Ireland to Exit Bailout Without Precautionary Credit Line

Ireland will exit its bailout program without the safety net of a precautionary credit line from international authorities, Prime Minister Enda Kenny said.

Ireland, which sought 67.5 billion euros ($90.8 billion) of rescue funds from international creditors in November 2010, will leaving the program on Dec. 15.

“This is the latest in a series of steps to return Ireland to normal economic, budgetary and funding conditions,” Kenny told lawmakers in Dublin today. “Like most other sovereign euro-zone countries, from 2014 we will be in a position to fund ourselves normally on the markets.”

Arriving in Brussels today to tell his euro region colleagues of the Irish move, Finance Minister Michael Noonan said Ireland doesn’t need a precautionary line after amassing a cash pile of about 20 billion euros. While the decision avoids the fee and conditions that would be attached to a credit line, it also means the ECB’s bond-buying Outright Monetary Transaction program won’t be tested.

“While this has been well signaled, it’s good from a confidence point of view,” said Juliet Tennent, an economist at Goodbody Stockbrokers in Dublin. “Still, we would have liked to have had continued external surveillance that would have gone with a precautionary line. But it may be that the conditions being sought may have been too onerous.”

Spain too is on course for a “clean break” from its aid program, Economy Minister Luis de Guindos told reporters in Brussels. Like Ireland, Spain was hit by a real-estate crash that prompted investors to shun its debt.

Bank Crisis

Spain took 41 billion euros in European aid for its banking industry last year out of as much as 100 billion euros that it originally requested as concern grew that mounting charges for souring assets linked to real estate at lenders including the Bankia group would contaminate government finances.

The credit line secured by the Spanish government for its lenders last year won’t be available anymore after the country exits the program, said a spokeswoman for the Economy Ministry who asked not be named, in line with government policy.

“The banking system is much more solid, much more solvent,” Guindos said. Ireland “must have done an analysis, in which it’s seen that effectively they have capacity to access the market. It’s good news for everyone.”

The yield on 10-year Irish government bonds has fallen over 560 basis points to 3.53 percent since the country first requested a bailout and its spread or difference with 10 year German bunds has fallen over 460 basis points to 1.82 percent.

Spanish 10-year bond yields have also declined since their government requested aid, falling 215 basis points to 4.07 percent.

In the run-up to exiting the bailout, the Irish government has been building up its cash buffers. In March, the state sold 5 billion euros of a 10-year bond, its first such issue since the international rescue.

Cash Buffer

While the government has enough cash to last until early 2015, the country’s debt agency will issue between 6 billion and 10 billion euros of debt next year to pre-fund for 2015, it said in an e-mailed statement today.

A war chest hasn’t always been enough for Ireland. In October 2010, then-Finance Minister Brian Lenihan pointed to the country’s 20 billion euros of cash as evidence that the government wouldn’t need a bailout. Within two months, Ireland sought outside help, as investors fretted that growing holes in the banking system would sink the state’s finances.

“It’s a display of confidence by the Irish government,” said Ryan McGrath, an analyst at Cantor Fitzgerald LP in Dublin, a primary dealer in Irish sovereign debt. “However, they’ve given up on having a 12-month insurance policy behind them.”

Portugal, which also needed a bailout, is watching developments in Ireland, Vice Premier Paulo Portas said in Lisbon.

“Our objective is to end the program and regain our autonomy,” Portas said. “In the right moment, we will speak about the model for Portugal.”

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