Ireland is considering issuing sovereign annuity bonds for the first time, to attract life insurers offering European sovereign annuities. The proposed bonds underline the sovereign's improving financing flexibility, although it is still uncertain what degree of market access can be maintained after Ireland's EU/IMF programme expires. The National Treasury Management Agency expects to raise EUR3bn-5bn over the next 18 months from a combination of annuity and inflation-linked bonds.
The bonds are a response to a change of legislation in October 2011, which introduced sovereign annuities schemes. These schemes will increase the demand for Irish sovereign bonds from pension providers, because they offer greater flexibility as to which sovereign bonds the pension provider can purchase.
The desire of Irish banks and households to reduce leverage in the face of falling house prices means their capacity to buy additional sovereign debt is limited. However, pension funds need to purchase annuities, and these are now attractive at the yields Ireland is paying.
The Irish sovereign began its return to the capital markets last month by issuing Treasury bills, offering investors a switch to longer-dated bonds as well as the sale of a new 2017 bond. The sale of the new 2017 bond and the tapping of a 2020 bond attracted EUR4.19bn of new money, which means Ireland has now covered a significant proportion of its EUR8.2bn January 2014 bond maturity. Domestic investors accounted for 34%, and international investors 66%, of the combined switch and outright sales.
The recent financing measures have added to Ireland's positive credit momentum; as we have said before, this improves its chances of making a full return to the bond markets later this year. However, market confidence remains extremely fragile, and a further escalation of the eurozone crisis could thwart the sovereign's return to the capital markets.
The 'BBB+'/Negative rating on Ireland reflects a fiscal deficit which is still large; and the fact that as an open, export-driven economy with an EU/IMF programme, it is susceptible to contagion from an intensification of the eurozone crisis. This contagion could come through worsening economic growth and falling demand for its debt.
Should Ireland fail to fully regain access to the bond markets in the short term, we expect official creditors to extend fresh financing without bondholder "bail-in", because Ireland's programme has stayed broadly on track.
The annuity bonds would pay a stream of principal and interest linked to sovereign bond yields for up to 35 years. Irish pension funds are the most likely buyers of these instruments.
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