Looked at from afar, the Irish story has taken such a nose-dive that many investors prefer to monitor from the sidelines, rather than risk another white-knuckle ride.

This explains why Irish debt is trading so cheaply. It largely reflects fear of the unknown from the point of view of international investors. Remember, late last year buying insurance to protect against Irish default was at the same level as the cost of insurance for the likes of Lebanon.

One of the humbling experiences of the financial crisis has been the loss of Ireland's coveted top credit rating. Ireland has exited the AAA-rated group that includes Germany, France, the Netherlands, Austria and Finland. Instead, Ireland is in the AA group that comprises Spain, Belgium, Italy, Portugal, Slovenia and Cyprus. Below that is the single-A group comprising Greece and Slovakia.

Does this matter? From a bond market perspective, it does. Some investors have ratings limits. But more importantly, the credit rating is correlated with the relative cost of issuing new debt. The lower the rating, the higher the spread Ireland must pay international investors to entice them to buy new bonds. Lower credit ratings makes debt financing more expensive.

Ireland is rated AA at S&P with a negative outlook. As a result, Ireland trades at almost 2% over the German yield on the 10-year maturity, whereas the likes of AAA-rated Finland trades at 0.4% over Germany. But here's the anomaly. Greece is rated low-A at S&P and trades at 1.7% over Germany in the 10-year, ie Greece has a lower credit rating, but Irish 10-year bonds trade cheap to Greece.

There are two possible explanations for this. The first is a liquidity premium. There are more Greek bonds and they have a larger size, and both of these factors can help to boost liquidity.

The more sinister possibility is that investors are in fact bracing themselves for further Irish credit rating cuts, and an ultimate possible convergence on the Greek single-A rating.

We can model credit ratings by looking at debt as a proportion of GDP (debt per income) and GDP per capita (income per person). The former is the problem for Ireland, as the debt/GDP ratio will likely top 100% in the coming years. However, the latter variable is a saving grace. Despite the big bite taken out of GDP, Ireland is still a wealthy economy, and can thus command more debt without tripping too many downgrades.

A convergence on Greek ratings is not likely. Low AA is as bad is it should get.

Investors are in the business of mapping out stress scenarios, and extreme events such as the effective bankruptcy of Iceland makes them nervous, rightly or wrongly, from an Irish context.

Investors in Irish bonds were burnt badly last year and earlier this year. The peak in spread coincided with a period in which global systemic collapse was a risk as confidence evaporated and banks struggled to maintain their solvency. The severity of risk aversion has eased considerably since, bringing with it an outperformance of risky assets, and Ireland is seen as one of those risky assets.

For the long-term investor, there is value. The trick will be to have enough of those positively tinted players getting involved.

Recent auctions have provided evidence that an underlying appetite is there, albeit tentative at times. Provided there are no (major) hiccups, the remainder of 2009 should favour a decent performance for Irish bonds.

Aiming for the 1% over Germany in the 10-year maturity is a first target Critically for the international buyer, it requires confidence that the banking/property issues are fully transparent, and that the forward trajectory is firmly away from the abyss.

Pádhraic Garvey is

a bond strategist at ING Financial Markets