Which Troubled Economy Will Seek New Debt Relief First?

Dublin, Ireland
Peter Muhly | AFP | Getty Images
Dublin, Ireland

Spain was widely expected to be the first peripheral eurozone country to take advantage of the European Central Bank(ECB)'s much-anticipated new bond-buying program.

Yet there are growing arguments that Ireland, seen by some as a relative success story for austerity, may want to access the funds, known as Outright Monetary Transactions, to backstop its bonds – or use other methods to prop up its recovery.

Spain's successful debt auction on Thursday means it has already secured 9 percent of its 2013 funding.

Three auctions of treasury bills in the first quarter of 2013 should give further indication of the appetite for taking a bet on Ireland's future. The first, on Thursday, appeared to have taken off well.

The most recent European Commission report into Ireland's bailout confirmed that the Irish government has "signaled their interest" in discussing new ways of gaining market access.

There have been plenty of positive signs on the Irish economy recently. The "bad bank" where state-backed assets are held – the National Asset Management Agency (NAMA) – reported a profit of 131 million euros ($175 million) for the third quarter of 2012.

The Irish government cut its estimate for the 2012 deficit from 8.2 percent to 7.8-7.9 percent of GDP, after a better-than-expected tax take for December.

Bob Parker,head of the strategic advisory group at Credit Suisse, described Ireland as the "major positive development"in the peripheral economies earlier this month – and he is far from the only market watcher to express this view, as the recent performance of Ireland's bond yields suggests.

Parker forecasts a trading range for the 5-year bond of 2.9-3.5 percent for the first half of 2013, remarkable given that those bonds hit 7.2 percent last May.

However, while 34 percent of loans held by NAMA are fully or partly performing, that still leaves 66 percent which aren't doing as well.

There are also growing concerns about whether Ireland's bailed-out banks will have to raise more capital if they don't start shaking out distressed mortgages. Around 100,000 mortgages come under this description,according to the governor of its central bank – a hefty amount in a country with a population of around 5 million people.

While unemployment has stabilized at less than 15 percent,this includes the effects of a new wave of emigration from Ireland, both by Irish-born citizens and some of those who emigrated from other countries during the boom years.

Ireland's reputation as the poster boy for austerity hasn't won it any favors from the troika in terms of changing the terms of its bailout yet, so the OMTs may end up being its best option if the recovery proves too fragile.