Ireland: Next stop OMT and a ratings upgrade

LONDON, March 13 (IFR) - Today's EUR5bn 10-year sale takes Ireland a step closer to having full market access, and paves the way for the sovereign to become the first eurozone country to meet the strict conditionality of the ECB's OMT program.

Early this year the Irish Finance Minister Michael Noonan said: "The ECB would probably say a significant issuance of 9-year paper - maybe twice - and then they would call that full access". All that is needed now is for Ireland to tap the new 10-year, and it would likely meet that "maybe twice" criteria.

But the breakdown of today's sale will be just as important, given the ECB president told us last week that a return to the market requires that a country be able to issue along the yield curve, to a fairly broad category of investors, and in certain quantities.

We remain constructive on Ireland, and while the spread narrowing against Germany has stalled, it is positive how the sovereign has behaved, especially against Italy. We like Ireland outside the OMT 1-3yr maturity, and also look for the 2s/10s curve to flatten further.

Not only do investors have a lot of catching up to do when it comes to positioning, but the likelihood is that rating agencies will now upgrade Ireland, which could help maintain a virtuous cycle. The current 10-year spread implies a rating for the sovereign much better than the actual Ba1/BBB+.

A look at the CDS curve for Ireland and comparing this to a ratings averaged CDS curve suggests that Ireland trades more like a low single A, as opposed to a triple B.