THREE MONTHS into the financial year, the National Treasury Management Agency (NTMA) has raised half the sum (€20 billion) that it plans to borrow in 2010 and has succeeded in doing so at competitive rates. On Tuesday, the agency sold €1.5 billion to investors in two bond issues that were oversubscribed.
This marks a remarkable turnaround on a year ago when the interest rate on 10-year Irish bonds – a measure of the Government’s cost of borrowing – was close to 6 per cent, or almost double the German benchmark rate. Earlier this week, the premium, or additional yield over the German rate sought by investors to compensate for the risk of sovereign default, had narrowed to 1.28 percentage points. And NTMA chief executive John Corrigan is hopeful the interest rate gap between Irish and German bonds can decline further.
The lessons of the recent Irish experience in debt control and budget management are clear. Austerity measures have produced a positive response from the bond market and a lower cost of borrowing. That success provides Greece with some useful pointers as it struggles to refinance its debt and to cut its budget deficit substantially. A year ago the cost of Greek debt was broadly similar to that of Ireland; now it is much higher.
Investors have doubted Greece’s capacity to meet its debt repayments while the Greek government has failed so far to convince bond markets that it can bring its public finances under control.
Euro zone finance ministers offered Greece some reassurance earlier this week. Loans and financial assistance would be made available to Greece, if needed, to help it refinance debt due for renewal in the months ahead and to pay interest rate bills. However, the terms of financial support by eurozone governments – given that EU law prohibits any bailout of a member state in difficulty – are likely to prove onerous.
Nevertheless, the prospect of EU backing will help reassure markets and will ease Greece’s short-term financing difficulties although it will not remove doubts about Greece’s capacity to address its longer-term budget and debt problems.
How best can countries (like Greece or indeed Ireland) convince investors they can repay their debts? The NTMA’s Mr Corrigan supplied a succinct answer in an interview with Bloomberg news agency: “You need to send a clear message to the market about how you are going to correct the problem, and then deliver.’’
That is easier said than done.