Ireland's insistence that it is different from Greece and the rest of the euro zone periphery appears finally to be striking a chord among investors.
Irish sovereign debt prices staged an impressive rally this week in spite of growing bond market volatility elsewhere in the euro zone, which was hit by doubt over the effectiveness of the latest bailout plan for Athens and concern about the ability of Italy and Spain to weather the storm.
While Madrid and Rome have only come under heavy market pressure over the past several weeks, Dublin is a veteran of the regional debt crisis, and its long-running efforts to tackle its banking and fiscal problems -- together with a relaxation of the terms of its 85 billion euro ($122 billion) international bailout -- are encouraging investors to take a second look.
I think there is a re-rating by the market of Ireland, said Fergal O'Leary, head of capital markets at Glas Securities in Dublin.
There is a growing feeling among international guys that Ireland has faced up to its problems, it is doing what it needs to do.
Unlike fellow bailout recipients Greece and Portugal, Ireland is meeting its budget deficit targets and has been singled out for praise by the International Monetary Fund and the European Union for its determination to get its annual deficit, still the largest in the euro zone as a proportion of gross domestic product, under control.
Although Ireland is mid-way through an unprecedented eight-year cycle of austerity, social unrest is almost non-existent and unlike Greece and Portugal, Ireland is expected to return to economic growth this year because of a vibrant export sector and the flexibility of its economy.
The Irish government has been trumpeting these points for months, but it is only in recent days -- during which Europe agreed to relax the terms of Dublin's bailout as part of a new approach to Greece, and a group of U.S. and Canadian investors saved Ireland's largest bank from effective nationalization -- that investors took notice.
Yields on Irish 10-year government bonds have tumbled to around 11 percent from a euro-era high of over 14 percent hit last week. Trading volumes have risen to over three times usual levels.
Portugal's 10-year yield has dropped more slowly, by about 2 percentage points to 12.7 percent. Spanish and Italian yields are much lower, in the area of 6 percent, but they have risen sharply in the past week.
It's real money and hedge funds coming in to cover shorts, but I would suppose the market is still extremely short there, said one bond trader of Irish debt. It's funny, there are no offers in the market now, whereas before there were no bids.
DIRTY LAUNDRY AIRED
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I don't think the importance of that can be under-estimated for the international credibility of Ireland, said Ryan McGrath, a bond dealer at Dolmen Securities in Dublin.
It put confidence back into the Irish story.
The scale of Ireland's banking crisis has been a major deterrent for investors, but Dublin's shock-and-awe response has impressed.
The decision to purge the banks of their risky land and development loans, shrink the sector from six players to just two and put a 70 billion euro price tag on bailing out the sector, has persuaded many investors that there are no further nasty surprises lurking.
All of its dirty laundry is out there for everyone to see and it's trying to wash it as opposed to other countries where there is a perception, whether it's reality or not, that maybe not everything is out there yet, said O'Leary.
Despite recent Europe-wide stress tests of banks' financial health, uncertainty still reigns in Spain over the scale of losses linked to that country's decade-long property boom, which ended nearly four years ago.
NOT OUT OF THE WOODS YET
Ireland's bond rally, while welcome, does not necessarily mean the country can avoid seeking a second bailout when its current program runs out at the end of 2013.
Its domestic economy remains extremely weak and the government needs a turnaround in private demand if it is to reach the sort of annual growth rates necessary to make inroads into its debt burden, which is projected to peak at around 120 percent of GDP in 2013.
Even before the 2 percentage point cut agreed in Brussels last week, Ireland's average 5.8 percent cost of funding under its current rescue package is still far below the yield on its 10-year paper. Bringing that yield down to levels at which Ireland can finance itself affordably in the market may remain impossible as long as the Greek crisis is unresolved, causing investors to worry about the stability of the euro zone.
Meanwhile, yields on Irish shorter-term debt continue to trade higher than the benchmark 10-year yield; the two-year government bond yield is near 15 percent.
This indicates the market believes Irish debt may be restructured in the next couple of years, perhaps as part of a deal on a second bailout, in the same way that Greece's second bailout involves a bond swap in which banks will take losses.
Ireland's yield curve may have to regain a normal, upward-sloping shape before many investors regain confidence in the country's debt.
There's a feeling that perhaps the worst is over for Ireland, said Ben May, European economist at Capital Economics. It's certainly not out of the woods.
(Additional reporting by Andrew Khalip in Lisbon; Editing by Andrew Torchia)