Debt refinancing looms large for Ireland and other eurozone countries

In the recent press briefing for the National Treasury Management Agency’s (NTMA) 2014 Annual Report, its chief executive Conor O’Kelly highlighted the difficult task facing Ireland in the next few years as a significant level of debt needs to be re-financed.

Between 2016 and 2020 almost €60 billion of bonds have to be paid back, so there is a need to come up with attractive switching terms into longer-term debt or new funding options to keep investors happy and ease the burden on the sovereign.

In the current benign market environment, raising new debt is not a major problem, but markets are fickle, and things can change very quickly. We don’t know what the global backdrop will be like in two years time.

All Ireland can do at this stage is keep its own house in order.

Budgetary restraint and a stable political environment will be key in this regard. So the next few months will be very important in terms of implementing a market-friendly budget in October and then ensuring that a new government when elected after next year’s election keeps up the positive momentum that we’ve seen on the economic and budgetary fronts under the current coalition.

Looking at the overall picture, one would at this stage say the biggest risk to Ireland and its ability to refinance its debt at attractive interest rates in the future will be the outcome of the British referendum on EU membership, due to be held before the end of 2017. Given the close trading ties between the two countries, a vote for ‘Brexit’ or a departure from the EU would be bad news for Ireland, certainly in the short-term, with bond yields likely to rise quite sharply as a result.

Of course, it is by no means certain that Britain will leave the EU, but it is still a potential serious problem nonetheless. All the Irish government can do is use any influence it has at European level to help ensure Britain’s continued membership.

But it isn’t only Ireland that needs to refinance debt over the next few years. Both Spain and Italy face onerous tasks, with Ireland’s needs paling into insignificance in comparison. When looking at the numbers involved, one would say the eurozone’s debt problems are far from over. At €86bn, Greece’s latest bailout package is less than 10% of the sum Italy and Spain need to borrow on markets before the end of 2017.

With Athens offered a temporary solution, sovereign debt bankers are turning their focus to the scale of the refinancing needs in some of bloc’s other highly indebted states as the interest-rate cycle turns and the crutch of the ECB’s bond-buying is set to be whipped away in just over a year.

No one is predicting investors will shun the likes of Spain and Italy, as they have Greece. But the risk is that they demand a higher rate of interest as both countries are struggling to get their debts back on a sustainable path.

Some investors even see a situation where borrowing costs and the economic recovery in the bloc become so lop-sided that the European Central Bank has to extend its quantitative easing (QE) scheme beyond its scheduled September 2016 expiry.

In Italy, where recent data showed public debt at a new record high of €2.2 trillion, the government has to refinance €635bn of bonds by the end of 2017, a third of its outstanding debt. Spain has to roll over €351bn in the same period, also around a third of its total debt.

With the help of the ECB’s market backstop, which has helped to push down bond yields to record lows all across euroland, Spain and Italy have used this cheap borrowing to extend the average maturity of their debt and ease future pile-ups.

Forecasts from the OECD show that by the end of this year, the debt ratios of both countries will still be rising. This is important because without the numbing affect of cheap central bank money, investors will start to once again pay closer attention to economic fundamentals and demand a higher risk premium from those sovereigns unable to get their houses in order.

Ultimately, the ECB may need to support the bloc with its bond-buying longer than currently envisaged. No central bank has so far been able to halt QE after just one round, and economic divergence in the eurozone suggests it won’t be any different for the ECB.

Alan McQuaid is chief economist at Merrion Capital


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