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By Carmel Crimmins
January 25, 2012 9:42 AM EST
Ireland launched a bond switch on Wednesday to avoid a near 12 billion euros funding cliff in early 2014 that threatens its ambition to exit an EU-IMF bailout next year.
In the most significant test of market sentiment since it was forced into a rescue programme in November 2010, Ireland's debt management agency offered holders of the four percent 2014 note a new bond falling due in February 2015 at a coupon of 4.5 percent.
"If we look forward at the capacity of Ireland to repay its debts, there is a kind of cliff hanging over us in January of 2014," Finance Minister Michael Noonan told reporters.
"This is the first step in getting back into the market."
Ireland's National Treasury Management Agency (NTMA) offered to buy the 2014 paper at a yield of 4.9 percent, broadly in line with where it is trading in the secondary market.
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The yield, which moves in the opposite direction to the price, had dropped from 5.4 percent on Tuesday as investors who had shorted the 2014 paper moved to cover their positions.
The NTMA, which last issued medium-term paper in September 2010, offered to sell the 2015 paper at a yield of 5.152 percent. Currently it has no debt falling that year.
Ireland wants to return to debt markets next year to cover its borrowing needs for 2014, estimated to be around 24 billion euros, but the maturity of the 11.8 billion euros note in January 2014 is a major hurdle.
The NTMA will seek to switch up to 2 billion euros in Wednesday's swap, a source familiar with the process told Reuters and said the NTMA would likely look at doing more swaps this year.
The offer will close at 1600 GMT and the size of the switch will be announced shortly after.
SMOOTHING OPERATION
Ireland's success so far in meeting its fiscal and banking targets under its bailout has helped cut its borrowing costs on secondary markets and the NTMA said its decision to offer the switch reflected appetite for its short-term paper.
"This exercise will help us smooth the maturity of the bond due in January 2014. The decision to undertake this now reflects substantial demand among investors for our short-dated paper and the resulting decline in yields on Irish paper recently," the agency said in a statement.
Ireland's borrowing costs have nearly halved on secondary markets since the summer, with 10-year paper currently trading at just under 7.5 percent.
The drop is due to Dublin meeting its bailout targets and after changes to the euro zone's new rescue fund reduced the risk of private investors having to take losses if Ireland needs additional official funding.
Most analysts expect Ireland will need to ask Brussels for additional aid next year under a so-called precautionary funding programme due to the combined large January 2014 bond redemption and a budget deficit still forecast to be 5 percent of gross domestic product (GDP) at the end of 2014.
The settlement date for the switch is February 1.
(Reporting by Carmel Crimmins; Editing by Anna Willard)
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