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Ireland’s Experience in the Bond Markets Presentation for IIEA Oliver Whelan Director Funding and Debt Management National Treasury Management Agency 20 October 2010. Overview of Bond Yields. Market participants’ considerations at present: A bond bubble or fair value?
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Ireland’s Experience in the Bond Markets Presentation for IIEA Oliver Whelan Director Funding and Debt Management National Treasury Management Agency 20 October 2010
Market participants’ considerations at present: • A bond bubble or fair value? • No unambiguous sign of a resumption of normal economic growth. • No fears of inflation in the short term. • No reversal of monetary easing – even prospect of further easing, Fed and BoJ have both signalled more easing; but ECB tending to make more hawkish statements. • Limit on rise in bond yields: capped by Central Bank buying if rise too much?
Euro area: • Flight to quality and reduced risk appetite for exposure to “periphery” markets putting downward pressure on German yields. • Periphery Euro area countries: • Fiscal adjustment problems – Ireland, Portugal and Spain. • Economic growth prospects – • Structural problems in Portugal and Spain. • Ireland – More flexible economy • Banking system problems: Ireland has by far the largest problem.
Countries with historically high levels of debt – Belgium and Italy – but reasonable fiscal deficits have seen their spreads hold relatively steady despite structural problems (ageing and lack of competitiveness). • Countries with large fiscal problems – Ireland, Portugal and Spain – have seen their spreads pushed much wider even if their debt burden was considered relatively low going into the crisis. Ireland’s case exacerbated by banking problems.
Euro Area 10 Year Bond Spreads over Germany on 20th October 2010 Debt and Deficit Levels: 2009
Greek rescue €110 billion package: • €80 billion in bilateral loans from Euro area countries and €30 billion from IMF. • ECB began purchase of Euro area government bonds in May 2010 – Spain, Italy, Greece, Portugal and Ireland: • €63 billion purchased to date – €60 billion by end-June. No details on the composition of the purchases by country – but much speculation. Source: ECB
European Financial Stability Facility (EFSF) €750 billion: • €60 billion EU Commission facility. • €440 billion borrowing facility guaranteed by Euro members. • €250 billion IMF facility. • EFSF not activated to date: • Press speculation that certain countries, including Ireland, may need assistance from the EFSF. • EFSF engaged in a number of investor presentations for information rather than with a view to issuance.
Largest holders of Greek bonds (end 2009): • France $79bn • Germany $45bn • UK $15.4bn • Netherlands $12.2bn • Not known how much of these holdings have been purchased by ECB.
Markets have given Ireland credit for recognising the problem and taking transparent measures to resolve the fiscal and banking crisis • The market perception of uncertainty regarding the full cost of recapitalising the banks has weighed heavily on the Irish government bond market, and contributed to the widening of our bond spreads. • For example, markets were shocked by the announcement of the €3 billion additional capital requirement for AIB.
The final figures announced on 30th September for the recapitalisation of the banks has been generally accepted by the markets as evidenced by the stability of our bond spread over Germany. • The increased cost of recapitalising the banks was one of a number of factors which led Fitch to downgrade Ireland’s credit rating by one notch to A+ with a negative outlook. • For the same reason, among others, Moody’s have put Ireland on review for possible downgrade within 3 months to Aa3 (equivalent to AA-).
NTMA cancelled the bond auctions scheduled for October and November. • Ireland is fully funded until mid 2011. However the credibility of that assertion began to be doubted in the markets as we continued to issue bonds at higher rates. • The ability to absent ourselves from the markets shows that the cash buffer is a reality • In addition we wanted the markets to have time to absorb three important milestones of new information: • The final cost of recapitalising the banks • The announcement of the 4 year budgetary framework in November. • The budget for 2011 to be announced on 7 December.
Market view is that there is no liquidity problem for Ireland • Cash Balances of €20 billion • Relatively small amounts of maturing bonds to refinance over the next few years. Next maturity is in November 2011 • National Pensions Reserve Fund €24 bn
With the continued widening of our spread the investor base for our bonds has begun to include “credit investors” (who chase higher yields) as well as the traditional “rates investors” • Thus, while certain investors will have a reduced interest in our bonds new classes of investors will become engaged in the market. In this context North American investors may become more important. • Evidence of continued demand for our bonds as certain real money investors take the view that Ireland will successfully deal with its problems and Irish bonds will rally.
Bank holdings of Irish Government bonds • 20 banks held a combined €20 billion (25% of total issuance) of Irish Government bonds, including €6.1 billion (7% of total) held by Irish banks. • RBS is the biggest holder with almost €5 billion of our bonds, followed by AIB with €4.7 billion and Bank of Ireland with €1.4 billion
Investor views ? • Many Money Market Funds, Non-Leveraged Bond Funds, Life Insurances and Pension Funds have little or no immediate plans or appetite for increasing their holdings of “periphery debt”. The forthcoming budgetary announcements will be important for these investors • Fund managers constrained by internal risk policies and client pressure • Higher yields are attracting increased interest from credit market investors • NTMA will continue to market the bonds to traditional investors and to potential new investors in the USA, Asia and Eastern Europe
Periphery countries’ domestic banks’ holdings of their own Governments’ bonds: • Recent survey work shows the following percentage holdings of the total in issue by the domestic banks in each country: • Integrity of the price formation for Irish bonds is underwritten by the overwhelming weight of overseas investors in the market Source: Central Bank
