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July 2, 2012 6:13 pm
Could Ireland be the biggest winner from last week’s European summit? If the price of its bonds is any guide, investors seem to think so.
The country’s financial markets have enjoyed a sharp turnround since the middle of last year, switching from one of the worst performing markets in the wake of its 2010 bail-out to one of the best.
The EU summit agreement, which allows the European Stability Mechanism, the eurozone’s new rescue fund, to invest directly in troubled banks, has provided a further boost.
Indeed, Irish long-term borrowing costs fell below those of Spain for the first time since February 2009 after the statement as hopes grew that the plan would break the so-called “vicious circle” between banks and sovereigns that is at the heart of Europe’s debt crisis.
“This is a game changer for Ireland without a doubt, assuming that the interpretation is correct that this removes the bank liabilities from the Irish sovereign to the eurozone as a whole,” says John Stopford, head of fixed income at Investec Asset Management. “
If this is the case, then Ireland is the biggest winner from the EU’s latest announcement to tackle the crisis.”
Other big fund managers, such as Pimco, agree the summit may be a positive turning point for Ireland, though they say it is too early for a definitive assessment.
Dublin has so far pumped €64bn into its banks in what ranks as one of the world’s worst ever financial crises.
The Irish government is now pushing to have as much of this debt retrospectively shifted from the shoulders of Irish taxpayers on to the shoulders of European taxpayers by attracting investment from the ESM.
The action by European leaders also boosts Ireland’s prospects of re-entering the debt markets for the first time since it was bailed out in November 2010.
Dublin is aiming to return to international debt markets, possibly as early as this week, to take advantage of growing investor confidence created by last week’s summit deal.
Ireland’s National Treasury Management Agency is preparing to issue short-term debt in the form of treasury bills in the first stage of a strategy designed to enable the country to exit its international bailout programme in late 2013.
“It would not be a surprise if we see an announcement regarding T-bill issuance this week taking advantage of the positive sentiment towards Ireland generated by last week’s European summit,” says Michael Cummins, an executive at Dublin-based financial services firm Glas Securities.
Growing optimism surrounding Ireland dates back to July last year as market sentiment improved because of Dublin’s determination to tackle its financial problems with economic reforms and tough austerity measures.
Investors in Irish government bonds have enjoyed total returns of more than 50 per cent since July 2011.
Irish government benchmark nine-year bond yields have fallen to 6.35 per cent currently – the lowest levels since October 2010, a month before the country was bailed out – from record euro-era highs of 15.51 per cent on July 18 last year, sharply outperforming other peripheral debt markets.
Investors in Irish equities have also enjoyed sizeable returns since September as Irish stocks have jumped more than 30 per cent since then, outperforming the FTSE Eurofirst 300 by about 15 percentage points.
However, some investors and economists warn against over-optimism.
Dermot O’Leary, economist with Goodbody Stockbrokers, says it is unlikely Ireland could recoup the full €64bn it invested in its banks as about half – roughly €35bn – relates to “dead” banks such as Anglo Irish Bank and Irish Nationwide. The market value of stakes in viable banks has fallen substantially since the capital injections.
“The market value of the viable banks is now estimated at just €9bn, not the almost €30bn invested in them. That is probably the most we can get for them if the ESM took a stake.”
He says the best prospect for a real reduction in Ireland’s debt-to-gross domestic product ratio would be a restructuring of the €31bn promissory note used to finance the wind-up of Anglo and Irish Nationwide.
If ESM cash could be used to finance a special purpose vehicle off the government’s balance sheet, then Ireland’s debt-to-GDP ratio could fall by 20 per cent.
Mike Amey, portfolio manager at Pimco, says the summit may be a game-changer for Ireland, but he is reluctant to make that call yet.
“If after the euro area has created the bank recapitalisation mechanism, the ESM was willing to take a chunk of the Irish bank liabilities off the sovereign, then that would be very good news for Dublin.
“But we think this might take a long time to deliver. It is too early to be too optimistic,” he says.
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