DUBLIN (Reuters) - On Europe's battered bond markets, Ireland has found it doesn't take much to stand out from the crowd.
Anaemic growth and slow progress towards stabilising its debt mountain have been enough to turn the country into the poster child for the periphery, the subject of a stream of praise from euro zone leaders scrambling for a good news story.
To maintain the momentum Dublin needs to avoid slippage in growth numbers that are barely skirting recession and hope that European leaders follow through on promises of bold action.
"Most of the numbers are pretty bad, there's a depression in domestic demand and the banks balance sheets are still damaged," said Stephen Kinsella, professor of economics at the University of Limerick.
"But if you look at our yield performance next to Italy and Spain, you start to see Ireland in a more favourable light," he said. "In the land of the blind the one-eyed man is king."
Ireland's surprise issue of medium-term bonds last week, the first by a country in an EU/IMF bailout programme, capped a stellar year in the bond market in which the premium investors demand to hold its debt over Germany's shrank by 60 percent.
Ireland's 10-year bond spreads over their German equivalent have fallen by 14 percent in five weeks, outperforming all its peripheral rivals and falling back to levels last seen before it entered its bailout in November 2010.
The crowning achievement of Ireland's year-long bond market run, the issue of 4.2 billion euros of new debt last week, was at least as much down to external trends in the wider euro zone as to improvements in the national economy.
"Bond market investors seem to reckon that buying Irish bonds at high yields is a good risk-return trade-off in a world that offers either paltry yields on safe-haven government debt ... or scary prospects of default on peripheral debt," said John Velis, head of capital markets research at Russell Investments.
"The Irish treasury authorities are profiting from exploiting this sweet spot."
Ireland's bond market surge has come despite mixed data on the economy. Gross domestic product shrank by 1.1 percent in the first quarter. After posting growth of 1.4 percent last year, the first in four years, the government expects a rise of 0.7 percent for the year.
Despite having the fourth highest unemployment rate in the euro zone and stagnant domestic demand, it is expected to be the only country in the euro zone periphery to post growth this year and next, according to a recent survey by Morgan Stanley.
IRELAND EYES ECB ACTION
As Ireland's outlook has improved in recent months, a deepening crisis in other parts of Europe's periphery has heaped pressure on the continent's leaders to consider previously taboo steps.
Much of the recent fall in Irish bond yields followed a statement by European leaders that they will look at cutting the cost of Ireland's bank bailout by October.
A promise by European Central Bank President Mario Draghi to do everything needed to save the euro gave Dublin a shot in the arm on the day of last week's auction, with the head of the debt agency saying it boosted demand by 20 percent.
The country's prospects now depend on promised concessions from Europe outweighing the drag which the euro zone recession is having on Ireland's key export sector. Merchandise exports to the euro zone fell 5 percent in the six months to June, but total exports were up 3.8 percent.
Another major risk is that the government will be forced to pick up the tab for large new losses on property loans at state-owned banks or the National Asset Management Agency, which is bidding to recoup 32 billion euros it paid for bad property debts.
But with a four-year head start tackling its banking crisis, investors see the risks in Ireland as far smaller than those now emerging in Spain and Italy.
"It's on schedule, it's on track, the idea and the plan is in place," said Owen Callan, senior dealer at Danske Markets, a primary dealer in Irish bonds.
"Other countries are much further behind, they're still at the panic stage, particularly in Spain at the moment and they don't really know how to fix this," he said.
(Additional reporting by Sinead Cruise; editing by Stephen Nisbet)