Foray a good exercise in reasserting sovereignty

The Government’s foray into the sovereign debt markets yesterday came a bit sooner than expected but the rationale for the move is clear.

If Ireland is to exit the troika bailout programme at the end of 2013, then it has to convince the markets it can meet its funding needs over the following few years. There is a €18.6bn funding requirement in 2014 and 2015.

Last January the Government swapped €3.5bn worth of bonds maturing in Jan 2014 for €3.5bn of bonds maturing in Jan 2015. The latest move took a further €1.04bn from bonds maturing in Jan 2014 and swapped them with bonds maturing in 2017 and 2020.

Irish bond yields have narrowed quite significantly against the 10-year German bund over the past few months. In fact, Irish bond yields are now performing better than Spanish yields and close to where 10-year Italian bonds are trading.

The Government has won plaudits for adhering quite successfully to the terms of the bailout programme. Moreover, the markets are taking the view that if the Government can get a deal on the bank debt, then the country’s growth prospects look good in the medium to long term.

After all, Ireland is one of the most open economies in the world and is well positioned if there is an upturn in global growth.

The benefits to Ireland exiting the bailout programme would be quite significant. The fact Ireland is a programme country is a huge negative for investors, not least because the terms of investment can be changed arbitrarily by the troika. For example, holders of green sovereign debt were forced to take a haircut.

And as long as Ireland is subject to a bailout programme, then there is a possibility that changes could be made to corporate tax regime.

But Ireland’s longer term market prospects hinge on euro wide developments. Comments made by ECB president Mario Draghi yesterday that the bank will do whatever is needed to save the euro has eased pressure on Spain and Italy.

For the moment. There will have to be much more movement on a banking union and how that will work before pressure properly eases on the Spanish sovereign.

But there is growing uncertainty over Greece’s future as a member of the eurozone. The Citigroup economist Willem Buiter issued a report yesterday claiming that there was a 90% chance that Greece would exit the eurozone because it would not be able to meet the targets stipulated by the troika.

If Greece does leave the single currency — with an exit as early as the autumn a strong possibility — then it could unleash a bout of contagion across other periphery countries, which would obviously have huge implications for Ireland. Also, a Greek exit would put the future of the euro in doubt as it would provide a template for other countries to depart.

Thus much more than domestic matters will shape Ireland’s performance in the sovereign debt markets in the future.