Luck of the Irish

NEW YORK (TheStreet) -- As PIIGS go, Spain and Italy have hogged headlines since July 26 when European Central Bank chief Mario Draghi suggested the bank may purchase Spanish and Italian debt to help ease borrowing costs.

Much less noticed was Ireland, which returned to long-term debt markets the same day.

From every angle, Ireland's auction was a rousing success. The National Treasury Management Agency sold ¿4.19 billion of five- and eight-year debt at average yields of 5.9% and 6.1%, respectively -- below comparable Spanish and Italian yields at the time. Demand was robust, roughly twice coverage for both offerings.

Funnily enough, the auction almost didn't happen. Treasury officials initially planned the offering as a swap, where holders of debt maturing in 2013 and 2014 could exchange their holdings for longer-term maturities -- essentially helping ease Ireland's near-term refinancing burden.

But with Irish sentiment riding high after EU officials reaffirmed Ireland's debt reduction progress and suggested they may relax some bailout terms, Treasury officials made a game-time decision to open the auction to new buyers. Only ¿1 billion worth of debt was swapped; the remaining ¿4.2 billion was purchased with fresh capital.

Why is bailed-out Ireland attracting new investors who don't demand Spanish- or Italian-sized risk premia, to borrow Draghi's pet phrase? Certainly it helps that Ireland was an outlier from the start, with a competitive economy and a relatively manageable debt load.

Ireland's problems stemmed largely from troubled Irish banks, which needed big state bailouts in 2010. Ireland had to borrow heavily to fund the rescues, which ballooned that year's deficit to 32% of GDP, sent borrowing costs markedly higher and ultimately forced Ireland to tap the EFSF for state funding.

Put another way, Ireland had a milder form of Spain's banking troubles, which recently earned a much less stringent EFSF assistance package. Had EU officials been this flexible in November 2010, Ireland likely would have remained on its own two feet.

But Ireland was bailed out, and it received a full austerity mandate from the EU and IMF, a mandate it complied with even though, from a competitiveness standpoint, Ireland didn't need much EU babysitting.

Irish officials dutifully cut spending, trimmed the already lean public sector and raised tax revenue, and the nation has met every deficit target with flying colors.

Ireland's economy also managed to grow 1.4% in 2011, rewarding officials' determination to maintain economic competitiveness by keeping the country's coveted 12.5% corporate tax rate despite some EU officials' pleas to hike it.

Had Ireland made firms' tax burden more onerous, production would likely have suffered and lower economic growth may have kept Ireland from meeting the troika's mandated 10.6% of GDP deficit target.

Instead, Ireland's case proves deficit reduction and low taxes can go hand in hand; 2011's deficit was only 9.3% of GDP, easily besting the bailout's mandate. (A lesson Ireland's neighbors across the Irish Sea would do well to learn from as they embark on austerity.)

Of course, none of this is to say Ireland's completely out of the woods. Irish GDP contracted in the first quarter, and while analysts expect growth over the entire year, data likely remain choppy.

Ireland would also benefit from the relaxation of some bailout terms, particularly the requirement that Ireland repay the banks' private bondholders, which added about ¿30 billion to Ireland's debt load and around ¿3.1 billion in annual interest payments until 2023.

EU officials have suggested they may strike a refinancing agreement in October, which would improve Ireland's fiscal footing and likely further increase investors' confidence in the Emerald Isle.

Yetm while Ireland does have further to go, the successful return to primary debt markets nicely marks all the progress made thus far, and provides the rest of the periphery a timely example of the benefits of economic competitiveness.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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