Debt sold from Dublin outperforms its troubled peers

FOR all of Ireland’s efforts to distinguish itself from Greece, it’s their similarities that have helped debt sold from Dublin to outperform all peers since last month’s meeting of European leaders.

Irish securities returned 11% from July 21 through Tuesday, the best among 26 government debt indices compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The bonds jumped as euro- area officials agreed to ease the rate on loans for all bailed-out nations to stem contagion from the region’s debt crisis. Greek bonds were second with an 8.5% gain after the latest rescue package, while Portugal’s 4.3% profit for investors left it third.

Bondholders may be betting the cheaper loans will boost Ireland’s prospects for pulling out of the debt mire that sent 10-year government bond yields to a record-high of 14.22% in the run-up to the summit.

Since taking power in March, Prime Minister Enda Kenny has lobbied for a reduction in the rate and fended off attempts that his government said were led by French President Nicolas Sarkozy to get a reciprocal increase in the 12.5% tax that the country levies on companies.

“They’ve been given the improved terms without actually forgoing their beloved corporate tax rate, so they have come out of it pretty well, with similar terms to Greece,” said Eric Wand, a strategist at Lloyds Banking Group in London. “Sarkozy was adamant that until they adopted a more austere corporate tax system, they wouldn’t get any help. As the situation deteriorated, he’s realised there are bigger fish to fry.”

Following last month’s gathering, euro-area leaders agreed to extend “substantially” the maturities of Greece’s existing bailout loans and provide financing at rates close to the costs paid by the European Financial Stability Facility of about 3.5%.

“The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland,” they said in a July 21 statement.

Ireland, which was saddled with an average 5.8% interest rate on the €67.5 billion of aid it received from the International Monetary Fund and the European Union, would save €1bn or more next year if the cut is extended to other loans, Finance Minister Michael Noonan said on RTÉ Radio on July 22.

A corporate tax rate about half the EU average of 23% has lured companies such as Hewlett-Packard Co and Pfizer Ireland will take part “constructively” in discussions on a common consolidated tax base after getting the lower loan rates, according to the July 21 statement.

Greek bonds rallied after European officials promised Greece €159bn of new aid with lower interest rates and longer repayment times. The euro region and IMF will contribute €109bn, with banks chipping in €50bn through bond exchanges and buybacks, under the terms of the July 21 agreement.

The returns show “the different outcomes for these two country blocs from the summit,” said Michael Leister, a fixed-income analyst at WestLB in London. “Greece, Ireland and Portugal can now effectively fund themselves at core rates. This is a clear positive. The terms are much better for these countries, but the contagion risks, which are the most prominent risk factors for Spain and Italy at the moment, haven’t really been affected.”

Mr Noonan joked in June that he’s considering having T-shirts printed saying “Ireland is not Greece”. While Greece missed some goals of the bailout agreement, Ireland may beat its target of reducing the government deficit to 10.6% of gross domestic product this year,Mr Noonan and Central Bank Governor Patrick Honohan said last week.

“We are on track to observe, and indeed overachieve, the programme target,” the two men said in a letter dated July 28 to the country’s bailout partners and published on the finance ministry’s website a day later. Ireland’s government has met and “in some important cases exceeded” its commitments under the aid programme agreed with the EU and IMF, according to the letter.

Ireland’s ISEQ Index declined 6.7% this year, the second-best performance among euro-region equity benchmarks, after Germany.

The market gains were led by Elan Corp, whose shares almost doubled, as sales of the multiple sclerosis drug Tysabri increased, and the Dublin-based company agreed to sell a unit in May in a deal valued at $960 million.