The Fighting Irish

Ireland took its first step back toward primary debt markets Thursday—its first offering since September 2010, two months before its bailout—and the €500 million auction was a success. The Treasury met its target, yields were a competitive 1.8% and demand was 2.8 times coverage.

Though the offering was small, in our view, the significance isn’t tiny. Ireland hopes to issue medium- and longer-term debt by early 2013, and Thursday’s results suggest investors have a healthy appetite for Irish debt and don’t require a huge risk premium to hold it. Plus, Ireland’s nine-year yield has fallen to 6.3% on secondary markets—on par with pre-bailout levels and below Spain’s 10-year yield.

Which makes sense, considering Ireland’s situation in 2010 is, in some ways, comparable to Spain’s now. Ireland, like Spain, needed help recapitalizing troubled lenders—and, also like Spain, had an otherwise relatively manageable debt load. However, where Spain approached the EFSF directly for bank bailout help, Ireland was on its own, initially. The Treasury borrowed heavily to fund bank recapitalizations in 2010, ballooning that year’s deficit to 32% of GDP and sending borrowing costs skyward—ultimately forcing Ireland to seek help with government financing.

Had a bank rescue package comparable to Spain’s been available at the time, chances are Ireland would have requested and received it, not a full state bailout. If Spain, as officials agree, doesn’t need a full austerity mandate, Ireland certainly didn’t. From the start, Ireland was the odd PIIG out. Its economy was (and is) one of Europe’s and the world’s most competitive. The World Bank and Heritage Foundation rank it ninth globally for ease of doing business and economic freedom. Ireland’s private sector is robust, thanks in part to its 12.5% corporate tax rate—Europe’s lowest—which makes running businesses cheap and easy for Irish folks and makes Ireland a top destination for foreign firms’ European operations. The public sector’s also lean: The government workforce is relatively small and, where Spain’s privatization program is just starting, Ireland’s shed billions of euros in state assets since 1991.

Even so, Ireland accepted its medicine and has met all mandated austerity targets. Through June, 2012’s deficit was nearly €1.4 billion below last year’s. It’s also complied with the IMF’s mandate to repay banks’ private bondholders, which added about €30 billion in high-interest promissory notes to Ireland’s balance sheet. Debt service on these is roughly €3.1 billion annually through 2023.

Ireland has repeatedly asked the IMF and ECB for help restructuring these notes, but the requests fell on unsympathetic ears until last week’s EU summit, when officials decided Ireland perhaps deserves Spanish-style leniency after all. The Summit Statement said eurozone finance ministers “will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme.” This suggests that once (and if) the eurozone establishes its “single supervisory mechanism” for banks, the EFSF will transfer bailout liability from Ireland’s balance sheet to the banks themselves—just like Spain’s. This would erase a large chunk of Ireland’s debt load and relieve its debt service burden, which is about 16% of Ireland’s 2012 expenditures to date, likely further enabling its return to capital markets.

Still, Ireland’s not out of the woods—unemployment remains elevated and economic growth is choppy, though GDP grew 0.7% in 2011. But Thursday’s debt sale is more evidence Ireland’s progressing nicely and, perhaps, a sign of things to come.