IRELAND'S SOVEREIGN DEBT -- IN GOOD HANDS

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000167 SIPDIS TREASURY FOR ATUKORALA E.O. 12958: DECL: 04/18/2019 TAGS: EFIN ECON PGOV EI SUBJECT: IRELAND'S SOVEREIGN DEBT -- IN GOOD HANDS REF: A. DUBLIN 156 ¶B. DUBLIN 146 ¶C. DUBLIN 86 DUBLIN 00000167 001.2 OF 002 Classified By: PEO Chief Ted Pierce. Reasons 1.4(b/d). ¶1. (C) Summary: On April 14, Emboffs met with Anthony Linehan, Deputy Director, Funding & Debt Management, National Treasury Management Agency (NTMA) to talk about the Irish government's debt program and the soon-to-be-operational National Asset Management Agency (NAMA). He indicated that the Irish government would have no difficulty raising funds to cover its growing debt load and that recent bond sales have done well. Linehan predicted an average discount of between 25 and 40 percent on the property-related assets that NAMA intends to buy from the banks. At that discount, the Irish government will need to take a greater stake in the two largest Irish banks, which will mean a majority stake in at least one of them. The NTMA is clearly a "steady pair of hands." The government can complement the good work done by the NTMA by sticking to its just-announced five-year fiscal plan (Ref A). End Summary What is the NTMA -------------- ¶2. (U) The NTMA was set up in 1990 to provide a higher-caliber management of the Irish government's debt profile. To that end, employees are on short-term contracts with the NTMA and are outside of the normal civil service pay system. They are paid more so that the agency can compete with the private sector for debt management professionals. The head of the NTMA, Michael Somers, reports directly to the Finance Minister, avoiding the need to vet decisions with senior officials at the Department of Finance. The NTMA, however, does not have a role in deciding the level of debt the government will incur. Their job is to fund any given level of debt and they are given quite a bit of leeway in this matter. ¶3. (C) Linehan admitted that the NTMA has done a poor job of marketing Irish debt, partly because they haven't recently had much to market. There were some in the agency who, until recently, worried that Ireland would soon not need to issue debt. Linehan joked that it was at that point he knew Ireland was in trouble. Ireland needs to market because nobody "needs" to hold Irish debt like they might need to hold U.S., Japanese, or British debt. Finance Minister Lenihan and senior officials in the NTMA will tour financial capitals (New York, London, Tokyo, Frankfurt, etc.) to kick-start a campaign to market Irish debt. The Immediate Task -------------- ¶4. (C) The NTMA needs to raise another Euro 15 billion (USD 23 billion) in 2009 to fund the government deficit and refinancing requirements. (Note: The NTMA has already raised about this much this year, so total financing looks to be in the range of Euro 29-30 billion (USD 45 billion). End Note) The government will need about the same amount next year if the estimates in the supplementary budget hold (Ref A). Linehan doesn't foresee any problem raising this amount and, in fact, said there was "phenomenal demand" for 10-year bonds and that the 3- and 5-year bonds issued earlier this year "sold well." The spread over German debt will be higher than it has been in recent years but Linehan said that these almost non-existent spreads "were the exception rather than the rule" and that current Irish/German spreads are "much more realistic." ¶5. (C) In contrast to the vast majority of those with an opinion, Linehan said that the Standard & Poors sovereign downgrade prior to the April 7 budget announcement was "probably a good thing in that it kept the minds focused on the task at hand." The downgrade (and the Fitch and Moody's downgrades that followed) was widely expected within the NTMA and, according to Linehan, was long overdue. He does not expect that these downgrades will make it any more difficult to raise funds and dismissed the idea that Ireland would default on its obligations. Linehan also described as "a fantasy" the idea that Ireland would leave the euro in favor of a renewed Irish punt. National Asset Management Agency -------------- ¶6. (C) The NTMA will have oversight of the National Asset Management Agency (NAMA),which will be the agency that will DUBLIN 00000167 002.2 OF 002 hold property-related assets purchased from Irish banks. Linehan said that the banks will sell all of their property assets and not just the "bad" ones, so it is a bit of a misnomer to call NAMA a "bad bank." Linehan said that the banks balked at transferring the "good" assets, so Finance Minister Lenihan decided to make it easy on them and take all of the assets. In keeping with this firm precedent, Linehan did not believe the banks would have much say in the pricing of the assets. ¶7. (C) Linehan speculated that the discount to book value of the assets will be, on average, 25-40 percent but cautioned that some assets will be worth far less and others far more. He said the only way to do this right -- and, reassuringly, the way the government plans to do it -- is to go through the books loan-by-loan. The government will contract an outside company (for example, Jones Lang LaSalle, a commercial real estate firm, has done some work on one of the banks' loan books),under the guidance of the NTMA, to conduct this pricing exercise. Linehan predicted that the entire exercise would take until early 2010 because the government must enact legislation setting up the NAMA, will need to find a contractor, and will need to ensure that the labor-intensive process of going through each loan is done right. ¶8. (C) Because there will be a substantial discount on the transferred assets, Linehan thought it likely that the Irish government would have to take an increased stake in the two main banks, AIB and Bank of Ireland. He said that the Irish government would end up with a majority stake in AIB, given its greater exposure to property loans. However, he was optimistic that the plan would reassure international investors that AIB and Bank of Ireland were, as he said, "legitimate banks," and that the government could draw down its stake as other investors stepped in. Linehan confirmed that, if the government re-capitalizes the banks, the funds will come from the National Pension Reserve Fund (NPRF) just as happened during the previous capital injection (Ref C). Comment -------------- ¶9. (C) We left the meeting more certain that Ireland's debt portfolio is well-managed. However, Linehan predicated much of what he said on the assumption that the government sticks to its recently announced five-year plan of moving toward a balanced budget. He's right that no level of financial acumen can overcome a government that is not willing to make hard fiscal choices. The government looks to be getting a better grip on its own accounts and, with the NAMA proposal, the banks' accounts. A good start, but Ireland still has a long way to go. FAUCHER