Bond Exchange Programmes

A number of initiatives have been taken by the NTMA over the years to improve liquidity in the Irish bond market with the objective of reducing borrowing costs for the Government:

Bond Switch Programme January 2002

8 billion euro of two old benchmark bonds retired.

Two new benchmarks issued - 4.25% Treasury Bond 2007 and 5% Treasury Bond 2013 500 to 700 million euro of one or other of the new bonds will be auctioned each month.

New bonds will be listed on EuroMTS electronic trading platform from June 2002.

The 2016 bond will be listed on domestic MTS.

In January 2002 the NTMA conducted its first major bond switch since the 1999 Securities Exchange Programme. Two of Ireland's benchmark bonds (the 3.5% 2005 and the 4% 2010) were by end 2001 "off the run" in terms of their euro zone peer group. The NTMA wished to create two new benchmark bonds that would have a good shelf life and that would be of sufficient critical mass (5 billion euro) to join the Euro MTS electronic trading system by mid year 2002. The best way to achieve these twin strategic aims was to offer investors switching terms out of the old 3.5% 2005 and 4% 2010 Treasury Bonds into two new "on the run" benchmark issues, the 4.25% Treasury Bond 2007 and the 5% Treasury Bond 2013.

In January 2002 the switch was successfully conducted via the NTMA's Primary Dealers.

Some 56% of the 2005 bond and 77% of the 2010 bond was exchanged into the new 2007 and 2013 bonds respectively on the day of the switch. Since the switch the Agency has bought back some additional amounts of the 2005 bond so that the total amount retired now exceeds 60%. Consequently both the old 3.5% 2005 and the 4% 2010 Treasury Bonds have ceased to be benchmark bonds as more than 60% of the amount in issue has been retired.

Securities Exchange Programme May 1999

In 1999, following the launch of the euro, the Agency decided that a major initiative was required to ensure that Irish bonds traded effectively in the new euro denominated pan-European market. The initiative taken was the Securities Exchange Programme.

The rationale underlying the Programme was the Agency's belief that, in order to be competitive in the new euro environment, Irish Government bonds must have relatively large issue size and technical characteristics analogous to those in other euro zone markets.

The Agency set out to address the above issues, within the constraints of the overall limited size of the Irish Government bond market, by consolidating about 80 per cent of the market into four bonds, each with outstanding amounts of euro 3-5 billion, with coupons around current market yields and technical characteristics similar to bonds in other European markets.

In the absence of such an initiative, there was a risk that the bonds would trade at yields inappropriate to Ireland's credit rating.

Execution of the Programme

The Exchange Programme was launched in May 1999 with the majority of transactions taking place in three phases, viz. on 11th, 17th and 25th May. On completion of the third phase over 91 per cent of the outstandings in the old bonds covered by the Programme had been exchanged for new bonds.

As a result of the Exchange Programme the ratio of General Government Debt (based on nominal value ) to GDP was increased by some 5 percentage points. Notwithstanding this, the ratio was 55.8 per cent at end 1998 and, at end 1999 it had fallen to 51.9 per cent including the effects of the Exchange Programme at end 1999. The Programme did not affect the economic value of the outstanding debt. Cashflow savings represented by the lower annual coupons on the new bonds offset the addition to the capital stock of the debt.

The following table sets out the amounts of old bonds bought back and new bonds issued under the Exchange Programme as at 26 May, the day after the completion of the third phase.