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Noonan dismisses plan for government bonds linked to tax income

Fianna Fáil’s Michael McGrath had asked the finance minister to consider a bond specifically linked to exchequer returns.

Image: Eamonn Farrell/Photocall Ireland

THE FINANCE MINISTER Michael Noonan has dismissed a Fianna Fáil suggestion that the government consider issuing a new line of government bonds where returns would be linked to Ireland’s tax income.

Fianna Fáil’s Michael McGrath had asked Noonan to consider a tax-backed bond where any rise or fall in the exchequer’s tax incomes would be reflected in the payouts made to investors lending to the country.

McGrath had proposed that these bonds be given a preferred status, which would allow Ireland to reduce the costs of servicing its debts if tax income was to fall, but which would also see costs rise as the national income grew.

Noonan said investors already considered tax receipts to be a fundamental source of the returns for their bonds anyway, and would generally not allow themselves to be nudged down the pecking order of sovereign creditors if a new tax-backed bond was considered.

“Furthermore, even if tax backed bonds were to be issued at a lower yield, an increased cost may be demanded from other bond investors who would not have been offered similar terms,” Noonan said.

The government would also have to rely on what the minister called a “potentially diminished pool of revenue streams” in order to cover the interest payable to the holders of more traditional bonds.

“Due to current market conditions, investors are reacting very negatively to any perceived or potential future subordination of their claims.

“The uncertainty caused by the widespread introduction of tax backed bonds could be expected to lead existing investors to reduce their holdings of Irish Government bonds, thus adversely affecting the yields on all new issues of Irish Government debt,” Noonan said.

Ireland has not issued any new government bonds since September 2010, the last auction before Ireland was frozen out of the bond markets and left requiring an EU-IMF bailout.

The National Treasury Management Agency did undertake a ‘switching offer’ in January, however, where it swapped €3.53 billion of bonds due in January 2014 with replacements which do not mature until February 2015.

It also intends to issue an annuity bond to pensions companies in the coming months, depending on the investor demand.

Read: Back to the markets: NTMA prepares to issue annuity bond

About the author:

Gavan Reilly

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