US Mutual Fund Places Large Bet on Irish Economy

on Sep 3, 2012

According to the FT, a leading American player in bonds investment has become Ireland’s biggest creditor. Michael Hasenstab, the financial guru who runs the Templeton Global Bond Fund, has used the vast pool of investment funds at his disposal to place a €6.1 billion (£4.84 billion) bet on Ireland’s economic recovery.

The Templeton Global Bond Fund, part of Franklin Templeton Funds, is a $61 billion (£48.32 billion) mutual fund which can boast a remarkable performance over the past 8 years, presenting its investors with negative results only twice during that period –in 2005 and 2011. And the fund has rebounded from last year’s loss with an 8.7 percent return through August of this year. Its huge portfolio consists largely of fixed interest investments in South Korea, Malaysia, Poland and now Ireland but the fund has also diversified into other countries’ debt as well as placing just over 10 percent in money market investments.

The FT reports that the fund has been adding to its positions in Irish debt throughout 2012, including the July bond sale, the first sovereign offering since the former Celtic tiger was bailed out by the Eurozone. Mr. Hasenstab demonstrably seems to have a positive view on Ireland’s economy going forward. “It will be challenging but Ireland continues to take the necessary steps on the road toward recovery,” he said.

!m[](/uploads/story/329/thumbs/pic1_inline.png)Ireland has welcomed the Templeton Global Bond Fund’s large investment as a much-needed vote of confidence in its economy. Opined the republic’s finance minister Brian Hayes, “They [the fund] see Irish debt as very good value and have taken a firm decision that the Irish economy is recovering, has turned the corner and they will be paid back…..They will yield a substantial dividend from it.”

On the other hand, rival bond managers have been critical of Templeton’s huge foray into Irish debt. According to one, if the fund gets it right, it might reap amazing returns but in the event of the Irish economy heading south, the fund will find it almost impossible to liquidate its Irish debt positions at any price. Others note that the country’s fair performance on international money markets in the current year has largely been due to Templeton’s aggressive purchases, the implication being that the trend is not guaranteed to continue for the upcoming years when the fund stops buying Irish debt. By way of response, Hasenstab said he has faith in Ireland’s future growth prospects but at the same time the amount invested, although quite substantial for smaller markets, remains little compared to the fund’s total assets. Hasenstab said he stands ready to quickly hedge the fund’s exposure in the credit derivatives market if needs be.

Meanwhile, a draft review of Ireland’s economy published by the European Commission shows a reduction in forecasted growth for 2013 from 1.9 to 1.4 percent. Growth for 2012 has also been downsized, from 0.5 to 0.4 percent, whereas unemployment predictions have been revised upward from 13.7 to 14.4 percent and export growth pegged back to 3.5 percent, from the previously projected 4.2. Although Irish authorities have shown a dogged determination in the imposition of austerity measures to meet debt reduction targets required by the Eurozone bailout, a slowdown in exports is undermining internal growth and threatening to make the debt burden unsupportable.
Most worryingly, the country’s national debt is being forecast to reach 120 per cent of GDP in 2013, a level which in the view of most experts is unsustainable. For Ireland to meet debt reduction targets, its economy must grow an average of 2.2 percent for the next four years, an ambitious task even for Europe’s “posterchild in austerity” – a soubriquet earned via its demonstrable ability to slash spending and meet EU and IMF bailout targets. But to retain that reputation, Ireland will have to introduce a new round of tax increases and spending cuts in its 2013 budget, due to be announced in December.

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