Franklin Templeton investment puts government debt in spotlight

The news that the giant global investment manager Franklin Templeton is the biggest holder of Irish government debt outside of the IMF and EU has put the economy in a spotlight before a series of crucial ECB/EU meetings.

It was reported by the Financial Times that the chief investment officer at Franklin Templeton, Michael Hasenstab, has built up a €4bn position on Irish government debt.

But Mr Hasenstab has already made a sizeable profit on his punt on Irish government debt. When his Franklin Templeton fund started buying 2-year Irish government paper in Jul 2011, yields had soared to 20%. Yields on 2-year debt are now at 2.5%. The lower the yield on a bond, the higher the price.

In other words, when other investors were fleeing Irish government debt last year, Mr Hasenstab took the view that Ireland was a lucrative bet. So far his strategy has paid off. But whether Mr Hasenstab remains a holder of Irish sovereign debt, or whether he will take profits at these levels, remains to be seen.

Irish government debt is the best performer among the eurozone periphery countries. Portuguese 2-year paper is trading at 5.5% whereas Spanish 2-year debt is trading at 3.5%. Irish debt is trading inside Spanish debt, even though Madrid has not applied for a sovereign bailout.

Chief European strategist with the US hedge fund Trend Macro, Lorcan Roche Kelly, says the yields on Irish government debt will be determined by wider eurozone events, but whether the Government repays the actual bonds will be determined by the performance of the economy.

Mr Roche Kelly remains positive on the Irish economy on the basis that the difficult structural adjustments were made 20 years ago under then finance minister Ray MacSharry.

The immediate future of Irish debt will be determined by events in Frankfurt, Berlin and Brussels over the next number of weeks, he said. On Thursday of this week, the ECB president Mario Draghi will unveil plans for buying up periphery eurozone debt.

On Sept 12, the German Constitutional Court will rule on whether the region’s permanent bailout mechanism, the ESM, is compatible with the German constitution.

Then later in September, the head of the eurogroup of finance ministers, Jean-Claude Juncker, will announce a template for a eurozone banking union, among measures aimed at closer EU integration.

Meanwhile Ulster Bank has upgraded its forecast for Irish 2012 GDP growth from 0.2% to 0.5%, according to its latest Irish Economic Outlook, released yesterday.

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