Ireland has taken its biggest leap into the financial markets since its €85bn bailout with a benchmark bond issue that could mark a pivotal point in the turnaround of one of the European economies that suffered the most damange from the global financial crisis.
Ireland's National Treasury Management Agency raised €5bn for the government from the sale at a yield of around 4.15 percent and from a pool of investor demand said to be worth more than €13bn. It's the first benchmark bond offering since 2010, when the government was forced to borrow billions from both the European Union and the International Monetary Fund to rescue its banking sector following the spectacular collapse of its housing market in the wake of the global financial crisis. Yields on Irish bonds soared to a Eurozone record 15 percent following the bailout as the government's grade was lowered to junk status by Moody's Investors Service.
"Today's transaction - particularly the size and breadth of the order book - represents a strong vote of confidence by the international debt markets in Ireland," said NTMA chief executive John Corrigan in a statement published on the agency's website. "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 NTMA said the sale drew bidders from 400 different financial institutions, with more than 80 percent of them based outside of Ireland. Of those, 25 percent came from the United Kingdom, 12 percent from Germany, 12 percent from the Nordic region and 11 percent from France. American investors comprised 7 percent of the non-Irish total, the NTMA said.
The debt sale also marks a crucial first step towards longer-term market stability for Ireland as it seeks to qualify for the European Central Bank's "backstop" programme of unlimited bond purchases. The programme, called Outright Monetary Transactions, or OMTs, by the ECB is designed to support borrowing costs of struggling Eurozone members by keeping an unstated lid on government bond yields through unlimited purchases.
However, ECB President Mario Draghi has explicitly stated that nations wishing to apply for OMT support either need to be actively engaging the EU and the IMF for formal financial assistance or returning to regular access to the financial markets following a previous rescue.
Today's sale would mark Ireland's second foray of the year into the government bond markets, following a €2.5bn sale of five year notes in January, but would unlikely meet, as yet, the ECB's conditions for OMT support.
Ireland isn't quite ready for a public auction of the securities, either, even as market yields are trading close to those quoted for Spain and Italy. Ireland's debt management team, the NTMA named Barclays, Danske Bank, Goldman Sachs, HSBC and Nomura, along with local brokerage firm Davy, to lead today's syndicated debt sale, meaning investor demand was canvassed privately and the results weren't made public until after the entire sale had been completed.
In its most recent Winter Forecast, the European Commission estimated Irish GDP will grow by 1.1 percent this year and 2.2 percent in 2014. Inflation, the forecast said, will slow to 1.3 percent and Ireland's budget deficit - which touched 13.4 percent in 2011 - will fall to 4.2 percent in 2014. Unemployment, however, is likely to remain critically elevated at 14.6 percent this year and 14.1 percent next year, according to the forecast.
"Unemployment remains painfully high at 14.6 percent," said IMF managing director Christine Lagarde last week following the Fund's annual visit to Dublin. "The authorities and I discussed how to foster job creation, including by accelerating investment projects, such as those funded by the European Investment Bank, National Pension Reserve Fund and private investors. We discussed how to help job seekers facing long-term unemployment to stay in the work force."
The IMF is forecasting GDP growth of around 1.4 percent this year, according to its latest World Economic Outlook.
"Even on our cautious forecasts, Ireland will be thestrongest growing country in the euro area this year," wrote Morgan Stanely's Elga Bartsch in a client note published last month. "(But) Despite strong economic performance, we would not rule out some mild fiscal slippage going forward. The fiscal adjustments required in Ireland are not unprecedented, but are clearly challenging by historical comparison. In this context,closing the primary deficit in 2014 would be a key milestone, especially in view of the planned exit from the bailout programme."
Ireland has executed spending cuts and tax increases equal to around 12 percent of GDP, the IMF said, in an effort to reduce the ballooning budget deficit it was forced to take on following the €65bn rescue of its banking sector.
Its painful efforts to stick with terms negotiated with the EU and the IMF in 2010 have, at times, put its leaders in conflict with certain Eurozone partners. This was evident last month when Ireland unveiled a controversial plan to restructure the terms of one of its bank rescues - Anglo Irish - by replacing short-term promissory notes with cheaper long-term government bonds. The plan, which appears to have been reluctantly accepted by the ECB and the IMF, has raised questions of legality in Berlin, where Bundesbank president Jen Weidmann has suggested it may violate terms of the EU Treaty which prohibit monetary financing of governments.
"I'm very concerned about monetary policy being too closely intertwined with fiscal policy and crossing the line to monetary financing," Weidmann told Bloomberg news during an interview on 15 February.
Ireland's Prime Minister, Enda Kenny, says the agreement could save around €20bn each year. He's also hoping to extend some of Ireland's bailout loans, which are due to mature in 2015. The IMF, which lent Ireland around €22.5bn in the 2010 agreement, says it's open to suggestions.
"It is not just about extension of maturity," Largarde told reporters last week in Dublin. "You can think of other devices possibly but certainly it includes the extension. We will look at it together with the other two partners in the Troika."