Interview, John Corrigan, CEO, NTMA: Europe’s comeback kid
John Corrigan must have known he was not taking on the world’s easiest job when he became CEO of Ireland’s National Treasury Management Agency (NTMA) in November 2009. The National Asset Management Agency (NAMA) ‘bad bank’ had been set up to recapitalise the country’s ruined financial institutions, and plans were afoot to carve out a chunk of the National Pension Reserve Fund (NPRF) for the same purpose.
But the sheer scale of the funding crisis in 2010 still came as a shock. By the end of Corrigan’s first year in charge, Ireland was turning to the EU, ECB and IMF ‘Troika’ for €67.5bn of emergency financing. The country’s GDP was €165bn.
“This was absolutely huge and traumatic in the context of the Irish economy,” says Corrigan, four years on and a few weeks from retirement. “We do booms very well in Ireland – but we are pretty good at busts, too.”
A year after it left the Troika programme we now know Ireland is not bad at recoveries, either. It repaid the trust of the Troika and its unilateral lenders handsomely in blood, sweat and tears – and a 20% reduction in primary government spending, mirrored in the private sector. This brutal internal devaluation, combined with natural strengths in both service exports and FDI, has resulted in four years of current-account surpluses. Unemployment is 11%, but employment has been rising – a sign that the emigration catastrophe of the 1980s has not been repeated.
There are good reasons to stick around: GDP growth of 2% is expected for 2014. A primary budget surplus looks likely for 2014, and by next year the full fiscal deficit should come in under 3%, freeing it from the EU’s Excessive Deficit Procedure. It looks like debt peaked at 123% of GDP a year ago. Account for government assets, including those held by NAMA, and net debt-to-GDP is more like 85%.
“There has been a massive turnaround,” as Corrigan puts it. “We feel we justify a yield on our bonds closer to Belgium’s.”
In fact, on 10-year paper Ireland trades around 64bps over Belgium. For Corrigan, this is an all-too familiar story of markets and rating agencies – “pretty ineffective throughout this crisis” – lagging reality. Standard & Poor’s and Fitch have upgraded Ireland to A- this year, but Moody’s only to Baa1.
This has not always been to the NTMA’s disadvantage, of course. Because Ireland was still at AAA until well into the spring of 2010, the Agency got a five-year bond away at a yield of 5% in January that year. Within a year and a half, two-year yields leapt from 1.4% to 14%.
“In better times we presented the proportion of foreign ownership as a strength but now those investors suddenly questioned whether they were natural holders of Irish paper, after all,” says Corrigan. “Anyone that bought the January 2010 issue was nursing a capital loss of 44% by July 2011, when yields peaked. That led to some difficult conversations.”
But there was a reason yields peaked in summer 2011. Just as the ratings-guided holders jumped, the hedge funds, emerging market funds and others doing their own analysis started buying. Franklin Templeton, in particular, built a considerable position.
“When we entered the programme, I asked the team, ‘What do we do now? Wait until 2014 to talk to the market?’” Corrigan recalls. “We decided to mount a major marketing campaign based on our politicians’ commitment to deliver on the Troika programme, and since it was clear there was no point going to those who went with the rating agencies, we identified over 200 new investors to meet twice a year. This required a lot of change management within NTMA and it is testament to the sophistication of the team that we were able to provide our new investors with all the data they needed to keep up-to-date with our progress.”
Yields tumbled and Ireland managed to return to the market by 2013, before it had exited the Troika programme. Today, the country is pre-funded through 2015, and its debt portfolio average interest rate is just 3.9%. Remarkably, two-year yields recently dipped below zero. “How times have changed,” Corrigan notes, wryly.
Changing times bring new liability-management plans onto the agenda. The first priority is €22.5bn in IMF loans denominated in Special Drawing Rights, which now look costly next to equivalent fixed-rate euro bonds. These look likely to be repaid.
“Refinancing those loans will certainly increase the number of bonds coming onto the market, but we will be very circumspect in managing that,” Corrigan says. “We remain very engaged with our investors – ours is a small market so we have to work hard, telling the right story to catch investors’ eyes.”
The main story is the spectacular fiscal recovery, of course, but innovative products could help, too. The amortising bonds issued during 2012-13 to back Ireland’s ‘sovereign annuities’, part of a strategy to improve Irish pension funding, attracted interest when yields were more generous but have been less successful since they came in. But the time may be approaching for Ireland finally to join Europe’s select band of inflation-linked bond issuers.
“Under the Troika it just hasn’t been the time to innovate,” Corrigan says. “We’ve stuck to very orthodox 10-year issues over the past year or so for the same reason. But inflation-linked and longer maturities are still on the agenda, and the price would be good for us, now.”
If debt management is starting to normalise, the crisis probably changed NTMA’s investment function for good. This year’s NTMA (Amendment) Act formalised the transformation of the €7bn left in the NPRF after bailing out the banks into the Ireland Strategic Investment Fund (ISIF). As the name suggests, this will pursue a domestic mandate – as well as a mandate for economic impact.
“In the first instance any investment must generate an acceptable risk-adjusted return,” says Corrigan – previously the CIO of the NPRF. “But on a secondary basis it should also have a positive economic impact. It will take a while to invest the fund – perhaps three to four years – because we need to be disciplined.”
Nonetheless, even before ISIF was official, the NPRF financed a €550m water-metering project, committed $50m (€64m) to a joint venture with China Investment Corporation, and invested in more than 60 small Irish companies through venture capital funds.
“This has meant a complete renewal of our investment skills,” Corrigan says. “But the expectation is that we would not represent 100% of any new money going into any new enterprise – which doesn’t guarantee success but it is at least peer-group validation of commercial viability. It also helps us to leverage our assets.”
Corrigan is hopeful that ISIF will become an “evergreen” investment vehicle to boost the economy. However, the new Act does set out government powers to tap the fund for bank bail-outs again should they be needed, and Corrigan himself adds that the idea of a pensions-related fund probably is not dead.
“The median age in Ireland is 35, compared with the EU average of 41, so today it makes sense to use these assets to stimulate our economy,” he says. “Nonetheless, we have a huge pension fund sector in Ireland that, it’s fair to say, is not in the best shape, and as that will have to be addressed I would not discount the possibility that this fund might one day revert to its original role as a pensions reserve fund.”
As Corrigan prepares for his own retirement from the NTMA he can reflect that Ireland can now afford to focus on these longer-term questions rather than imminent crises thanks in no small part to the job he and his team have done over a very eventful five years.