The decision to leave the bailout and return to the bond markets without a safety net credit facility from our partners in Europe was to some extent a response to their continuing reluctance, much of it for reasons not to do with Ireland, to provide such a facility.
Unanimity is required to draw down from the European Stability Mechanism, and Germany, for one, was not enamoured of the idea, while the EU Commission was wary of precedents being set. As the sign says in countless shops, "Please do not ask for credit as a refusal may offend" – better for our reputation in the face of a likely No, not to ask. Yesterday's decision was about making a virtue of necessity.
But, just as importantly, the Government’s decision is also a declaration, and welcome at that, of the confidence in Merrion Street that the country’s economic reputation in the markets has been largely restored and that bond traders do not now – or will not in the medium term – see investment in our loans as carrying risks requiring a heavy premium. Indeed, our standing, it is hoped, will be further enhanced by the return to full market funding unaided – if the country can stand on its own two legs unaided, so the argument goes, its loans must be a safe bet.
Yesterday’s lack of reaction in the bond markets to the decision suggests that they are willing take that benign view – Irish bonds were trading at a yield of 3.55 per cent, and there was only the merest flicker of a response to the announcement. And the Government will certainly have taken comfort from the recent stability and moderation of rates in making its decision.
While Ireland was paying as much as 8 per cent for most of 2011, yields have come down sharply since then, allowing the Government in March to buy some €5 billion worth of reasonably priced 10-year-bonds. Yields have come down from 4.14 per cent at the end of August to 3.5 per cent today, and traders hope they may fall towards 3 per cent next year. In the second half of 2014, when Mr Noonan is expected next to need some cash, borrowing from the markets should not prove too painful in the absence of shocks to the system in the interim. Admittedly there’s many a slip between cup and lip, and exercises in that interim like the bank stress tests, which may produce evidence of further bank recapitalisation needs, could produce new market jitters.
Critically, however, the markets can be reassured that the policies and disciplines which have got the country to the point of bailout exit will not be relaxed. December 15th, “Independence Day”, will not be a day of wild casting off of economic shackles and letting rip with spending as some might like to suggest. Despite the exit Ireland will continue to be subject to significant post-programme surveillance, as well as the euro zone’s tough new “two-pack” rules. Tough love is for life.