For once we have some good news to report, a glimmer of hope. Last week, Ireland managed to come to the international bond market on which it made a partial buy-back of existing debt (2014) and managed to roll it over into 2015 @ 4,9%. And it was a success with an announcement of more buy-backs in the pipeline. The Irish drama and possible reversal of fortune is really worth to take a look at. When disaster struck in 2008/09, the Irish were the first to feel the pain of excessive leverage, huge bank bailouts and sequential rounds of austerity. The impact on the economy was substantial as well in terms of GDP contraction, unemployment, structural output gap and public finances (cfr infra summary OECD table). And the cost and measures which were taken have been huge. There were substantial budget cuts in welfare benefits (pensions, students), wage cuts in administration (up to 25%). NAMA – the national asset management agency – took over large loans from banks in 2009, enabling the banks to return to normal liquidity to assist the economic recovery. In 2010, The IMF, the EU and Ireland agreed upon a 85 bio EUR rescue package of which 45 bio covered by EFSM & EFSF, 22,5 bio by the IMF, 17,5 bio by the National Irish Pension Reserve Fund and bilateral loans from the UK, Denmark and Sweden. All in all, the cost of bank rescues, NAMA and government deficits had set to push a debt spiral into motion, originally aimed at 125% of GDP in 2015.
Despite emergency facilities and austerity put into place, the Irish funding conditions on the governmental front worsened throughout the first half of 2011, culminating in default yields in July 2011. The levels which were reached were comparable levels for the actual state of Portugal (20% 5 year yields). Nevertheless, we have seen quite a recovery with yields dropping 10 to 20% across the yield curve :
Because of these improved funding conditions, the Irish government last week took the opportunity to come to the market and re-organize its term structure of existing outstanding debt. And they managed to do so. When strictly looking at the structure and maturities, it is even better balanced than most EMU countries which face in between 20 to 25% of outstanding debt having to be rolled over in less than 2 years time from now (Ireland < 10%) :
So it’s a promising start but we are not quite there yet. To conclude, Fitch today – for what it’s worth of course – followed Moody’s in downgrading several countries like Belgium, Cyprus, Italy, Slovenia and Spain. Especially the further outlook for Spain was revised to strong negative. Most important Fitch comments we have picked up so far :
1) Italy’s outlook not revised because of the Monti reforms and the ECB LTRO operation enabling Italy to fund itself at beneficial cost (6 month bills < 2% and banks @ 1%)
2) On Ireland, no immediate action, nor in the foreseeable future, with rating confirmed at BBB+