Moody downgrading fails to dampen demand for NTMA bond aution

DESPITE Monday’s downgrading by rating agency Moody’s, demand for yesterday’s €1.5 billion bond auction by the NTMA (National Treasury Management Agency) reflected signs of an easing in funding pressures across the EU.

But it also reflected an increase in the risk premium demanded by investors for funding Ireland’s state coffers. The NTMA says in raising 90% of its €20bn target for 2010, the state coffers are now funded until the second quarter of 2011.

But the price demanded by investors on the Government’s 10-year bond issuance was disappointingly north of 5% at 5.537%. Whilst affordable in the good times, it is today a significant debt-servicing cost to be borne by the state and its taxpayers.

Citing the Government’s “gradual but significant loss of financial strength”, Moody’s, in downgrading Ireland’s rating by one notch, and indicating it doesn’t see any further downgrades at this time, switched its outlook to stable from negative. Its move was erroneously reported by some as reflecting favourably on the economy.

Moody’s economic growth forecast is a tad less sanguine. It sees growth of between 2% and 3% from 2011 onwards, whereas the Department of Finance is expecting rates of nearly double, at 4% from 2012 to 2014. At the upper end of the optimist’s spectrum, it seems Government is betting on a faster recovery than most others predict.

The gradual loss of financial strength, in other words repayment ability, is seen in the yield difference, the excess risk over German 10-year sovereign debt demanded by bond investors, which from last April has risen to 2.84%. Spain paid a premium of 1.65% during its auction.

Even at these premium rates, bond investors expect delivery by the Government on its next bout of economic austerity measures which will see it slash expenditure by another €3bn. There can be no fudge. Warning recently of “the vulnerability of the Irish economy to the vagaries of market sentiment on our sovereign debt” the ESRI said that “it is imperative that the Government adhere to its programme of fiscal consolidation”.

Rising bank bailout costs, estimated at a minimum of €25bn, remains a significant concern. The final cost of funding the black holes in Anglo’s and INBS’ (Irish Nationwide Building Society) balance sheets remains unknown. Paying less than 28c in the euro for INBS loans, ominously, NAMA has yet to announce the scale of its write down pricing on the second tranche of Anglo loans which it says are still undergoing due diligence.

Some maintain most of the risk premium demanded by bond investors is directly attributable to Anglo’s drain on the Exchequer.

All eyes are now on Friday when results of EU stress tests on the top 90 banks will be published, including Bank of Ireland and AIB recapitalisation costs.


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