Bloomberg News

Irish Bet on Bond Market Return as Wine Tax Helps Cut Budget

December 05, 2012

Irish Finance Minister Michael Noonan said he is confident that the country can return to the bond markets as he reins in the European Union’s biggest budget deficit by taxing wine drinkers and mansion owners.

Noonan today laid out measures so Ireland can stick with its promise to the International Monetary Fund and European funders of its 2010 bailout to cut the shortfall to 7.5 percent of gross domestic product next year. From midnight tonight, a bottle of wine will go up by 1 euro ($1.30), while a new property tax will come into effect in July 2013.

“We will not dither or procrastinate, but will drive forward to lead this country out of the despair and despondency and lack of self-worth in which we found ourselves in March 2011,” Noonan told lawmakers in parliament in Dublin today, referring to the month when the government took power.

Ireland is about 75 percent through cuts amounting to 33.4 billion euros, or about a fifth of the size of the economy, stretched over eight years through 2015. While the deficit will still be the highest in the 27-member EU for the fourth year in a row in 2013, the austerity has been lauded by investors.

The National Treasury Management Agency plans to raise about 10 billion euros in the market next year as it returns to syndicated bond sales and regular monthly long-term debt auctions, its chief executive officer, John Corrigan, said on Nov. 22. Ireland sold Treasury bills and bonds in July for the first time in almost two years.

Being Smart

“Ireland has been smart through the crisis so far by not promising too much too soon,” said Padhraic Garvey, head of developed markets debt strategy at ING Groep NV in Amsterdam, before the budget was announced. “Achievable targets are what is required to pave the way for wider market access for 2013.”

The Finance Ministry forecast last week that this year’s deficit will be 8.2 percent of GDP compared with the 8.6 percent target it promised the IMF and EU.

Yields on the country’s benchmark 2020 bond rose 2 basis points today to 4.46 percent, down from 7.4 percent at the start of June and from as high as 14 percent in July 2011.

Stabilizing public finances are “an essential prerequisite to long-term growth and job creation,” Noonan said. Ireland can only access markets if investors believe that “we have a credible fiscal strategy and agree that our debt is sustainable,” he said.

Taxing Property

Ireland will introduce a property tax from July, levied at an annual 0.18 percent for homes valued below 1 million euros, rising to 0.25 percent above that threshold, Noonan said.

He will exempt new homes bought up to the end of 2016 from the tax and will introduce legislation on real-estate investment trusts, or REITs, to help boost the property market, whose collapse triggered Ireland’s economic demise.

Ireland is establishing the trusts to lure investors into the commercial property market, Noonan said. Their introduction will assist the National Asset Management Agency as it sells property. The agency was set up by the previous government to take on bad bank debt as it propped up the financial industry.

“The property measures are also designed to create additional jobs in the property and construction sectors,” Noonan said today. Home prices, down 50 percent from their 2007 peak, have risen in three of the past four months, according to the Central Statistics Office in Dublin.

Mortgage Debt

At the same time, the government plans to tackle the levels of debt, a lot of which stems from the property market. The central bank is overseeing the rollout of solutions to deal with “unsustainable personal and commercial debt,” he said.

Allied Irish Banks Plc, the largest mortgage lender, has pledged to contact 1,500 customers a month to work on restructuring their home loans, he said.

“This is the level of ambition that the government expects from all banks,” he said. “The Irish financial crisis could be summarized in one word: debt. The government is committed to dealing with both.”

To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net


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