ECB president Jean-Claude Trichet: purchasing a lot of Greek bonds

Buffeted by the eurozone sovereign-debt crisis, some observers see continuing challenges for Ireland. On 20 July, the National Treasury Management Agency will tap the market for more borrowings. Three days later the EU publishes its stress tests into Irish and other European banks.

But is Ireland on the right track? For how much is the ECB buying eurozone debt? How will the crisis pan out? The Sunday Tribune asked the views of commentators and analysts.

Ciaran O'Hagan, Head of Paris rates strategy, Societe Generale

How would you describe what is going on in the eurozone debt markets now?

The European Central Bank (ECB) is buying and investors are selling. There is an uneasy truce – investors continue to be… sellers of high-yielding sovereigns, with one very big exception: the €6bn worth of bond buyers for Spain [last week]. That potentially gives a boost to confidence in the high-yielding sovereigns.

The ECB has been buying Greek bonds, only in the secondary market. We estimate that about 70% of the bonds purchased by the ECB so far have been Greek bonds.

The NTMA will have no problem selling its bonds over the next few months. Ireland is also lucky in being a small player. It is rolling in cash. I think the fact that the ECB is buying eurozone debt has been seen by investors [as a sign] that they need to get out. It has been very negative for the sovereigns concerned. It is like waving a red flag. It is a sign that the interests of bondholders have been subordinated to political interests.

The ECB started off promising to be tough to Greece. So instead of asking Greece to stand on its own two feet and make do with what it had got, it actually gave more cash to Greece. This has been very hurtful to investors. What is the situation now? Greece can borrow for three years at a floating rate not far from 4% and at a fixed rate of a bit over 5%. It is a subsidised lunch, not a free lunch.

How will the crisis pan out?

I would emphasise the importance of sovereigns standing on their own feet. After the debacle of Greece, Ireland, Portugal and Spain must not enter the clutches of the IMF and the European Union fund.

It is imperative, especially for Ireland, that thought is given to protecting the interest of the taxpayers, not just the banks. The decision in Ireland has been taken to protect all the banks and for no one to suffer any losses and to prevent foreign banks from coming in and taking over their assets. I think it is imperative now that the Irish taxpayer is protected from further costs on the banking side – across all the banks.

There is going to be a stress-testing system published in the next two or three weeks which is going to throw light on the whole issue.

That could be the kind of occasion for Ireland to reinforce the creditworthiness of the taxpayer, of the sovereign. It is in the hands of the government. The Irish government can continue to favour banks and bank investors or it can give greater emphasis to the interests of its own taxpayers.

Is the 20 July NTMA auction a challenge?

I would not call it a major test. The amount for sale is small. I think with enough discount, as Spain showed, it will work. So I expect the July tap by the NTMA to go with no problem. Part of the problem is that because the [Irish] government has so much money tucked away it allows [itself] to continue its policy of supporting bank investors. It has total liberty to continue on this policy of favouring bank bond holders.

Alan McQuaid, Chief Economist, Bloxham Stockbrokers

How would you describe what is going on in the eurozone debt markets now?

To my way of thinking, the situation in the eurozone is stabilising. It seems to me that the Spanish and Portuguese have been taking some corrective steps. I suppose you could always ask for more, but my colleagues who deal with them seem not unpleased at what has been done.

As for my own two concerns, Ireland and Greece, I was very interested in the Department of Finance increasing its GDP growth forecast. There are also indications from the second quarter that things have got a bit better. Clearly that will take a long time to work through. That will be another milestone, when and if it occurs. The government's finances also appear on target – that is also a good sign – and inflation is still negative, which is probably a good thing for competitiveness.

How will the eurozone crisis pan out?

There will be a continuous improvement in the growth rate for the majority of countries. That will become apparent every three months. Some will stand out. We expect Greece GDP not just this year, but next year, to fall. The IMF seems reasonably pleased at its performance against targets. It will leave it with a 8% deficit but that is an awful lot better than the 13% deficit it had last year.

The next test for Greece and Ireland?

The next test is the following year. In Ireland, we want to see a successful end to the process of Nama taking on all the big property loans. We expect it to meet that target. We would hope to see growth continue throughout the year. We would like to see government revenues recover as much as possible. The Irish government has managed from a public relations viewpoint the changes forced on it by Eurostat very well. In Greece, it is a bigger and slower problem. We would like to see the government pass its reforms through parliament.

On ECB sovereign bond purchases?

We know the ECB is winding down its lending to banks, making it less readily available. I suspect that it is doing the same on its purchases of eurozone debt.

Chris Pryce, Fitch Ratings Director Who Watches Greece and Ireland

How would you describe what is going on in the eurozone debt markets now?

The situation now is that the markets and the authorities are diverging. The markets take the view that Greece will restructure or default some time in the next few years, and that the policy makers are in denial. I think the only solution is for the fiscal austerity deadlines to be extended.

How will the crisis pan out?

More than one house in the UK is talking about the break-up of the euro. You have stress tests on European banks on 23 July and the ECB's Jean Claude Trichet seems to believe that this will sort things out. I am not so sure.

Next test for Ireland?

We have a bond auction on 20 July. The NTMA will get it away at a higher rate.