Friday, February 08 09:26:32
The ISEQ is higher this morning at 3,575, up 18 points on yesterday's closing levels as European markets rebound on positive Chinese data and the possibility of a further rate cut from the ECB next month.
Following all the hype from yesterday's promissory note deal Davy Stockbrokers offers it's evaluation:
The government announcement yesterday that it had secured longer-term monetary finance from the ECB will have a significant but not transformative effect on the public finances.
The ECB interest charge remains at 0.75pc on the remaining E28bn of promissory notes, but now with an average repayment term of 15 years.
This compares with the E3.1bn reduction in ELA per annum under the old structure, set to expire in 2020 when IBRC was wound up. On average, this will save the government close to E1bn in debt interest per annum (0.6pc of GDP) - a significant reduction but just one piece of the puzzle to guarantee Ireland's debt sustainability.
The extension of ECB monetary finance of the Irish sovereign will reduce funding needs by E6.2bn in 2013 and E3.1bn in 2014.
However, the Central Bank is scheduled to start selling newly issued bonds of E0.5bn by end-2014, E0.5bn per annum through to 2018, E1bn per annum through to 2023 and E2bn per annum from 2024. This means that the average Central Bank of Ireland holding period is 15 years, during which any interest on the newly issued government bonds will accrue to the exchequer. So, the effective interest cost is still the ECB's re financing rate, currently 0.75pc.
In the short term, additional benefits may accrue as IBRC is liquidated. In 2013, these savings will be negated by a likely E1bn charge on the Eligible Liabilities Scheme. As assets are transferred to NAMA further costs may be incurred as the liquidators value IBRC's remaining assets. These benefits will effectively depend on whether IBRC was overly capitalised prior to the liquidation.
The deal is certainly a considerable achievement for the government.
Effectively, ECB monetary finance has been extended out beyond 2030. This brings the ECB to the limit of its legal constraints on finance of sovereign debt. However, while the gains are considerable, they should be seen in context. The July 2011 decision to reduce the interest cost on Ireland's E67.5bn bailout loans will yield far greater interest savings.
Similarly, attention will now inevitably turn to the January decision by EU finance ministers to consider extending the term of EU bailout loans.
With E6.9bn of EU/IMF debt due to mature in 2015 and E6.1bn in 2016, the Irish government will surely now move to exploit this opportunity according to Davy Stockbrokers.