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


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

  1. 1. Investment Research — General Market Conditions 7. January 2013StrategyIreland – on the road to full market accessToday, the Irish Debt Management Office (NTMA) announced that it is tapping the Key pointsIRISH Oct-17. This is another step in the direction to get full market access for the Irishgovernment. The NTMA is tapping (troughIreland was the first country to walk down the austerity path and since passed 8 Troika syndication) the IRISH Oct-2017reviews even though it has been some tough years with private consumption collapsing bond. Ireland is ratedand unemployment rising to 15%. The effects of the restructuring programme is shown by BBB+/BBB+/Ba1 fromthe recent positive GDP data as well as PMI’s outperforming EU peers. This is driven Fitch/S&P/Moody’s withprimarily by the export industry as domestic demand is still subdued (see charts on page stable/neg/neg outlook3). There is still a long way to go for Ireland, but there is current account surplus, internal This is another step in order todevaluation is ongoing, government finances are improving and the target for deficit in get full market access and shows2012 which was initially set at 8.6% of GDP and revised to 8.2% a month ago is now that the financial marketsprobably around 7.8-7.9% of GDP. continue to believe in the IrishThe financial markets have embraced the Irish restructuring case, and the NTMA came recovery.back to market last year with switch auctions, issuance of T-bills and a true syndicated Given the ongoing restructuringdeal. Irish government bonds has since mid-‘11 outperformed EU peers as shown below. and expected full market access then negative rating cycle thatChart 1. The eturn on Irish government bonds since mid 2011 versus EU peers has dominated the periphery is expected to change and move70.0% Return on EFFAS 1-10Y bond indices since Jun-11 57.7% 58.6% Ireland from a negative outlook60.0% towards a stable outlook from50.0%40.0% Moody’s.30.0% We expect that the spread20.0% 15.7% 11.9%12.0%12.5% 8.5% 9.7% 9.9% 10.7%11.3%11.3%11.4% between Ireland and Italy will10.0% 0.0% 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-Source: Danske Bank market)Furthermore, the Irish banks have also returned to the market with the issuance ofcovered bonds from both AIB and BoI and a subordinated deal by BoI. The covered bonddeals have performed strongly despite the problems in the Irish housing market, whereloan in arrears continues to rise. We are seeing some stabilization in the house prices asshown in the chart below. So with the 4Y deal we are seeing the positive spiral continuefor Ireland on the road to full market access, which is necessary for ratings to improveand to qualify for the OMT programme. 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 Chief Analyst Jens Peter Sørensen +45 45 12 85 17 jenssr@danskebank.dkImportant disclosures and certifications are contained from page 5 of this report.
  2. 2. StrategyThe outlook for Irish government bonds in 2013 – we expect asolid spread tightening to Germany towards 200bp or lowerThe Irish government bonds should be poised for a solid performance in 2013 althoughwe do not expect to see the same stunning returns as in 2011 and 2012. However, theIrish economy continue to be on the recovery path, the external balances looks good, thePMI’s are better than EU peers and public finances are expected to remain on track withthe projections. Ireland’s deficit target for 2013 is set at 7.5%, and should be achievablegiven that the deficit in 2012 is now below 8%.The negative rating spiral that has dominated the peripheral governments should stabilisein Ireland’s case. There is possibility that Moody’s will change their outlook back tostable on the back of the improvement in the public finances and if Ireland regain marketaccess together with sustainable debt dynamic. In Moody’s credit opinion fromNovember 7, 2012, they write that “Upward pressure on the rating could develop if thegovernments continued success in achieving its fiscal consolidation targets, supported bya resumption of sustained economic growth, enables it to reverse the current debtdynamics 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 withECB’s OMT programme, which again provide extra support. Hence, we expect that thespread between Ireland and Italy to converge, and that the spread Germany will convergeto 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 andpossible inclusion in the ECB’s OMT programme.Chart 2. Convergence between IRISH and BTPS – some 15-20bp to go IRISH BTPS 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 0 2 4 6 8 10 12 14Source: Danske Markets2| 7. January 2013
  3. 3. StrategyChart 3. Austerity works – Ireland is returning to positive Chart 4. ... driven by the export sectorgrowth rates 170 170 Current account surplus GDP 2007=100 Germany 14 160 160 EUR Bn 4 % of GDP 150 150 12 << Current account Ireland 2 balance 140 140 10 Spain 8 130 130 0 120 Germany 120 6 -2 Greece 110 110 4 Italy -4 100 100 Trade balance 2 -6 surplus >> 90 90 0 00 02 04 06 08 10 12 14 90 95 00 05 10Source: Danske Markets Source: Danske MarketsChart 5. Irish PMI outperforming peers Chart 6. ... as Ireland regains competiveness 160 Index, 2000=100 16070 PMI manufacturing survey Ireland 150 15060 140 Unit labour costs (ULC), SA 140 130 13050 120 Euro area 12040 110 110 100 10030 Germany France 90 9020 00 02 04 06 08 10 12 00 01 02 03 04 05 06 07 08 09 10 11 12Source: Danske Markets Source: Danske MarketsChart 7. The gap between public spending and revenue is Chart 8. Unemployment have stabilisedclosing 16 Unemployment, % 14 12 10 8 6 4 2 0 00 01 02 03 04 05 06 07 08 09 10 11 12Source: Danske Markets Source: Danske Markets3| 7. January 2013
  4. 4. StrategyChart 9. but the domestic economy is under pressure - private Chart 10. as indicated by the mortgage in arrears that haveconsumption is low been rising Private consumption, (99=100) % of loan accounts in arrears for more than 90 days 170 16% 160 14% 150 12% 10% 140 8% 130 6% 120 4% 110 2% 0% 100 90 99 00 01 02 03 04 05 06 07 08 09 10 11 12Source: Danske Markets Source: Danske Markets4| 7. January 2013
  5. 5. StrategyDisclosureThis research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘DanskeBank’). The author of the research report is Jens Peter Sørensen, Chief Analyst.Analyst certificationEach research analyst responsible for the content of this research report certifies that the views expressed in theresearch report accurately reflect the research analyst’s personal view about the financial instruments and issuerscovered by the research report. Each responsible research analyst further certifies that no part of the compensationof the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressedin the research report.RegulationDanske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subjectto the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. DanskeBank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of theregulation by the Financial Services Authority are available from Danske Bank upon request.The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’rules of ethics and the recommendations of the Danish Securities Dealers Association.Conflicts of interestDanske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in DanskeBank’s research policies. Employees within Danske Bank’s Research Departments have been instructed that anyrequest that might impair the objectivity and independence of research shall be referred to Research Managementand the Compliance Department. Danske Bank’s Research Departments are organised independently from and donot report to other business areas within Danske Bank.Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includesinvestment banking revenues, but do not receive bonuses or other remuneration linked to specific corporatefinance or debt capital transactions.Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Republic ofIreland and may hold long or short positions in, or otherwise be interested in, the financial instruments mentionedin this research report.Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing,trading, brokerage, investment management, investment banking, custody and other financial services activities,may be a lender to Republic of Ireland and have whatever rights are available to a creditor under applicable lawand the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may havecredit or other information regarding Republic of Ireland that is not available to or may not be used by thepersonnel responsible for the preparation of this report, which might affect the analysis and opinions expressed inthis research report.Danske Bank is a market maker and may hold positions in the financial instruments mentioned in this researchreport.Within the previous 12 months Danske Bank, its affiliates and subsidiaries have acted as joint lead manager inconnection with a public offer of bonds of Republic of Ireland and have acted as advisor to Republic of Ireland inconnection with other publicly announced investment banking service.As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services,including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiariesmight seek to become engaged to provide such services to Republic of Ireland in the next three months.Danske Bank has made no agreement with Republic of Ireland to write this research report. No parts of thisresearch report have been disclosed to Republic of Ireland. No recommendations or opinions have been disclosedto Republic of Ireland and no amendments have accordingly been made to the same before dissemination of theresearch report.Other relations, financial interests or facts that may result in a material conflict of interest for Danske Bank and/orits affiliates and/or subsidiaries in relation to Republic of Ireland.On Jan. 7 2013 the authors of this research report had no holding of bonds issued by Republic of Ireland.5| 7. January 2013
  6. 6. StrategyOther personal relations, financial interests or other personal material conflicts of interest in relation to Republicof Ireland:Financial models and/or methodology used in this research reportCalculations and presentations in this research report are based on standard econometric tools and methodologyas well as publicly available statistics for each individual security, issuer and/or country. Documentation can beobtained from the authors upon request.Risk warningMajor risks connected with recommendations or opinions in this research report, including a sensitivity analysisof relevant assumptions, are stated throughout the text.DisclaimerThis report has been prepared by Danske Research, the fixed income research department of Danske BankMarkets, independently of the Company and the information and opinions in this report are entirely those ofDanske Bank Markets as part of its internal research activity and not as a sponsor of the Offer or as a manager orunderwriter of the issue or as agent of the Company or any other person. In particular, any projections or forecastsexpressed herein are, unless otherwise attributed, entirely those of Danske Bank Markets and do not representthose of the Company or any other person. Danske Bank Markets has no authority whatsoever to make anyrepresentation or warranty on behalf of the Company or any other person in connection with the proposed Offer.Although reasonable care has been taken to ensure that the facts stated and the opinions expressed are fair andreasonable, neither Danske Bank Markets nor the Company has independently verified the contents of thisdocument. Accordingly, no representation or warranty, express or implied, is made as to the fairness, accuracy,completeness or correctness of the information and opinions contained in this document and no reliance should beplaced on such information or opinions. The information and views given in this document are subject to changewithout notice. 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