NTMA chief says investors have reclassified Irish debt as it avoids Italian chaos

The head of the State’s debt office has said that the steady performance of Irish government bonds in the face of recent market turbulence sparked by Italy’s political crisis is evidence that investors have “reclassified” the nation’s creditworthiness.

The market interest rate, or yield, on Italy’s 10-year bonds spiked on Tuesday at 3.44 per cent, their highest level since 2014 and having surged by more than 90 per cent in four weeks, as investors feared the country was hurtling towards fresh elections that would become a referendum on its continuation in the euro zone.

This prompted a sell-off across a range of assets internationally, particularly Spanish and Portuguese bonds. However, the yield on Ireland’s 10-year bonds has remained within a tight range around 1 per cent for the past month, close to their 12-month average.

Strong economic growth

"Unlike previous periods of euro zone uncertainty, it seems that investors have in effect reclassified Ireland as much closer to the euro-zone core than to the periphery," said Conor O'Kelly, chief executive of the National Treasury Management Agency, said in a statement on Wednesday evening in response to questions from The Irish Times.

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“The feedback we get from investors suggests they are looking favourable on Ireland’s strong economic growth, our stable political environment and our favourable funding profile.”

Ireland’s creditworthiness had been rated “junk” at the height of the financial crisis by Moody’s, but it has since been restored to an A-grade across the three main ratings firms.

Meanwhile, Italian and other peripheral bonds rallied on Wednesday on hopes that a political stalemate could be overcome and government could be formed. Italian president Sergio Mattarella said on Wednesday evening that he would give two populist parties – League and Five Star – more time for talks to form an administration.

Italy successfully sold five- and 10-year debt at an auction on Wednesday, bringing some relief to jittery markets following this week’s meltdown in the nation’s bonds.

Budgetary restraints

It also emerged on Wednesday that the European Commission will propose a €30 billion plan for countries hit by economic shocks, as it responds to French calls for a euro zone crisis-fighting budget.

The European Investment Stabilisation Function is far less ambitious than ideas put forward by France president Emmanuel Macron, who last year called for a fund amounting to several percentage points of euro zone gross domestic product.

But the commission will argue that its plan to be presented on Thursday is a "first step", saying differences among euro zone governments and European Union budgetary restraints prevent more ambitious proposals at this stage.

– Additional reporting, the Financial Times