Luck of the Irish
Ireland is less risky than the United States, say bond markets. That’s a stunning performance for a country barely out of bailout, and it looks like a throwback to the pre-crisis era when credit risk was ignored. It may not be durable and dents Ireland’s hopes for EU debt relief.
Ireland’s five-year yields are below U.S. ones after Moody’s, the ratings agency, gave it back its investment grade. It’s reminiscent of the glory days following the 1999 euro launch, when markets chose to ignore sovereign credit risk. U.S. yields reflect the prospect of tighter monetary policy. But Ireland’s five-year bonds also only pay a premium of 89 basis points over German debt, half the early-October level. The credit default swap market is pricing Ireland as if it were rated single-A, rather than the triple-B tag given by Moody’s, according to Markit.
The move reflects Ireland’s progress in tackling its fiscal woes. The primary deficit (the excess of spending over revenue before interest payments) will shrink from almost 12 percent of output in 2009 to near-balance this year. The markets’ reaction also reflects investors’ changing priorities. They worried about deficit and debt at the beginning of the crisis. Now they want growth, and Ireland’s open economy is benefiting from the global recovery. According to EU forecasts it should grow 1.7 percent and 2.5 percent respectively this year and in 2015 – significantly more than the euro zone average. Rigorous stress tests in 2011 should guarantee that the government won’t have to pour money into the banks, and the housing market is stabilising. Some investors may even view Irish bonds’ 50 basis point spread over French ones as too high. Back in 2007, Dublin was considered less risky than Paris.
But markets are fickle. A weak economic recovery could refocus attention on fiscal weaknesses. The euro zone bailout left Dublin with high debt and an interest bill equivalent to 13 percent of revenue this year – more than Portugal, Spain or Italy. The bond market recovery is also a double-edged sword. Falling bond yields help the economy. But they scupper Ireland’s hopes to share the burden of its bank bailout with the rest of euro zone. Being the poster child for EU crisis management has its downside.