Irish Go Commando as Noonan Draws Line Under Crisis: Euro Credit

Finance Minister Michael Noonan says Ireland won’t need any more aid after becoming the first of the rescued euro members to exit a bailout program next month. The country’s banks might yet test that optimism.

Ireland’s borrowing costs have declined to below those of Spain and Italy as it recovers from the near-collapse of its financial system. Noonan said yesterday he won’t seek a precautionary credit line after three years of relying on the 67.5 billion-euro ($90.9 billion) emergency loan package. Yet dangers remain, such as a derailment of the economic revival in other parts of the world or mortgage defaults at home.

“There are risks associated with this approach, even if they look remote for now,” said Harvinder Sian, a fixed-income strategist at Royal Bank of Scotland Group Plc in London. “The risks are renewed global growth pressures sapping confidence in periphery nations and renewed concern about Irish banks.”

Ireland is regaining its economic sovereignty as debate swirls in Greece and Portugal over the potential need for more bailouts. By spurning a credit backstop European Central Bank President Mario Draghi said last week was useful to have, Noonan and Prime Minister Enda Kenny are avoiding more strings attached to aid such as fees and foreign oversight of budgets.

While it leaves Ireland at the mercy of bond investors who shunned the country in 2010, the government says it has enough cash to pay bills and can borrow at “historically low” rates. Irish 10-year bonds yielded 3.5 percent today, down from 4.14 percent at the end of August and almost 14 percent in 2011.

No Underwear

The exit will be aided by improving “domestic and economic conditions,” the Finance Ministry said in a statement yesterday. As each month goes by and real estate price rises, the chances of Irish banks needing more capital were lessening, Noonan told reporters in Brussels.

Bond investors will be swayed by the country’s planned spending cuts and tax increases that will help reduce the Irish deficit, Natixis analysts Alan Lemangnen and Cyril Regnat wrote in a note to clients afterwards.

Ireland is “to go commando on leaving the bailout,” the Paris-based analysts wrote. “Although the strategy may seem risky at a first glance, we think Ireland won’t be penalized when coming back on the markets next year.”

Spread Narrows

The premium Ireland pays to borrow for a decade compared with Germany is 1.79 percentage points, down from a high of 11.4 points in July 2011. Portugal, which is trying to emulate Ireland and end reliance on rescue loans in a matter of months, pays a premium of 4.15 percentage points.

Ireland sought its bailout after the worst property market crash in western Europe and its financial system buckled. The housing recession “is finally showing signs of bottoming out” after seven years, Moody’s Investors Service said yesterday. This will limit the level of losses Irish banks face on residential mortgages, the ratings company said.

At the end of June, 18.6 billion euros of private Irish residential mortgages were in arrears of more than 90 days, with 8.7 billion euros of buy-to-let loans also behind in payments.

Moreover, banks are losing more than $1 billion a year on market-tracker mortgages, loans handed out during the housing boom that are tied to the ECB’s benchmark rate, Merrion Capital estimates. The financial industry faces another round of stress tests next year.

Noonan Wavers

Noonan had wavered on whether to seek the credit line from the troika of bailout masters, the ECB, the International Monetary Fund and the European Commission.

After suggesting in September that he may look for a 10-billion euro backstop, he surprised some investors in October when he said that one might not be necessary.

The reaction wasn’t all positive. It would be “foolhardy” for Ireland to turn down such “insurance,” Citigroup Inc. chief economist Willem Buiter said in October.

A credit line could reassure investors that Ireland has a source of emergency cash should another debt crisis hit Europe. By not taking the insurance, Ireland also won’t be eligible for the ECB’s Outright Monetary Transaction program, which would buy sovereign bonds to cap borrowing costs.

That probably doesn’t matter, according to Conall Mac Coille, chief economist at Davy, the country’s biggest securities firm. Most investors believe that Ireland has an “implicit guarantee of European funding” no matter what happens, he said in an interview.

Still, the decision leaves the Irish hoping that another European crisis doesn’t flare up and cause investors to dump the country’s bonds again, analysts said.

“They’ve given up on having a 12-month insurance policy behind them,” said Ryan McGrath at Cantor Fitzgerald LP in Dublin, who’d expected the government to seek a credit line. “Like any insurance policy, it will only come into play in the event of an unanticipated shock.”

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