THE SUCCESS of the monthly Government bond auction yesterday, where €1.5 billion was raised from investors, can be measured in various ways. The National Treasury Management Agency (NTMA) – found a healthy investor interest in the bonds issued. These were three times oversubscribed, and the yield, or interest rate, payable was broadly in line with market expectations. In what have been difficult financial times, the auction result reflected a satisfactory outcome, and a remarkable change in market sentiment over a short period.
Earlier this month, when the NTMA faced market turbulence arising from the Greek debt crisis – which investors feared could affect other weak euro zone economies, including Ireland – the agency had considered skipping this month’s bond auction. But two major developments caused the NTMA to change its mind. First, came the EU and IMF agreement to provide a €720 billion loan facility to support euro zone governments in difficulty. Second, was the decision by the European Central Bank (ECB) to buy government bonds in the secondary market.
These emergency measures have helped to stabilise European bond markets in the shortterm and to reduce the Government’s cost of borrowing. The yield spread – or interest rate premium of Irish over German bonds that investors demand to compensate for increased lending risk – has narrowed sharply, Both these developments provided a positive backdrop to yesterday’s bond auction, and helped ensure its success. It will be interesting to see the results of Spain’s sale of sovereign debt later this week.
Yesterday’s auction brings to €13.2 billion the amount raised from the bond market this year. This represents some two-thirds of the NTMA’s target figure for 2010. And with the agency also holding over €20 billion in cash balances, it is well placed to fund the Government’s huge borrowing requirement this year and in the interim, to withstand any adverse market developments that may arise.
But, there are no grounds for complacency. A state that must borrow some €20 billion to bridge the gap between revenue and spending this year, will continue to rely heavily on borrowing as the budget deficit is reduced to 3 per cent by 2014. The bond markets will remain the arbiters of how much and at what price we borrow. Foreign investors now hold some 86 per cent of government debt. How they view the management of the Irish economy matters more than ever.