A “VERY challenging year” was how National Treasury Management Agency (NTMA) chief executive John Corrigan aptly described 2010. But the NTMA did meet its target to fund the State’s borrowing requirement for the year by raising €20 billion before the cost of issuing Irish debt soared in the final quarter.
This led to the NTMA’s withdrawal from the bond market in an unfolding drama that ended when the Government sought help from the EU and IMF. The NTMA cannot be faulted for its handling of debt management operations last year. Its average borrowing cost (4.7 per cent) was only slightly higher than in 2009 in what were more difficult circumstances.
Mr Corrigan has said the NTMA will resume borrowing when market conditions permit, suggesting this might be possible – though not probable – later this year.
The obstacles to any early return to the bond markets are clear. With 10-year Irish bond yields currently above nine per cent, and with the average interest rate payable on the EU-IMF loan facility under 6 per cent, the rate gap would first have to be closed before the NTMA could resume funding in the markets. How quickly that can be achieved will depend partly on how convincingly Ireland demonstrates it has the fiscal deficit under control.
Last year proved no less challenging for another of the NTMA’s responsibilities, the National Pension Reserve Fund (NPRF). At year end the value of the fund stood at €24.4 billion. This consisted of a discretionary portfolio (€14.9 billion) that excludes investments in Irish banks made under ministerial order and a directed portfolio (€9.5 billion) that contains those bank investments. But because the NPRF must provide up to €10 billion of the State’s €17.5 billion contribution to the €85 billion EU-IMF bailout programme, the remaining assets in the discretionary fund would be reduced to some €5 billion.
And since recent legislation means the fund can be subject to ministerial direction to invest in Irish government securities or to fund capital spending, the NPRF will soon find itself without the freedom to manage a discretionary portfolio or the financial means to do so.
The NPRF was set up to prefund state and public service pensions but the fund has been largely stripped of its assets and left to act as an unwilling investor of last resort, with shareholdings in banks that are difficult to value.
The NPRF Commission is considering the implications of these changes for the fund’s future operations and investment strategy. But what is at issue is the NPRF’s continuance. And that requires a wider debate.