Bloomberg News

Captive Irish Banks May Help Avoid Second Bailout in Bond Swap

February 01, 2012

Jan. 31 (Bloomberg) -- Ireland’s government bailed out the banks. Now, the banks may help the state sidestep a second rescue by easing the financing pressure on the nation just as its aid is due to run out.

Irish lenders made up the majority of investors who decided on Jan. 25 to shift about 30 percent of 11.9 billion euros ($15.6 billion) in government debt due in 2014 to a note maturing in 2015, according to Davy, the country’s biggest securities firm. Davy said it carried out about half the orders as the Irish debt management agency sought to relieve funding pressure when the aid package runs out at the end of next year.

“This is a smart solution and ticks a lot of boxes for both the government and the banks,” said Gavin Blessing, a bond analyst at Collins Stewart in Dublin. “Rather than trying to get the market to absorb a fresh bond issuance, they were dealing with a captive audience.”

While the debt crisis in Greece stems mainly from government borrowing and spending, in Ireland it was the euro region’s worst banking crisis that precipitated the economic collapse. As a result, the Irish state now controls five of the six biggest domestic lenders.

Ireland stepped out of bond markets in September 2010 and sought a 67.5 billion-euro international bailout, which means the state is fully funded through the end of 2013. The government will then face what Finance Minister Michael Noonan has called a “funding cliff” in 2014. Spreading out repayments means Ireland needs to raise less cash next year.

Perception Switch

“There had been speculation that Ireland would be forced to seek a second bailout or even a Greek-style restructuring,” said Jens Peter Soerensen, chief analyst in Copenhagen at Danske Bank A/S, a primary dealer in Irish government bonds. “We expect that the switch will change the perception, even though apparently mainly Irish banks took part in the auction.”

Bank of Ireland Plc, Allied Irish Banks Plc and Irish Bank Resolution Corp., the three biggest lenders, declined to comment on their role in the switch. A spokesman for the National Treasury Management Agency, or NTMA, also declined to comment on participation by the Irish banks.

The move came after Irish bonds posted the world’s best returns during the past six months. In addition, the government has met targets set by its bailout partners and convinced investors that a line has been drawn under the woes in the financial system.

“The NTMA’s offer to switch into 2015 paper was well-timed to take advantage of demand for short-term paper,” Conall MacCoille, an economist at Davy in Dublin, said in a note. “It is reasonable to assume that Irish banks played a key part.”

Bonds Rally

Ireland’s October 2020 bonds, regarded as the benchmark, yielded 7.37 percent yesterday, down from 9.1 percent at the start of December. The yield on the equivalent Greek security is 34 percent and 17 percent on the Portuguese note.

The 2015 bonds, which yield 5.1 percent, can be used as collateral for banks to use to gain access to European Central Bank three-year funding at 1 percent. Demand for “three-year instruments” wasn’t being met before the switch, the NTMA said.

“This is bullish in so much as this represents the country dipping its toe back into the market,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “However, the fact that the take-up was reportedly a largely domestic affair does dilute the positive implications.”

ECB Lending

The ECB awarded 489 billion euros to banks across the region in December and is planning another tender on Feb. 29.

Domestic and overseas lenders with operations in Ireland borrowed 107.2 billion euros at the end of December, up from 102.9 billion euros a month earlier, the Irish central bank said on Jan. 13. Ireland’s state-backed banks typically make up 70 percent of the financial industry’s borrowing from the ECB, according to the Finance Ministry.

In addition to giving the banks collateral, a successful return to the international credit markets by the Irish state also may ease the way for banks to sell debt again.

Bank of Ireland was the last bank to auction a public benchmark bond, in October 2010. The nation’s largest lender sold 750 million euros of 2 ½-year notes priced to yield 420 basis points more than the benchmark mid-swap rate at the time.

Ireland may repeat the exercise. The NTMA may seek to undertake a further swap later this year, according to a person with knowledge of the matter. Each time the state lessens the payments due in 2014 it increases the chance they won’t need to seek more external aid in 2013.

“The move was very positive and creates a viable route to regain market access and issue in the primary market” said Alan McQuaid, an economist at Bloxham Stockbrokers in Dublin. “The only disappointing aspect was the amount of foreign demand. To make a really successful return to the bond market, the international investor base has got to be more involved.”

--Editors: Rodney Jefferson, Tim Quinson

To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net Joe Brennan in Dublin at jbrennan29@bloomberg.net;

To contact the editor responsible for this story: Rodney Jefferson at r.jefferson@bloomberg.net


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