Ireland on the road to full market access (from Danske Research)

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Investment Research — General Market Conditions

Today, the Irish Debt Management Office (NTMA) announced that it is tapping the

IRISH Oct-17. This is another step in the direction to get full market access for the Irish

government.

Ireland was the first country to walk down the austerity path and since passed 8 Troika

reviews even though it has been some tough years with private consumption collapsing

and unemployment rising to 15%. The effects of the restructuring programme is shown by

the recent positive GDP data as well as PMI’s outperforming EU peers. This is driven

primarily by the export industry as domestic demand is still subdued (see charts on page

3). There is still a long way to go for Ireland, but there is current account surplus, internal

devaluation is ongoing, government finances are improving and the target for deficit in

2012 which was initially set at 8.6% of GDP and revised to 8.2% a month ago is now

probably around 7.8-7.9% of GDP.

The financial markets have embraced the Irish restructuring case, and the NTMA came

back to market last year with switch auctions, issuance of T-bills and a true syndicated

deal. Irish government bonds has since mid-‘11 outperformed EU peers as shown below.

Chart 1. The eturn on Irish government bonds since mid 2011 versus EU peers

Source: Danske Bank

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.

8.5% 9.7% 9.9% 10.7%11.3%11.3%11.4%11.9%12.0%12.5%15.7%

57.7% 58.6%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0% Return on EFFAS 1-10Y bond indices since Jun-11

7. January 2013

Important disclosures and certifications are contained from page 5 of this report.

Chief Analyst Jens Peter Sørensen +45 45 12 85 17 [email protected]

Strategy

Ireland – on the road to full market access

Key points

The NTMA is tapping (trough

syndication) the IRISH Oct-2017

bond. Ireland is rated

BBB+/BBB+/Ba1 from

Fitch/S&P/Moody’s with

stable/neg/neg outlook

This is another step in order to

get full market access and shows

that the financial markets

continue to believe in the Irish

recovery.

Given the ongoing restructuring

and expected full market access

then negative rating cycle that

has dominated the periphery is

expected to change and move

Ireland from a negative outlook

towards a stable outlook from

Moody’s.

We expect that the spread

between Ireland and Italy will

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-

market)

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

2 | 7. January 2013 www.danskeresearch.com

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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

Source: Danske Markets

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

0 2 4 6 8 10 12 14

IRISH BTPS


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Chart 3. Austerity works – Ireland is returning to positive

growth rates Chart 4. ... driven by the export sector

Source: Danske Markets Source: Danske Markets

Chart 5. Irish PMI outperforming peers Chart 6. ... as Ireland regains competiveness


Chart 7. The gap between public spending and revenue is

closing Chart 8. Unemployment have stabilised


00 02 04 06 08 10 12 14

90

100

110

120

130

140

150

160

170

90

100

110

120

130

140

150

160

170GDP 2007=100

Germany

Germany

Ireland

Italy

Spain

Greece

Current account surplus

90 95 00 05 10

0

2

4

6

8

10

12

14

-6

-4

-2

0

2

4 % of GDP EUR Bn

Trade balance

surplus >>

<< Current account

balance

20

30

40

50

60

70

00 01 02 03 04 05 06 07 08 09 10 11 12

PMI manufacturing survey

Germany France00 02 04 06 08 10 12

90

100

110

120

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150

160

90

100

110

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130

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150

160

Unit labour costs (ULC), SA

Ireland

Euro area

Index, 2000=100

0

2

4

6

8

10

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16

00 01 02 03 04 05 06 07 08 09 10 11 12

Unemployment, %


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Chart 9. but the domestic economy is under pressure - private

consumption is low

Chart 10. as indicated by the mortgage in arrears that have

been rising


90

100

110

120

130

140

150

160

170

99 00 01 02 03 04 05 06 07 08 09 10 11 12

Private consumption, ('99=100)

0%2%4%6%8%

10%12%14%16%

% of loan accounts in arrears for more than 90 days


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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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On Jan. 7 2013 the authors of this research report had no holding of bonds issued by Republic of Ireland.


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Ireland on the road to full market access (from Danske Research)