Sovereign drives Ireland’s capital market return
The very positive response from investors to Ireland’s return to the international bond market at the start of this year was in part a reflection of the vastly improved sentiment that followed the ECB’s momentous OMT initiative last summer.
But it is churlish to ascribe the success of Ireland’s return to the market purely to external factors or to short-term swings in investor sentiment. The strength of investor demand for Irish credits over the last nine months is also a clear endorsement of the continued recovery of the economy, the strengthening of public finances and the accelerated deleveraging in the banking system.
Representatives from the National Treasury Management Agency (NTMA) and a number of bankers gathered at the EuroWeek roundtable in June to exchange views on what Ireland has achieved over the last two years, and on the challenges and opportunities that lie ahead.
Participants in the roundtable were:
Susan Barron, director, frequent borrower origination, Barclays, London
Owen Callan, senior analyst, fixed income strategy, Danske Bank, Dublin
Nick Dent, managing director, head of EMEA syndicate, Nomura, London
Lars Humble, managing director, head of SSA syndicate, financing group, Goldman Sachs, London
Anthony Linehan, deputy director of funding and debt management, National Treasury Management Agency (NTMA), Dublin
Hugo MacNeill, managing director, investment banking division, Goldman Sachs, London
Samu Slotte, head of SSA origination, Danske Bank Debt Capital Markets, Helsinki
Paul Spurin, managing director, EMEA flow rates trading, global markets, Nomura, London
Oliver Whelan, director, funding and debt management, National Treasury Management Agency (NTMA), Dublin
Rossa White, chief economist, National Treasury Management Agency (NTMA), Dublin
Moderated by Phil Moore, EuroWeek
EUROWEEK: The IMF says at the start of its most recent report on Ireland that “the government’s market access is deepening, fiscal results were better than expected in 2012, and recent indicators suggest an upward revision to 2012 growth estimates.” Is Ireland on track to exit from the Troika programme within the next six to 12 months?
Rossa White, NTMA: The economic situation in Ireland has been quite stable over the last couple of years.
Clearly the first thing all market investors want is for a country to meet its fiscal targets and Ireland is unique within the euro area in the sense that it has been on track on every step during its fiscal programme. Back in 2011, we beat the deficit target handsomely by 1.5 percentage points GDP. Last year again we were one point better than targeted. But growth has been similar in each year, rising by more than 1% in each of the last two years.
So Ireland has given the lie to the idea that you can’t have a successful consolidation without putting growth under pressure because the fiscal multiplier is too high. In both of those areas, confidence has built up over the last two years.
The other key factor in Ireland is that it has gone about its business exactly as it said it would during the programme. We’ve had a series of quarterly targets which allow investors to track our progress, and we have consistently met those targets. We haven’t shocked the market over the last couple of years. In fact, when we have surprised the market it has been in a positive sense, such as with the recent promissory note deal. So the trend has been favourable.
Although we’re only half way through this year, so far so good on the fiscal numbers for 2013. So having built up a 2-1/2 year track record, it will be a case of continuing to deliver on our quarterly targets over the rest of this year.
EUROWEEK: And investors have been responding positively, haven’t they?
Oliver Whelan, NTMA: Yes. There has been a very good response to the two syndications we’ve launched so far this year, a five year issue in January and a 10 year benchmark in March, through which we raised a total of €7.5bn.
We had a very well diversified book for each of these benchmarks, with a preponderance of real money investors and very little participation from alternative asset managers. We had a good geographic spread of investors, with strong demand from the UK, mainland Europe and Scandinavia as well as domestic investors. We also had significant participation from the US in both transactions.
In terms of reaching our objective of having full market access, we would like to issue a little bit more, perhaps through a series of auctions. We haven’t made any announcement about that yet, but our target for the year was to issue €10bn, and so far we have raised €7.5bn, so there is some scope for auctions, which we plan to do later in the year.
Of course, that opens up the potential for OMT eligibility. It also helps to achieve our target, which is a cautious one, of having sufficient cash in hand at the end of this year to cover us for 12-15 months ahead. This is a target that the Troika has endorsed and it has appeared in all our documentation. We view this as a sensible strategy because irrespective of whether any sort of precautionary credit line is made available, it is prudent to have a cash buffer in place. That is what we are working towards and investors are very comfortable with this strategy.
EUROWEEK: Going back to the macro side for a moment, to what extent are investors comfortable with the macroeconomic picture? Much of the success of the five and 10 year transactions was obviously driven by the turnaround in investor sentiment towards Europe since the Draghi speech last summer. But to what extent has it also been driven by investors’ response to Ireland’s macroeconomic indicators?
Nick Dent, Nomura: The catalyst for the investor feedback we’ve had from late last year was the announcement of the budget, where the numbers were a lot better than investors were expecting. Yields were already coming down at the end of 2012, and this continued into 2013.
The tap was announced on January 8, and from that point onwards the NTMA has been very prudent about how it has approached and accessed the market. Printing €2.5bn of the tap at 5bp back from Ireland’s curve and with such a strong book was a very impressive achievement. It almost left investors wanting more, and I think that naturally led NTMA to the next stage of its funding programme which was pushing down the curve and launching the new line, which was the €5bn 10 year benchmark.
Demand was driven by investors’ recognition that Ireland’s fundamentals were turning around and they bought into the prudent and sequential approach adopted by the NTMA.
Lars Humble, Goldman Sachs: Both syndications proved that traditional European government bond buyers were prepared to buy into the Irish recovery story. In spite of Ireland’s split rating, as Oliver said we saw some very high level support from investors throughout Europe.
There were some concerns about demand going into the first syndication, but investors’ response showed that the Irish recovery is well and truly underway, and that they are confident that the story is underpinned by sound macroeconomic fundamentals.
If you look at the relative value of Ireland versus some of the other European countries, it is clear that investors value the fundamental economic situation in Ireland.
Susan Barron, Barclays: The investor work that the NTMA conducted was also very important. It started from a very early stage, which made the roadmap for its return to the market very clear, and also allowed the NTMA to show the achievement of each of the milestones it passed along the way. I think this all gave investors additional comfort and allowed them to focus on the sustainable recovery path.
Samu Slotte, Danske: I agree that the NTMA has done a very good job in being open with investors and transparent about what its next steps would be. As Lars said, most of the traditional European government bond buyers participated in this year’s two syndications. What we’re still missing is much of the central bank community outside Europe. But I’m sure that demand will come as and when ratings improve.
EUROWEEK: Were there any notable changes in the way NTMA roadshowed either or both of this year’s syndicated deals?
Anthony Linehan, NTMA: Clearly there has been some change over time in terms of the investors that we’ve met. But I think it has been the consistency of our marketing, and the consistency of our approach to meeting and updating investors that has borne fruit over time. In the earlier days that was a longer haul because deals seemed further away.
Now investors are up to speed. That’s important when you’re a small country because people can forget to look at you. So that constant updating of investors has been very important.
Owen Callan, Danske: As Rossa said at the start, one of the most important points about the programme is that it has been predictable, and there have been no unpleasant surprises along the way. Ireland has been inching its way back to normality from a fiscal perspective, as well as from a growth perspective and a market point of view.
The low volatility in Irish spreads and Irish yields has been one of the things that has encouraged people to invest more. Low volatility has meant that investors have been relaxed when spreads have retraced by 5bp or 10bp. In Spain and Italy you see much more volatility on a day to day basis.
In Spain investors have been concerned about whether the economic cycle has found a base yet, and in Italy there has been political uncertainty. Ireland has escaped from that negative spiral. It is now in a much more positive spiral, which has meant that from an investor’s point of view Ireland has been a position that has been much easier to keep.
Politically there have been very few shocks because the opposition is broadly supportive of the programme. Fiscally Ireland has outperformed most of the time, and any underperformance has been benign and short-lived before kicking back into gear. So from an investor’s point of view it has been a perfect situation which was reflected in the 12 uninterrupted months of performance that we saw after the referendum last year.
EUROWEEK: You make the comparison with Spain and Italy, but was it ever appropriate to bundle Ireland in with some of the southern European countries, which are very different to Ireland, economically and culturally?
Callan, Danske: The assumption was that the troubled European countries were in trouble for the same reasons. The common narrative was that monetary policy in the eurozone was broken and that the fiscal imbalances in some southern European countries were very similar to Ireland’s.
That was an over-simplification because all countries in the eurozone are obviously different. But Ireland is much more of an Anglo-Saxon economy than Spain or Italy. Some 45% of all its trade is with the US and the UK, which makes it very different from the rest of the eurozone.
We had a banking sector crisis and a huge fiscal imbalance that needed to be rectified, but in many ways the Irish economy was much better placed structurally than some of those in southern Europe. From a long term demographic perspective Ireland is also very different from a country like Italy.
It was a generalisation that was probably too readily used. I don’t think Irish people wanted to be compared with southern European economies, not because they felt southern Europe was inferior, but simply because we had our own strengths and our own weaknesses which needed to be addressed independently. There was a feeling that a pan-European response to the crisis was not appropriate.
Hugo MacNeill, Goldman Sachs: I think the comparison with southern Europe missed the economic transformation that had taken place before Ireland became side-tracked with the property market.
Between the 1970s and the early 2000s Ireland went from one of the countries in Europe with the fewest amount of people who wanted to set up their own business to one of the highest. Even after the dot.com boom and bust in the early 2000s there has been a profound economic transformation, which has been reflected not just in the inflows of foreign direct investment. It has also been reflected in a new entrepreneurial spirit in Ireland and the transformation of a number of Irish companies which have become very significant on the world stage in their own right.
Having returned to Ireland in the early 2000s after being away for many years, this economic transformation was one of the things that struck me. This new economic structure is still in place and it is one of the key differentiating factors between Ireland and some of the southern European countries.
White, NTMA: At the start of the crisis we had a common fiscal narrative that was applied to several eurozone countries. When the problem was more specifically diagnosed, and it was recognised that it was not a case of one problem fits all across the eurozone, it became obvious that many countries that have suffered in the bond market faced a competitiveness problem.
When that became clear, Ireland was able to distinguish itself from the others, most obviously through its current account which returned to balance quickly. That encouraged people to look in more detail at the factors that allowed Ireland to achieve this re-balancing in the economy, such as the flexibility of its labour market.
If you look at the global competitiveness ranking, for example, Ireland has moved up another three places to 17th, having slipped during the 2000s. Some of the southern European countries are much further down that ranking.
Another reason why Ireland did not conform to this fiscal narrative was that, as we all know, banking problems were the main issue that forced Ireland into the financial assistance programme.
So when you look in greater detail at the credit story and start to explain it to investors, it becomes easier for Ireland to differentiate itself from other economies — although it may take some time for the differences to become apparent.
Dent, Nomura: From an investor’s point of view another important point is that there is so much transparency around Ireland’s debt profile. Coming into 2013 investors could see that there was an €11.9bn redemption due in early 2014 and that it was being taken care of via the liability management exercise and five year tap. Coupled with the fact that Ireland was fully funded for 2013, this made the NTMA’s funding plans very easy to understand.
Paul Spurin, Nomura: We’ve been living with this crisis for many years now, and it’s easy to forget just how scared and disillusioned many investors were at the beginning of the crisis. When we went to see big investors in Asia, and particularly in Japan, they weren’t interested in the economic fundamentals of individual countries. They were more worried about the future of the eurozone, and whether the currency was even going to exist in five years’ time.
I think it’s only in the last couple of years, during which time a lot of work has been done by central banks around the world, that countries have had the opportunity to prove themselves on the basis of their own economic fundamentals.
This comes back to Anthony’s point about why it was so crucial throughout the whole of that process to be in front of the investors all the time, and to continuously remind them of your own fundamentals. That ensured that when they were ready to make an investment decision based on fundamentals alone, they were comfortable with the Irish credit.
EUROWEEK: It’s interesting that you mention Japan. Is it too early to gauge whether Japanese investors are responding to the BoJ’s stimulus package by looking at some of the higher yielding European government bond markets?
Spurin, Nomura: They’re definitely looking. The aggressive moves from the BoJ have obviously caused a lot of excitement in financial markets as well as plenty of volatility and disruption. There was a knee-jerk reaction when it was assumed that the BoJ’s action at the beginning of April would have a very positive impact on non-yen bond markets, which was short-lived.
I think the subsequent volatility in the domestic bond and equity markets will mean that Japanese investors’ focus is going to be on their home market for some time to come. When they do start to look overseas, I think they’ll look primarily at dollar product ahead of euros. But over the longer term, Japanese investors will have a role to play in the European government bond market. Even if they’re not directly involved in the Irish market, they move in such size that when they do move into Europe there could be a meaningful knock-on effect.
Whelan, NTMA: Certainly until recently, Japanese investors have been constrained by our split rating. While on our recent roadshow there were definitely pockets of interest in Asia, it’s fair to say it was limited.
It would be foolish to ignore the fact that the split rating is a real issue, but once the rating impediment is out of the way I think we’ll see more involvement from Asia.
EUROWEEK: What signals are the agencies giving you about future possible ratings actions?
White, NTMA: It’s a timely question because we met one of them last week.
There is clearly a divergence between S&P and Fitch on the one hand and Moody’s on the other. We’ve had affirmations on our rating from both S&P and Fitch on all that has been done in Ireland to improve our creditworthiness over the last year. This has led to a change from negative to stable outlooks, at a level three notches into investment grade.
Moody’s still rates Ireland one notch into sub-investment grade. To be fair, I think they recognise the progress that has been made in Ireland, but the crisis in the euro area is still something that they cite as an issue, which probably prevents Ireland’s rating from moving. In other words, as long as there is still pressure on ratings elsewhere in the euro area, it is difficult for Ireland to move against the grain.
But if you look at market-implied ratings, Ireland would certainly be in investment grade territory. There is no doubt about that. So hopefully we’ll continue to see improvements in ratings in Europe over the next year.
Humble, Goldman Sachs: That’s an interesting point because some investors have told us that when a number of European countries were downgraded at the beginning of the crisis the agencies cited a lack of an institutional framework within Europe as a reason for the downgrade.
These investors have told us they have been struck by the fact that there have been no upgrades to reflect the fact that a lot of important support mechanisms have been put in place since then. It’s an interesting observation from the investor community that the agencies were very quick to downgrade on the basis that there was no supportive framework, but now that it has been put in place there has been no recognition of this in the form of upgrades.
EUROWEEK: Beyond the split rating, what are investors’ other concerns?
Slotte, Danske: One aspect related more to markets than to economic developments in Ireland is volatility.
Many investors have been drawn to Ireland because of the attractive yields and the low volatility which has been the result of the predictability of its economic profile. Secondary market liquidity has also been improving, mainly because of the NTMA’s efforts to push primary dealers to maintain a secondary market.
But in this most recent period where we have seen increased levels of market volatility in peripheral government bond markets, many investors have taken fright. That is an area where the NTMA needs to push its primary dealers to increase their commitment to supporting the market.
Linehan, NTMA: We’ve always worked well with our primary dealers, but the time has now come for them to adhere to much tighter obligations than they have done heretofore. Market conditions are such that this can be done now by primary dealers, because we are no longer in stressed conditions.
When we return to auctions, we’ll have an opportunity to provide liquidity to those bonds where there are special situations. That will be one of the benefits of returning to auctions.
EUROWEEK: Do you have a timetable for reintroducing auctions?
Linehan, NTMA: No. We have indicated that we are likely to do so before the end of this year, but we haven’t announced a timetable yet.
Spurin, Nomura: Investors would welcome a return to auctions. It would also give primary dealers more confidence to provide liquidity by selling bonds to investors up and down the curve. It’s a difficult question to judge, because lack of supply is clearly beneficial in that it drives yields lower. This has been demonstrated by the success of the two syndicated transactions.
From a dealer’s perspective, I believe the market is ready for auctions. Investors aren’t going to be shocked if anything is announced in terms of regular bond auctions, and I think the positives would probably outweigh the risks. It would certainly improve secondary market liquidity, because it’s tough to trade a market that has zero regular supply.
Barron, Barclays: We’ve already seen with the advent of T-bills again, and with the amortising bonds, that making multiple products available gives the dealer community and investors a higher degree of confidence.
I think that going back to a more regular auction schedule is an integral part of that predictable time frame which the NTMA has done very well to show to the market.
Spurin, Nomura: It could also be positive in the eyes of the ratings agencies, because it might break their habit of calling all issuance opportunistic, which is slightly frustrating. Establishing an auction schedule helps you prove that you have regular and free access to the market.
White, NTMA: Going back to your question about the macroeconomic concerns that investors may still have, the unemployment rate has been a concern. Although domestic conditions in Ireland are still difficult for many people, we appear to have passed a turning point in that we saw a peak in the unemployment rate of just over 15%. That has now come down to below 14%, which represents clear progress over the last year or so.
The other area that gets a lot of attention from investors is banks’ mortgage books. The long term trend in unemployment is very important in this regard because most econometric analysis would suggest that long term unemployment is a key factor in driving mortgage arrears. So the fact that we have started to see a turning point in the unemployment numbers is key.
More generally, the domestic economy appears to have bottomed. Half way through last year we saw two consecutive quarters of improvement for the first time since 2007. Things have looked a little weaker early this year, but that is usually the pattern immediately after the budget.
We have reached a point where net exports have started to weaken because global conditions have softened, and demand in the euro area has clearly shown a weaker trend over the last year. But at the same time, the domestic economy is starting to compensate for the fall-off in net exports. It’s lucky timing and hopefully the trend will continue.
EUROWEEK: You identify unemployment as a concern. But if you offered the Spanish or the Greeks an unemployment rate of 13.7%, they’d bite your hand off, wouldn’t they?
White, NTMA: They would. But then again the Irish unemployment rate is now 10 percentage points higher than it was for 10 or 12 years throughout the Celtic Tiger phase of the late 1990s and the period of the property bubble. However, you’re right to say we’re doing much better on unemployment than southern Europe. And when unemployment has passed its turning point, it tends to continue moving in the right direction.
The continued decline will be slow, and people aren’t anticipating that we’ll get back to single digit unemployment rates for some time yet, but the trend is clearly in the right direction. Half of all economic sectors are now creating jobs again, and wages are rising in more than half of all sectors too.
EUROWEEK: Is there a disconnection between the exporters and the domestic economy, in the sense that export industries such as pharmaceuticals aren’t very labour intensive?
White, NTMA: It has been well-recognised for a long time that the pharmaceuticals sector is very productive in the sense that value-added per worker is high. It accounts for a large share of exports but there is also a high import content both in that sector and in other multinational industries. So the bottom line impact is not as big as it would be if you were just looking at exports.
But the general point is fair, in that the multinational sector has clearly been the driver of growth in the last two to three years. The domestic economy is only now starting to find its feet again — and with good timing.
EUROWEEK: You mentioned the banks’ mortgage books, so this might be a good time to move on to the link between the banks and the sovereign, which was clearly very strong in Ireland, given that the bank bail-out cost some 40% of GDP.
But in the capital market, what came first? Did the successful return of the sovereign to the market open the way for the banks? Or was it the return of the banks to the covered bond market in the first instance that helped the sovereign to make such a successful return to the market in January?
Dent, Nomura: There was obviously a link between the two. The approach to the market by Irish borrowers has been very well organised and the way the banks have come to the market has been as pragmatic and as prudent as the sovereign.
Let’s not forget that it was November when Bank of Ireland came back into the market with a three year covered bond. There was a lot of price discovery around that deal, and it has since followed up with five year covered bonds, subordinated debt and a three year senior. So it has gone through all the different steps of restoring fully-fledged market access.
There has never been the feeling from the market that we have had too much supply, either from the banks, or from the sovereign, or from the two combined. In fact, after all these different entry points from the banks and the sovereign, the market still feels quite under-supplied with Irish debt. I think that is down to the well organised sequence of issuance.
EUROWEEK: Does the NTMA communicate with the banks about its issuance schedule, and vice versa?
Whelan, NTMA: Yes. We are clearly aware of what the banks are doing in terms of their issuance, because it makes no sense to have a clash of calendars. When the Eligible Guarantee Scheme was in operation, we had regular discussions with the banks about their issuance plans. Even though that scheme has now ended we continue to have a dialogue with the banks, not in any controlling sense, but in the sense that they would let us know what their funding plans are.
Linehan, NTMA: When we had the ELG scheme the banks had to come to us as the Scheme Operator to apply for government guarantees. Now we’re in the post-guarantee world we’ll still get a courtesy call from the banks telling us about their funding plans but it wouldn’t be for us to tell them what to do or not to do.
EUROWEEK: So it is accurate to say that the sovereign and the banks seem to have come to the market in a very clear, sequential way.
Whelan, NTMA: It’s fair to say that we accessed the market in 2012 in very clear phases, and the feedback we’ve had from investors suggests that this was seen as being positive for the banks, which have also regained market access on a phased basis.
But the fact that the banks were able to issue was also a good statement about Ireland, so there has been a symbiotic relationship between the issuance of the sovereign and the banks.
Callan, Danske: The compression we saw late last year in sovereign spreads helped the banks to regain market access, and gave them impetus and support.
The change we’ve seen in the last three months is that the banks have been able to issue on their own. In the case of Bank of Ireland, we’ve now seen a subordinated issue, the Coco trade and most recently a senior unsecured transaction.
In the new banking world, this is all risk capital, because there won’t be any sovereign support to bail those types of securities out in the future. Unfortunately in the past when Ireland got into trouble there was no proper resolution mechanism in place to inflict losses on the more senior types of debt. But today nobody is buying senior unsecured debt from Bank of Ireland thinking that the sovereign is going to back it up in the same way as it did in the past, which was obviously why Ireland got into such a crisis in the first place. The losses at the banks were so big that they impinged on the sovereign’s creditworthiness. That won’t be allowed to happen again.
MacNeill, Goldman Sachs: Related to that was the different type of foreign investment that was coming into Ireland. For a long while the only investors who seemed to be interested in Ireland were private equity and distressed debt funds. But the Bank of Ireland equity issuances have brought a number of long term institutional investors back into the market. We have also seen foreign investors looking to put their risk capital to work in a wider range of asset classes in Ireland, which has a positive knock-on effect for the banks as well as the sovereign.
At the same time, the very strong framework created by the sovereign has given investors the confidence to make the long term bet on the recovery of the Irish economy.
Slotte, Danske: I’d agree with Oliver’s comment about the symbiotic relationship between the banks and the sovereign. Some of the larger Nordic pension funds pulled out of anything related to Ireland some time ago, and they only came back when they had done their background work very thoroughly. And rather than starting off by dipping their toes in the government bond market, they did so by buying bank debt in the form of covered bonds, where they said they saw better value.
EUROWEEK: Coming back to Hugo’s point about investor support for a broader range of Irish asset classes, presumably NAMA has played an important role in this process?
MacNeill, Goldman Sachs: Absolutely. NAMA has shown that it has made important progress in a number of ways, including disposing of loan books, which again gives confidence to investors that the Irish property market isn’t some vast black hole.
Whelan, NTMA: Our experience when we’ve been on the road meeting investors is that in the early days they were concerned about NAMA. That has changed, and as Hugo says, investors are now much more comfortable with the success NAMA has had in getting to grips with the challenges it faces.
White, NTMA: There has certainly been a big change in how NAMA is viewed compared with three years ago. NAMA’s chief executive is very confident of its future and if you just look at its numbers for this year it will meet its targets very comfortably. It has to repay €7.5bn of its senior bonds by the end of 2013 and has already paid €6.25bn so it is well on track.
NAMA is also looking ahead at how to deal with the assets it is unable to sell right now. It is adding value to a lot of those assets in order to generate income and its record on creating cashflow, particularly from rents in Ireland, has been excellent over the last couple of years.
EUROWEEK: In terms of the next step for the banks, will this be a senior unsecured issue for AIB or a longer dated unsecured deal for Bank of Ireland?
Barron, Barclays: Both of these would be a potential logical next step, although everyone will remain mindful of the volatility that we’ve seen in the market in recent weeks.
It is interesting to note that each of the southern European countries and Ireland have been working on positioning themselves as individual credits. You could argue that as a result we have probably seen less volatility in Irish government bond spreads recently than we have in Portugal, Spain or Italy. But I think the whole market now feels that it is in a wait-and-see mode, and it’s difficult to foresee a definitive time line for likely issuance from Ireland at this stage.
Dent, Nomura: We’re now at decade-lows in terms of senior issuance, which will certainly be helpful for any of the banks going forward. The beauty of the covered bond is that in more volatile times it’s a great way for banks to access the market, so I think the Irish banks have plenty of options open to them in spite of recent events in the global fixed income market.
EUROWEEK: How has NTMA’s investor base been evolving over the last year or so? According to your latest investor presentation, foreign ownership of Irish debt has been falling but central bank participation has been rising.
Whelan, NTMA: The latest figures for ownership of Irish debt are a direct reflection of the promissory note arrangement, where because of the liquidation of the IBRC in February, €25bn of those notes were replaced on the books of the central bank by long-dated Irish government bonds. So if you strip that €25bn out of central banks’ holdings, non-resident holdings of Irish government debt remain at about 72% of the total.
There is a schedule for selling those central bank holdings back to the market, but that will be a very gradual process over a number of years, so the overall ownership of government debt has not changed much.
Like other countries, we would like to see more domestic support for our bonds from pension funds and insurance companies rather than banks. Last year we issued €1bn of bonds tailor-made for pension funds, and going forward we would expect pension funds’ asset allocation to have more of an exposure to domestic government bonds.
We were talking a little while ago about the link between the domestic banks and the sovereign, and having reduced that link we don’t really want to see it built up again through the banks buying an excessive amount of Irish sovereign bonds. The banks play an important role in the market and there is a level of investment in government bonds at which they are comfortable in terms of their asset allocation. It would make no sense for them to increase their holding excessively beyond that level.
There is also quite a high level of retail participation, not in Irish government bonds, but in products such as savings certificates that are sold through the post office. There is now about €17.4bn outstanding in retail debt, so the retail investor is an important source of funding for us.
EUROWEEK: What sort of balance do bankers think that a sovereign like Ireland should be aiming for in terms of the distribution between domestic and international investors? Japan is an extreme example of a market that is overwhelmingly owned by local investors, which is one reason why until very recently yields in the JGB market have been so low. But are European sovereigns reappraising the ideal balance?
Spurin, Nomura: I think the most stable demographic for placement for it is to be as wide and as broad as possible in terms of geography and investor type. Although it may give governments a secure feeling to have a very high domestic holding of their debt, if something suddenly changes — as it has recently in Japan — you can be faced with a very unstable situation.
We’ve talked a lot about volatility and price movements, and for most markets, stability is all about having plenty of different types of investors buying your debt for a range of different reasons, because if one group should have to sell or want to sell, it’s very healthy to have another group ready to be on the other side of the trade.
My personal view is that the broader the distribution, the more positive it is.
Humble, Goldman Sachs: It’s clearly a balancing act, but if you think of the eurozone as a whole, domestic investors are thought of as those who buy debt in their domestic currency. Part of the objective of building a pan-European capital market was to encourage cross-border investment within Europe, which makes the definition of domestic investors very different in a eurozone country to any country that has its own domestic currency.
You may generate truly domestic demand for instruments such as bonds linked to domestic inflation that cater to the needs of a specific investor base. But ultimately you would expect foreign investor ownership to be much higher within a currency union.
Linehan, NTMA: From our point of view, the most important objective is not so much to ensure that we have Irish owners of our debt but to make sure we have diversified debt-holders. In that sense, the retail market and the amortising bonds which serve a specific function both play an important role, as would inflation-linked or dollar debt if we were to issue in those markets in the future. These would all appeal to different investor bases at different times.
One of the problems we had going into the crisis was that a lot of our investors reacted the same way at the same time.
But when I joined the NTMA in 2007 we hadn’t issued any debt for three years because we had a budget surplus, and we thought that all Irish debt was about to disappear — so we’ve been through quite a roller-coaster ride.
One of our aims going forward is to tap into different investor bases. There would be no point in having a large, financially repressed domestic investor base. You want a wide range of investors who hold your debt because they want to, not because they have no alternative.
EUROWEEK: You’ve mentioned inflation-linked debt and dollars. Looking to the longer term, what is the next step for NTMA’s funding programme?
Linehan, NTMA: As we mentioned earlier, one of our main objectives is to ensure we have sufficient liquidity in the bonds we’ve already issued. As a debt manager you want two things: yes, you want a diversified investor base over time but you also want your main bond market to be liquid.
Whelan, NTMA: We have indicated to the market that we are open to the idea of issuing a bond linked to Irish inflation.
That was in the context of discussions we had with the domestic pensions and insurance industry. There would also be demand from other investors, both domestic and international, but it would be driven by local pension funds and insurance companies, so we’ll look at this when they reach a final decision about their asset allocation plans.
As for a dollar issue, when we were in the US on our most recent roadshow there was huge investor support for a potential dollar issue, so last autumn we could probably have issued a very successful dollar deal. We chose not to, but it is something we would certainly keep as an option going forward as part of our funding diversification.
But we really wanted to make a statement in Europe that we are committed to issuing in a normal way and we made that statement very clearly through our euro denominated issuance. A dollar issue would be regarded as opportunistic, but the contacts we have built up with the US investor base would certainly enable us to issue in dollars if we wish to do so.
EUROWEEK: If you went to the dollar market would it be arbitrage-driven or would you be prepared to pay up to access the deeper pool of US liquidity?
Whelan, NTMA: Of course the pricing would have to be competitive. It wouldn’t necessarily be beneficial for us to pay more for 10 year dollars than for 10 year euros, say. The diversification would be beneficial, but pricing would be a significant factor.
Once we have fully re-established our presence in the euro market then perhaps we can look at alternatives such as dollars.
EUROWEEK: Would the bankers around the table agree about the likely strength of investor demand for alternative instruments from NTMA such as inflation-linked or dollar bonds? US investors love Ireland, don’t they?
Dent, Nomura: There was a lot of talk at the back end of last year about a dollar deal, and the general view was that demand would have been very strong. But since then it has become clear that there is also good demand in that investor base for domestic issues, with about 10% of both the tap and the 10 year line sold into North American accounts.
In terms of maturity profile, the dollar market this year has been concentrated in five years. There has not been much 10 year issuance, at least not from the European names.
There is also the basis swap back into euros to consider, which can mean that the costs of dollar issuance has flip-flopped above and below that of domestic issuance.
Looking at other instruments, as the Irish recovery story gathers momentum floating rate notes and inflation-linked bonds are also likely to be well received, although their main appeal would be to domestic investors.
Spurin, Nomura: I think dollars would be well received by Asian investors. We were in Asia three weeks ago and virtually every investor we visited was asking us about issuance from European borrowers in dollars. Demand from non-Japan Asia has increased noticeably, so I think a European sovereign bond in dollars would sell very well there.
Slotte, Danske: It might have made more sense to have issued a dollar bond last autumn than it would now. That is simply because the execution risk in the dollar market is much lower given that you can issue a $1bn benchmark, whereas in euros you need to do a bigger size to be regarded as a benchmark.
It has now become quite clear that Ireland has market access in euros, so unless a dollar deal is price-competitive and brings in new investors I think Ireland should focus on the existing products at its disposal.
Humble, Goldman Sachs: I agree. It all comes down to issuers’ needs, which is why I think the top priority for Ireland should be to go back to having regular auctions. That to me would be a more important exercise than issuing US dollars or some other instrument.
Dent, Nomura: We’ve spoken a lot today about taking the next step in a funding programme. In many ways the jump from the five year to the 10 year benchmark was a giant leap for Ireland to prove that it has access to the euro market. It has also certainly taken the pressure off a number of other potential issuance opportunities. But as we’ve seen over the last four or five months of this year, the market does from time to time throw up opportunities for longer dated issuance.
Given the major market event that Ireland has just been through, however, I think investors’ expectations for any major new issuance this year are pretty low.
Callan, Danske: Ireland is in a relatively unique position, in that because of its €7.5bn of syndicated issues, the promissory note deal and the extensions from the EFSF and the EFSM, it is already way ahead in its funding requirements. It is pre-funded for about 15-18 months, so it can spend six months getting a full, regular monthly auction programme together and re-engage investors in a very slow and deliberate manner without having to worry about finding execution windows, as Spain and Italy do every month.
The decisions about Spain’s and Italy’s funding are made by the market as much as by their national debt offices, whereas the NTMA can be much more selective in its issuance. Time is on the NTMA’s side, which means it can focus on making sure the products, tenors and pricing are exactly what it wants from a long term point of view.
EUROWEEK: So just to be clear, the combination of the syndicated deals NTMA has already done, the promissory note and the EFSF and EFSM extensions means that Ireland has no funding requirement at all for the next 12-18 months. But you can pre-fund if the conditions allow, yes?
Whelan, NTMA: We’d like to have an ongoing market presence through small auctions, but yes — the objective at the end of this year is to ensure that we have 12-15 months of pre-funding in place which now takes us through to the end of 2014 and into the start of 2015.
In that respect, the promissory note and the maturity extensions you mentioned have been enormously helpful. Between them, they have reduced our funding needs by roughly €4bn each year over the next decade. That’s €40bn taken out of our funding needs, so that has reinforced the positive background and of course it has also hugely strengthened the debt sustainability picture by allowing us to stretch our funding over a much longer period. It has also significantly reduced our refinancing risk.
So as Owen said, we have plenty of time and we are under no pressure to rush back to the market.
Slotte, Danske: It’s interesting that from the NTMA’s point of view the maturity profile of Ireland’s debt is quite long, whereas investors would like to have longer bonds. Ireland has longer dated funding on its books, but from official rather than market sources. So there is a bit of a mismatch there.
EUROWEEK: What is the average maturity of Ireland’s debt?
White, NTMA: Of the medium and long term and official debt, it’s over 10 years now. One of the Troika partners has mentioned that Ireland is in the top three longest in the eurozone in terms of the average maturity of its debt.
Callan, Danske: The key point is that through all the initiatives we’ve discussed, 35% of Ireland’s debt has been refinanced into long term, cheaper debt. That compares with Italy which couldn’t issue anything over 10 years last year. So Ireland has clearly been improving its debt metrics and therefore its debt sustainability. That is what sovereign debt is ultimately all about: it’s not about being able to repay it, but being able to roll over short term debt and bear the interest costs of that debt.
EUROWEEK: What was the market impact of key developments such as the promissory note arrangement and the EFSF and EFSM extensions?
Barron, Barclays: Both were very positively perceived. The promissory note deal came between the two syndicated transactions and if you compare the two deals, in the second we saw almost twice as many investors, and a book that was double the size.
The promissory note and the rescheduling provided another example of the sustainability of Ireland’s debt. When we were marketing earlier this year there were a lot of questions from investors about the promissory note, and February’s arrangement was a very helpful clarification.
Humble, Goldman Sachs: I think the promissory note deal was all part of the gradual process of regaining investors’ confidence. The added clarity certainly helped performance.
EUROWEEK: What are the NTMA’s plans for roadshowing? Are you adding any more stops to your usual roadshow itinerary these days?
Whelan, NTMA: We’ll be visiting investors in the US later this year and we’ll also be going back to Asia. We also remain active in roadshowing in the main financial centres of Europe.
EUROWEEK: Going back to the macro story, and to the subject of confidence in the longer term prospects for Ireland, what are net migration patterns telling us? Are the Irish prepared to dig in for the long term recovery, or are they doing what they did in previous downturns, packing their bags and leaving?
MacNeill, Goldman Sachs: You need to look at Irish net migration figures over a longer period. In the early 1980s there was huge emigration because we had 20% unemployment, with 50% of the jobless out of work for more than one year. In the 1990s unemployment fell to 4%, and pretty much everyone who wanted to come back did come back.
The Irish Times recently published a survey of young people going abroad, and 60%-70% said they were doing so out of choice, in order to gain experience with a view to coming back later. As somebody once said, permanent emigration may be a national tragedy but temporary emigration can be a national asset.
During the economic transformation there was an interesting statistic that 40%-50% of the workforce between 20 and 45 was either non-Irish, or were Irish people who had lived abroad and come back. That contributed to the dynamism of the economic transformation we saw here during the 1990s, because these people imported entrepreneurial ideas from overseas.
One of the things the government has been doing quite effectively in recent years is focusing on the Irish diaspora which don’t come back, and harnessing its potential in terms of investment and capability expertise.
White, NTMA: If you look at the census data for between 2006 and 2011, the main migration we saw was among unskilled workers.
The number of graduates staying in Ireland between 2006 and 2011 did not change very much. We don’t have figures updated to 2013, but unless there has been a dramatic change in the last couple of years we haven’t actually lost too many skilled workers.
As long as the domestic economy picks up and people come back, temporary emigration is not a threat. We saw a pattern where the people who left in the 1980s came back in the 1990s. I expect we’ll see a similar pattern this time round.
Dent, Nomura: You can’t have them all back. I think the City of London would suffer if all the best Irish graduates went back home.
Callan, Danske: It’s also worth remembering that the Irish population has increased by about 40% since the early 1990s. So 15-20 years of positive inward migration has been met with two or three years of outward migration, which is by no means a tragedy.
EUROWEEK: Among the other long threats to the Irish economy, is sabre-rattling in Europe about a harmonised corporate tax rate a worry, given its importance in attracting FDI?
White, NTMA: Ireland has a very attractive corporate tax rate of 12.5% and the government has made it clear that this is not going to change. But there is always the danger that something comes from leftfield in terms of tax. Two years ago there was some sabre-rattling in France about tax and a fear that Ireland would be forced to do something to bring its tax rate in line with the rest of the eurozone. That was dropped, but there is also always the danger that if the US tax code is changed that could have a negative impact on Ireland — and that is something that is getting a lot of attention at the moment.
EUROWEEK: Debt sustainability has been mentioned a couple of times. Is NTMA comfortable with Ireland’s debt to GDP ratio of 120%?
White, NTMA: We’re a year away from returning to primary surplus. We’ve consistently laid out the numbers demonstrating that Ireland is on track to do so, and if we do return to primary surplus it will become clear that we have achieved debt sustainability.
On debt to GDP, we are set to peak at just above 120% and we then edge down. There’s no consensus about what debt ratio is too high, but if you compare Ireland to other countries in Europe with tighter spreads, our metrics over the next couple of years will end up very similar.
EUROWEEK: Just to wrap up, is there a general belief that although neither Ireland nor the eurozone is out of the woods, the worst is behind us?
Slotte, Danske: Yes. From an Irish perspective, definitely. The only question mark is over the European situation.
Dent, Nomura: I’d agree. We’ve definitely turned a corner. The worries and concerns we discuss today are very different from those we were talking about a year ago. If you ask most economists, they view the recent correction we’ve seen in the market as a short term dip. Some investors may even see this as a buying opportunity, because they recognise spreads aren’t going to go tighter in a straight line.
Spurin, Nomura: What began as a banking crisis developed into a sovereign crisis and is now a good old-fashioned economic crisis, which has been good for pushing interest rates and bond yields lower everywhere. We’re now seeing the first signs of growth in the US, which everyone agrees we need, but the risk is that it will spook the bond market. That’s the balancing act we’ll need to negotiate.
Humble, Goldman Sachs: If you look at yield levels in Ireland, we’re not far off all-time lows at the moment, which is a pretty good indicator of how the market is interpreting the Ireland recovery story. If you believe markets are even vaguely efficient, that is a good sign of what to expect from Ireland.
Barron, Barclays: I agree. I believe Ireland has decoupled itself from many other European countries, and over the course of the last few months has definitely addressed investors’ concerns.