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Ireland and Portugal aim for full return to capital markets

Published on 08/07/2012

Ireland and Portugal, two eurozone countries bailed out by EU/IMF rescue packages, could return to long-term capital markets next year, but analysts wonder if their struggling economies will be ready.

Ireland, the former “Celtic Tiger,” and Portugal were forced to turn to the European Union and International Monetary Fund for financial help after they were devastated by the 2008-2009 global financial crisis.

Since November 2010, Ireland has received 85 billion euros ($105 billion) in aid, and since May 2010 Portugal has received 78 billion euros.

Access to the cash, however, depended on agreeing to austerity measures that included public spending cuts accused of contributing to the onset of deep recessions in both countries.

Greece has been thrown three international lifelines worth almost 350 billion euros but its economy is still in shambles and no one expects it to return to sovereign debt markets anytime soon.

On Thursday, Ireland took its first tentative step back into private capital markets as it raised 500 million euros in a modest issue of three-month bills.

It was the first time in two years that Ireland had been able to borrow on the open market.

A full return with bond issues of up to 10 years will take a little longer.

“Ireland can theoretically return to the markets next year, but for Portugal it’s a little more complicated,” said bond strategist Rene Defossez from the French investment bank Natixis.

Lisbon’s first debt maturity not covered by rescue money falls in September 2013.

Currently, investors think Ireland is faring better than Portugal, as previously issued Irish 10-year bonds trade on secondary markets at a rate of around 6.0 percent.

Portugal’s 10-year rate is 9.9 percent — unsustainably high but a considerable drop from the 12 percent peak hit in May.

Other eurozone countries are struggling as well.

The comparable Spanish rate stood on Friday at 6.9 percent, dangerously close to the 7.0 percent threshold at which other countries had to ask for help.

A level of 6.0 percent or higher is considered unsustainable over the long term.

Cyprus has also asked for help from the EU and IMF and Russia, and investors are jittery about Italy.

Portugal has promised creditors it will achieve a public deficit equivalent to 4.5 percent of gross domestic product this year and cut that to 3.0 percent, the theoretical EU limit, by the end of 2013.

But several economists think Portugal might request an extension of its aid package.

“This is the only nation to have had little growth since it joined the eurozone. Portugal has a lot to gain by prolonging its rescue plan,” noted Gilles Moec, a senior economist at Deutsche Bank.

Portugal has not been entirely isolated from the markets either however, having regularly obtained short-term loans guaranteed by the rescue funds.

Marie-Anne Allier, a manager at French asset management firm Amundi, said IMF and EU officials think Portugal and Ireland remain on target but felt the key factor in determining their success remained growth — or lack thereof.

“There are worries about the growth levels in 2013 and the ability of these countries to continue being good students,” Allier said.

Economic projections for Ireland and Portugal remain bleak, with a leading Irish think tank forecasting last month that the economy would grow by a less-than-expected 0.6 percent this year provided Dublin can maintain its export trade.

Ireland wants to relax austerity measures meanwhile, Irish broadcaster RTE said, but EU officials in Brussels seem reluctant, and the outlook for both countries will only become clear once the eurozone crisis ends.

Developments at a recent EU summit in Brussels gave rise to some new hopes, however.

“My belief is that if these countries cannot return to the markets as planned, it won’t be their fault,” Allier said.

“It will be above all because of the crisis throughout the eurozone.”