Patrick’s Day after selling bonds this week, there’s one topic to avoid: debt.

Heading to 122 percent of gross domestic product, it is still the fourth highest in the euro region even after Ireland last year secured a deal cutting the burden of rescuing the former Anglo Irish Bank Corp. International Monetary Fund Managing Director Christine Lagarde said on a visit to Ireland last week that the country remains “swamped” in debt.

Yet five-year Irish borrowing costs have dropped to the lowest in almost eight years as investors bet against political deadlock in Italy sparking another flare-up in the European financial crisis. The government in Dublin yesterday sold its first 10-year bond since Ireland’s 2010 international bailout.

“In the last six months, everything has changed and investors are looking at Irish assets and even property,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin. “But there’s a lot of complacency among investors on the potential impact of Italy for the periphery, not just Ireland. There’s a lot priced into Irish yields to be justified.”

Irish bonds are the third-best performers in the euro area during the past year, trailing Portugal and Greece. Debt with maturities of between seven and 10 years returned 27 percent over the period, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Bond Sale

The National Treasury Management Agency yesterday sold 5 billion euros ($6.5 billion) of bonds, more than the 3 billion euros it had planned, giving politicians more news to spread as they travel overseas on trade missions as part of the March 17 annual celebrations for Ireland’s national saint.

The sale will be an “impressive piece of news” for ministers as they promote the nation on their trips, Finance Minister Michael Noonan told reporters in Dublin yesterday. Prime Minister Enda Kenny heads to the U.S. for a weeklong visit, which includes the traditional meeting and handing over a bowl of shamrock to the U.S. President.

Exports are about 12 percent higher than 2007, the height of the Celtic Tiger economic boom, while employment rose on an annual basis in the fourth quarter for the first time since 2008. The $220 billion economy is forecast to expand at the second-fastest rate in the euro region this year, behind Malta, according to the European Commission.

Finding Light

“Markets are forward looking and if they can see some of the light at the end of the tunnel, they are willing to give the benefit of the doubt to a country like Ireland,” said Lucy O’Carroll, chief economist at Scottish Widows Investment Partnership, an Edinburgh-based manager of 142 billion pounds ($213 billion). “It’s creating a belief in the future.”

The spread, or difference, between yields on Irish five-year government bonds compared with German bunds has fallen to 2.3 percent from a high of 15.4 percent in July 2011. The government says it’s on track to be the first country to exit a bailout since the euro-region debt crisis began four years ago.

The cost to insure against Ireland reneging on debt payments using five-year credit-default swaps has dropped to 166 basis points from a peak of 1,196 on July 18, 2011.

The turnaround gained momentum after Ireland last month won respite on Anglo Irish, which pushed the state close to bankruptcy as the property market collapsed.

Taking Losses

Under a plan the European Central Bank agreed not to block, Ireland swapped so-called promissory notes used to rescue the failed lender for 25 billion euros of government bonds with maturities of up to 40 years.

In addition, European finance ministers are considering giving Ireland more time to pay back the loans from the country’s 67.5 billion-euro bailout.

“Ireland still needs debt restructuring, but that’s happening through the official sector taking losses via extensions rather than private investors,” said Michael Saunders, an economist at Citigroup Inc. in London. “Creditor nations are softening their position.”

Neither the agreement on Anglo Irish nor extending maturities do anything to tackle Ireland’s debt levels.

The International Monetary Fund estimates the nation’s general government debt will peak at 122 percent of GDP in 2013, equivalent to almost 200 billion euros. That’s up from 25 percent in 2007, an increase Lagarde called “astounding.”

Budget Deficit

After five years of austerity, Ireland will still run the biggest fiscal deficit in the euro region this year, at 7.3 percent of GDP, compared with 4.6 percent in Greece and 4.9 percent in Portugal, based on European Commission forecasts.

The more relaxed approach to Ireland’s debt levels came after ECB President Mario Draghi last year pledged to do whatever is necessary to save the euro.

While Italy’s borrowing costs rose at a bond auction yesterday following a credit-rating downgrade because of the post-election stalemate, yields on the country’s 10-year bonds are still below what they were two weeks ago, at 4.68 percent.

Ireland returned to international credit markets last July after an almost two-year hiatus, with the sale of 500 million euros of Treasury bills and 4.2 billion euros of bonds.

“The Irish debt outlook is not scary at all,” said Holger Schmieding, chief economist at Berenberg Bank in London. “There is a risk of complacency now that Ireland has had a number of successes, but in the aftermath of the crisis people will remember what a tough price has to be paid if it doesn’t get its fiscal house in order.”

Biggest Risk

Consumers are still laden with debt, mostly stemming from mortgages taken on during the decade-long boom that imploded in 2008. Irish household borrowing is more than twice disposable income, compared with an international average of about 135 percent, according to O’Leary at Goodbody.

“When you look under the hood with investors, often they are surprised by the level of the private debt,” said O’Leary. “Private debt is the single biggest risk to the recovery.”

Against that backdrop, the government is pushing Europe for a refund of the 30 billion euros it spent to rescue lenders including Allied Irish Banks Plc and Bank of Ireland Plc.

The entire cost of rescuing the banking system amounted to 40 percent of the economy, or 35,000 euros for every home in the country, premier Kenny said in London on March 11. He said the Irish saved the banks at the behest of European authorities.

“This debt now weighs heavily as Ireland seeks to fully re-enter the markets at sustainable interest rates,” Kenny said. “Where the policy for dealing with bank failures was determined at European and not national level, so too must the burden of the legacy costs of those policies.”

Kenny may face a challenge winning the retrospective recapitalization, economists said.

“Bank refunds depend on circumstances,” said Saunders at Citigroup. “If it’s make or break for market access, then maybe it will be conceded. None of the red lines are set in stone because the alternatives are worse.”

Before it's here, it's on the Bloomberg Terminal.