Natixis’ Rene Defossez considers the improvements in Ireland’s credit
Rene Defossez, fixed-income strategist at Natixis, has looked at the recovery in demand for Irish government bonds and asked: is it a miracle or mirage?
The recent reduction in Irish government bond yields is nothing short of impressive. They now sit at or below Italian BTP levels right across the curve, way below their former highs. In mid-2011, for instance, yields for 10-year Irish bonds reached 15%. And Fitch’s recent decision to raise Ireland’s outlook to stable from negative signals further improvement for the Irish position.
However, it still seems somewhat premature to disconnect sovereign Irish risk from euro risk. Although its projected growth for 2013 is higher than that of most euro zone countries, its credit rating is still only BBB+, two notches above junk status. Its debt ratio is incredibly high. Furthermore, Ireland is relying on its European partners to shoulder part of the burden in restructuring its banking system. And if the euro zone slips deeper into recession, the main engine of growth for Ireland will seize up.
Austerity measures seem to be working
Fitch’s change in outlook, however, stemmed exclusively from Ireland’s specific situation, rather than as a consideration of its position in the euro zone. Thus far, the ratings agency noted, Ireland has managed to meet its fiscal targets without having any excessively adverse impacts on economic growth. And indeed, Ireland benefits from a political consensus and a broad public acceptance of the necessity for austerity. Such a public environment is in stark comparison to Greece and Spain, whose street protests against imposed austerity measures are becoming a near-daily occurrence.
For these reasons, Ireland is often held up as a poster-country for fiscal austerity, as core countries (notably Germany) cite it as the best solution for the euro zone sovereign debt crisis. And using Ireland as an example for their cause is understandable. The country should be capable of resuming normal issuance in the primary market before the end of the current bailout’s terms. Meanwhile, the feelers put out in August – the issuance of long-dated paper to selected investors, for instance – went very well, and the most recent issue of three-month T Bills (in mid-November) was placed at a yield of only 0.55% with a bid-to-cover of four to one.
Meanwhile, the proportion of Irish public debt held by non-residents is stabilising at around 73% – an encouraging figure since it declined by 10 percentage points between April 2011 and April 2012.