Ireland's bond swap shows how self help can work

Greece is on the cusp of a disorderly default; Portuguese bonds are tanking as investors price in sharp haircuts. But Ireland has successfully tapped international debt markets for the first time in 16 months.

Dublin has persuaded creditors holding 3.53 billion euros of 2014 bonds to swap them for securities maturing one year later. The deal should make it easier for Ireland to return to debt markets in 2013 – as targeted under its International Monetary Fund and EU bailout. Before the swap, Dublin would have needed to raise 24 billion euros in 2014 alone, according to Glas Securities.

The swap is the latest sign of Ireland’s improved market standing. Irish 10-year bond yields have almost halved from their peak last July. Investors like the fact that Dublin has recapitalised its banks. Moreover, Ireland should eke out modest growth and run a current account surplus this year – unlike France, Italy, Spain, Greece and Portugal, according to Deutsche Bank.

The debt swap may also be a savvy play on the euro zone’s monetary policy. The new 2015 bond is a security that bank investors can use in the European Central Bank’s three-year liquidity operations. Ireland has room for more switches. Its banks have relatively low holdings of domestic bonds compared to other peripheral countries.

Ireland still has many challenges. It is unlikely to hit its fiscal deficit target of 8.5 percent of national income in 2012 due to the global slowdown. The International Monetary Fund has halved its 2012 growth forecast to 0.5 percent. House prices are still sliding and one in six mortgage holders is in arrears or has had their home loan restructured.

But the fact that Ireland is digging its way out of its bailout programme does more than show how self help can work. It should cheer policy makers in Berlin, who are facing ever higher cash calls to support peripheral economies. It may even help persuade them to agree to Ireland’s recent request that the euro zone help fund the country’s 31 billion euro bank bailout.