There is life after bailouts. Dublin is issuing long-term debt for the first time since its rescue in 2010. The deal is expensive funding, but the fact it is being attempted suggests that bailouts needn’t go on forever, or end in default.
Braving merciless markets sounds like a risk not worth taking. Dublin doesn’t need private money right now, and a botched deal might only worsen the febrile conditions pushing Spain and Italy ever closer to a bailout. The proposed pricing looks expensive, allowing Ireland to raise five- and seven-year funds at a yield of 5.9 per cent and 6.1 per cent. Ireland’s existing bailout costs are linked to the funding rate of the euro zone’s rescue fund, the European Financial Stability Facility. The EFSF’s five-year debt currently yields just 1.5 per cent. But the positive message a successful deal would send is probably worth more than the extra borrowing cost. The bond sale is being tagged onto a plan to persuade investors with €14-billion ($17.4-billion) of bonds maturing in 2013 and 2014 to switch to longer-dated notes. If bondholders agree, that should make it easier for Dublin to issue next year, spreading out the funding burden. It would also be a sign of confidence that a Greek-style debt restructuring was unlikely.
Ireland is wisely making the most of a run of good news. Its 10-year yields have fallen by over a percentage point since the euro summit of June 29, when euro zone leaders hinted they might tweak Ireland’s bailout terms to reduce the burden of the bank rescue. However, Dublin is not out of the woods. It must cut its deficit by over five percentage points of GDP over the next three years, in a climate of weak domestic demand. The summit deal is still vague. And Ireland will need to bring down its funding costs from current levels for its debt to be considered sustainable.
The hope is that dipping a toe in the water will spark a virtuous circle of rating upgrades and lower yields. At the very least the deal will allow euro zone leaders, who may soon have to stump up funds for both Spain and Italy, to show their taxpayers that bailouts don’t always mean writing blank cheques.