John C. Corrigan (pictured above), the CEO of the National Treasury Management Agency (NTMA) is one of the best paid civil servants in the country with a basic salary of €480,000 plus an annual bonus of up to 60% of this. It should be said that for 2012 only he has agreed to waive 15% of his basic, bringing him down to €408,000 and he has waived any bonus entitlement for 2011. But he is still a very well rewarded civil servant. How well is he doing in 2012? With Ireland’s notional long term cost of borrowing now at 4.8%, how wise were the bond issuances and swaps earlier this year, and have the actions of the NTMA needlessly cost this country billions of euro?
Here is the complete list of the NTMA’s issuances and swaps of bonds/treasury bills this year
(1) January 2012, €3.53bn of bonds due for redemption in January 2014 were extended to February 2015 at an interest rate of approximately 5.15%
(2) July 2012, €500m of 3-month treasury bills were issued at an interest rate of 1.8% per annum
(3) July 2012, issuance of €1.344bn of bonds due for redemption in October 2020 at an interest rate of 6.1% per annum, issuance of €3.889bn of bonds due for redemption in October 2017 at an interest rate of 5.9% per annum, purchase of €1.04bn of 2013/2014 bonds.
(4) August 2012, issuance of €1bn of 35-year amortising bonds at an interest rate of 5.91% per annum
(5) September 2012, issuance of €500m of 3-month treasury bills at an interest rate of 0.7% per annum
So, in summary we have issued €10.5bn of bonds/treasury bills so far this year at a weighted average interest rate of 5.25%.
And what is the NTMA doing with this expensively acquired cash? Something fiendishly clever you’d wager given the €800,000 a year available to be earned by the NTMA CEO. According to Minister Noonan (see below), because that the State is sitting on a cash balance – approximately €25bn at present – the funds are actually “held in the Exchequer account at the Central Bank where they earn the Euro Overnight Index Average as set by the European Banking Federation on a daily basis.” – currently 0.09%. Yes that’s right, we have borrowed €10bn at a weighted average 5.25% and we have put it on deposit at the Central Bank where it earns 0.09%. You probably have difficulty understanding the logic of this, but chances are, you are not on a €800,000-a-year package.
You might have further difficulty understanding the wisdom of this year’s actions given the current notional interest rate of 4.8% on our 8-year bond. If we had issued the €10bn today, the notional weighted interest rate of this years issuances/swaps would be approximately 4.2% rather than 5.25%. Or in other words, we would be saving over €100m per year on €10bn of debt issued, compared with the path followed by the NTMA.
The actions of the NTMA this year have been defended with the claim they were needed to get the interest rate on our bonds on a downward trajectory as we re-entered the bond market from which we were frozen-out in September 2010. Even if that claim were valid, what the bould John has done is get us to an interest rate which now threatens to jeopardise any prospect of a deal on our bank debt. Think about it, why would any German or French politician consider a request from Ireland to make our debt more sustainable when they see that we are back in the market with interest rates at levels which predated the crisis in October 2010 and the subsequent bailout? If the shoe were on the other foot and Greece came with the begging bowl – and because this Government and the previous administration failed to deal with bondholder issues, that is what we are reduced to, the begging bowl – why would Ireland agree to write off Greek debt when they can borrow at what are now sustainable or close to sustainable rates?
Earlier this week the Sinn Fein finance spokesperson Pearse Doherty asked the Minister for Finance Michael Noonan about the NTMA’s actions this year – the full exchange is below – and the main defence seems now to be that we avoided a so-called “funding cliff” in January 2014 when €11.9bn of previously issued debt fell due for repayment. So at between 16-24 months ahead of when the money was needed, when we would have had continued access to c3% ESM funding in 2014 if sustainable rates were not elsewhere available, the NTMA has decided to issue expensive bonds, place the proceeds on deposit at a derisory rate and has arguably jeopardised the ongoing debt negotiations.
I wonder what the 2012 bonus will be for the NTMA CEO?
Deputy Pearse Doherty: To ask the Minister for Finance further to the issuance on 26 July 2012 of new five-year and eight-year bonds and the exchange of bonds maturing in 2013 and 2014, the reason for the bond issuance and exchange at this time in view of the healthy cash position and remaining Troika programme funding available; the use to which the new funding will be put in the short term, and if the funding is merely placed on deposit or used for the purchase of treasury notes, the interest rate that pertains to such uses..
Minister for Finance, Michael Noonan: In order to enable Ireland to successfully exit the EU/IMF programme, the NTMA’s working plan through 2012 has been to begin to return to the markets on a phased basis, mainly through shorter-term issuance, while also taking advantage of any opportunities to issue longer-term debt.
The EU/IMF programme provides funding to the end of 2013. As at the end of 2011 the Irish State was faced with €11.9 billion of bonds maturing in January 2014, commonly referred to as the funding cliff.
Addressing this funding cliff has been a priority for the NTMA. The transactions to which the Deputy refers are among a number of successful capital market operations the NTMA has taken in this regard during the course of the year so far. In total these long-term capital markets operations have effectively reduced the 2014 funding cliff from €11.9 billion to €2.4 billion. This has removed a major obstacle to full market re-entry and should, in tandem with continued progress on other fronts, help us achieve lower yields.
Proceeds of debt issuance are used to fund the ongoing operations of the State and the balances are held in the Exchequer account at the Central Bank where they earn the Euro Overnight Index Average as set by the European Banking Federation on a daily basis.
NAMA Wine Lake 
On the other hand,
1) We have now averted fears of a default in January 2014.
2) The NTMA have been very oportunistic, managing to place auctions very quickly in the aftermaths of good news or positive developments on the secondary market.
3) Also important to note, that the Troika money (the remainder of the 67.5bn) still be coming to us despite the successful auctions.
I really disagree with your position on this. Playing the long-game seems preferable to playing some hopeful game of ‘Chicken’ with the official lenders.
While this does seem to be raising money at unaffordable rates. The figures above are misleading.
This only gives an increased cash balance of around 5bn, which we may need if any of tail risks faced by European countries occur.
I think it is naive to think that the NTMA could have re-entered the markets in any other way successfully.
If we waited until the troika funding was exhausted and we had no option but to borrow then we would have paid significantly more.
I think the success of the strategy, caused by other factors as well, can be seen in the declining bond yields since we begun dipping our toes in the market.
Since we issued that 5 year bond at 5.9% the yield had fallen by nearly 250bps and at 3.57% is now very much in the sustainable territory.
@Dreaded Estate
Nonsense. The reduction in the funding rate was the work of one Mr Draghi so trying to suggest that the NTMA had any act in this is fanciful. Much more importantly is the thaught that a deal can be achieved on a potential write off of banking debt whilst at the same time continuing to stick out ones chest and pretend we can take this burden on. We can’t, so lets stop pretending. The q2 GDP figures were significantly worse than presented and Constantin Gurdgiev explains why and this gets worse from here not better.
http://trueeconomics.blogspot.ie/2012/09/2092012-flat-growth-is-really-shrinking.html
Without a growth rate at or above the the cost of funds the debt dynamic gets worse. The chances of our GDP growing at or above 3.57% any time soon is laughable. I’m quite sure the personal assistants caring for those incapable of looking after themselves would much rather the €100m lost as a result of this escapade be retained and put to a better public use than in the hands of bond holders across the globe.