Ireland on the road to full market access (from Danske Research)
1. Investment Research — General Market Conditions
7. January 2013
Strategy
Ireland – on the road to full market access
Today, the Irish Debt Management Office (NTMA) announced that it is tapping the
Key points
IRISH Oct-17. This is another step in the direction to get full market access for the Irish
government. The NTMA is tapping (trough
Ireland was the first country to walk down the austerity path and since passed 8 Troika syndication) the IRISH Oct-2017
reviews even though it has been some tough years with private consumption collapsing bond. Ireland is rated
and unemployment rising to 15%. The effects of the restructuring programme is shown by BBB+/BBB+/Ba1 from
the recent positive GDP data as well as PMI’s outperforming EU peers. This is driven Fitch/S&P/Moody’s with
primarily by the export industry as domestic demand is still subdued (see charts on page stable/neg/neg outlook
3). There is still a long way to go for Ireland, but there is current account surplus, internal This is another step in order to
devaluation is ongoing, government finances are improving and the target for deficit in get full market access and shows
2012 which was initially set at 8.6% of GDP and revised to 8.2% a month ago is now that the financial markets
probably around 7.8-7.9% of GDP. continue to believe in the Irish
The financial markets have embraced the Irish restructuring case, and the NTMA came recovery.
back to market last year with switch auctions, issuance of T-bills and a true syndicated Given the ongoing restructuring
deal. Irish government bonds has since mid-‘11 outperformed EU peers as shown below. and expected full market access
then negative rating cycle that
Chart 1. The eturn on Irish government bonds since mid 2011 versus EU peers has dominated the periphery is
expected to change and move
70.0% Return on EFFAS 1-10Y bond indices since Jun-11
57.7% 58.6% Ireland from a negative outlook
60.0%
towards a stable outlook from
50.0%
40.0%
Moody’s.
30.0% We expect that the spread
20.0% 15.7%
11.9%12.0%12.5%
8.5% 9.7% 9.9% 10.7%11.3%11.3%11.4% between Ireland and Italy will
10.0%
0.0% converge and that the spread to
Germany will tighten to 200bp.
Currently, the bond trades some
15bp above Italy (mid-market)
and 270bp above Germany (mid-
Source: Danske Bank
market)
Furthermore, the Irish banks have also returned to the market with the issuance of
covered bonds from both AIB and BoI and a subordinated deal by BoI. The covered bond
deals have performed strongly despite the problems in the Irish housing market, where
loan in arrears continues to rise. We are seeing some stabilization in the house prices as
shown in the chart below. So with the 4Y deal we are seeing the positive spiral continue
for Ireland on the road to full market access, which is necessary for ratings to improve
and to qualify for the OMT programme.
Danske Bank Markets has been appointed as Joint Lead Manager in connection with
the upcoming offering of debt instruments by Republic of Ireland.
THIS DOCUMENT MAY NOT BE DISTRIBUTED IN THE UNITED STATES Chief Analyst
Jens Peter Sørensen
+45 45 12 85 17
jenssr@danskebank.dk
Important disclosures and certifications are contained from page 5 of this report.
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2. Strategy
The outlook for Irish government bonds in 2013 – we expect a
solid spread tightening to Germany towards 200bp or lower
The Irish government bonds should be poised for a solid performance in 2013 although
we do not expect to see the same stunning returns as in 2011 and 2012. However, the
Irish economy continue to be on the recovery path, the external balances looks good, the
PMI’s are better than EU peers and public finances are expected to remain on track with
the projections. Ireland’s deficit target for 2013 is set at 7.5%, and should be achievable
given that the deficit in 2012 is now below 8%.
The negative rating spiral that has dominated the peripheral governments should stabilise
in Ireland’s case. There is possibility that Moody’s will change their outlook back to
stable on the back of the improvement in the public finances and if Ireland regain market
access together with sustainable debt dynamic. In Moody’s credit opinion from
November 7, 2012, they write that “Upward pressure on the rating could develop if the
government's continued success in achieving its fiscal consolidation targets, supported by
a resumption of sustained economic growth, enables it to reverse the current debt
dynamics and enhances its ability to re-access the capital markets on a sustained basis” .
If Ireland gets full market access with regular auctions, then Ireland will also comply with
ECB’s OMT programme, which again provide extra support. Hence, we expect that the
spread between Ireland and Italy to converge, and that the spread Germany will converge
to 200bp across the curve of on the back of the continued recovery for the Irish economy,
expected full market access and the possibility for change in the rating outlook and
possible inclusion in the ECB’s OMT programme.
Chart 2. Convergence between IRISH and BTPS – some 15-20bp to go
IRISH BTPS
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
0 2 4 6 8 10 12 14
Source: Danske Markets
2| 7. January 2013
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3. Strategy
Chart 3. Austerity works – Ireland is returning to positive
Chart 4. ... driven by the export sector
growth rates
170 170 Current account surplus
GDP 2007=100
Germany 14
160 160 EUR Bn
4 % of GDP
150 150 12
<< Current account
Ireland 2 balance
140 140 10
Spain 8
130 130 0
120 Germany 120 6
-2
Greece
110 110 4
Italy -4
100 100 Trade balance 2
-6 surplus >>
90 90 0
00 02 04 06 08 10 12 14 90 95 00 05 10
Source: Danske Markets Source: Danske Markets
Chart 5. Irish PMI outperforming peers Chart 6. ... as Ireland regains competiveness
160 Index, 2000=100 160
70 PMI manufacturing survey Ireland
150 150
60 140 Unit labour costs (ULC), SA 140
130 130
50
120 Euro area 120
40 110 110
100 100
30
Germany France 90 90
20 00 02 04 06 08 10 12
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Danske Markets Source: Danske Markets
Chart 7. The gap between public spending and revenue is
Chart 8. Unemployment have stabilised
closing
16
Unemployment, %
14
12
10
8
6
4
2
0
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Danske Markets Source: Danske Markets
3| 7. January 2013
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4. Strategy
Chart 9. but the domestic economy is under pressure - private Chart 10. as indicated by the mortgage in arrears that have
consumption is low been rising
Private consumption, ('99=100) % of loan accounts in arrears for more than 90 days
170 16%
160 14%
150 12%
10%
140 8%
130 6%
120 4%
110 2%
0%
100
90
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Danske Markets Source: Danske Markets
4| 7. January 2013
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5. Strategy
Disclosure
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of the research report is Jens Peter Sørensen, Chief Analyst.
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6. Strategy
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