Tuesday, July 3, 2012

3/7/2012: Curb your enthusiasms?

So, the NTMA have issued a (welcome) note that Ireland is to resume auctions of T-bills. The note states that "on Thursday 5 July 2012. The NTMA will offer €500 million of Treasury Bills with a three-month maturity in its first such auction since September 2010." 



The details of the auction on 5 July are as follows: 
• Auction size: €500 million. 
• Maturity: 15 October 2012. 
• Auction opens: 9:30 a.m. 
• Auction closes: 10:30 a.m. 
• Settlement date: 9 July 2012. 

This is potentially (pending results of sale, namely yield, volume and percentage allocation to non-captive banks and funds) a minor positive for Ireland. Minor, because:
  1. Bills are NOT bonds - bills are short-term instruments, traditionally under 12 months maturity (bonds are over 1 year maturity).
  2. Bills issued currently fall to mature within the period of existent EFSF funding programme, so in effect there will always be funds to cover these, short of a catastrophic collapse of the euro during the duration of the bills.
  3. Issuance of bills has nothing to do in terms of signaling the state of public finances health or economic conditions health of the issuer, as both Greece (see here) and Portugal (here) have issued these during their tenure in the rescue programmes.
  4. Portugal issuance (linked above) covered 18-mos bills, which would constitute a stronger positive signal than that of planned Irish sale, if there was any whatsoever informational content to these auctions.
  5. Ireland has issued T-bills back in September 2010, and then it was NOT a signal of any confidence in Ireland's financial health.
The media statements that this sale shows that 'Ireland is back to bond markets' is fully incorrect. T-bills market is not the same as bond market. And T-bill instruments are distinct from the bonds. For example, T-bills were not covered by PSI default in Greece, unlike bonds.

Funding public spending via T-Bills is a (marginally?) riskier undertaking for the Exchequer because it implies transfer of any potential maturity mismatch risk onto the Exchequer. Maturity mismatch risk arises when the Government uses short-term debt to finance longer-term spending commitments.

So what is the 'positive' then in NTMA news? For now - just a hope we do not get a complete rejection (which is highly unlikely, as NTMA has primed the market already). We need to see results of the auction to tell if things are positive or not - e.g. how high is the demand from outside Ireland? how expensive is the funding obtained compared to secondary bonds markets on shorter maturity end? etc.

H/T for some of the above to: Prof Karl Whelan, Prof Brian M Lucey, Owen Callan (Danske Markets)

Update:  There is a nagging question begs asking - why does Ireland need T-bill? Portugal and Greece might have used T-Bills to manage expenditure in the interim of disbursals of EFSF funds, which, especially for Greece this year, have been uncertain. Ireland is fully compliant with Troika requirements and is getting its money on schedule, with no uncertainty. In effect, therefore, either we are facing a shortfall on funding within the programme (unlikely in my view) or we are using T-bills (more expensive money raising) to finance that which we can finance at cheaper rates via Troika funds. The latter option is double-daft as the repayment of T-bills will be done out of the same Troika money. In this latter case, of course, the motivation can be to simply 'generate feel-good news' by the Government that 'Ireland is back to the (bond) markets'...
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