Irish Bonds and the ECB - Bond Sales Watch - the Risk of Sovereign Default

[C. Flower]

Bonds at 8.07

[C. Flower]

FT blogger on why the ECB must keep buying bonds, the 60 days before calling for EFSF aid and ais arriving, the flight of capital from the periphery and the feedback of peripheral contagion (Ireland etc.) to the core (France and Germany).

http://ftalphaville.ft.com/blog/2010...se-mr-trichet/

[C. Flower]

@FrankSunTimes @brianmlucey : 3year bond=770%, 5y=629% and 10y=625% but it's all academic. ECB will underwrite our recovery... in year 2057

Gurdgiev on twitter.

These spreads look way beyond the level at which Clearnet would impose a heavy margin.

[C. Flower]

Spreads exceed Argentina's

http://ftalphaville.ft.com/blog/2010...atter-of-time/

[C. Flower]

#bondwatch Irish ten yr bonds 8.11%, Portuguese 7.02. Clearly, markets are pushing for a bailout, and guess who pays? http://j.mp/aCtMpr

8.14 quoted by Brian Lucey.

http://www.bloomberg.com/news/2010-1...ds-widens.html

[Apjp]

Portugal are doing well compared to us..

[Xray]

We are the weak animal that has been picked out from the herd. No matter how high we keep our head or how hard the stronger animals pretend they are going to fight for us we are dead.

But on the up side, there is life after death.

[C. Flower]

Someone has kindly given me an explanation of what a Clearing House like LCH does. A fair amount of a bank's assets are held in the form of bonds. Banks also need cash for day to day liquidity. A Clearing House takes bonds from banks on a "sale/return" basis -("Repo") - in exchange for cash that the bank needs for liquidity purposes. LCH Clearnet is the main Clearing House that deals with Irish Bonds.

When it sees bonds as very risky, from the point of view of possible default, it covers the risk by imposing a charge ("margin") on each bond it handles. This obviously pushes the price of the bond up and thus pushes up the interest that people will expect to get to compensate - the bond spread will increase. This would add costs to borrowings and would create a serious problem for our banks. It's possible that LCH will require extra margin for trading Irish bonds from next week.

The other problems we have, simultaneously, are that

- no buyers have wanted to touch Irish bonds for many months, due to uncertainties regarding the Irish economy and banking system, and we have become completely reliant on the ECB to sell bonds ( i.e. borrow money).

- the ECB has indicated many times in recent months that it proposes to cut back on these emergency liquidity purchases of bonds and has begun to do so.

- the NAMA bonds held by the banks have proven to be set up in a way that means they can't be traded on the markets - only the ECB can buy them, and it is getting sick of it.

- the Irish banks' losses are very much larger than they have admitted to date.

- we have a very serious fiscal problem - we are spending around 20 billion more than we bring in.

- personal debt is very high: mortgage default will be unavoidable for many people and that will knock on to the banks.

- deposits (mainly Corporate) have begun to flow out of Irish banks due to unease with the whole situation.

- we can't devalue, which is the classic way of dealing with a non-competitive economy, as our currency is not our own.

- FDI in Ireland is under threat from other cheaper locations. Jobs have been falling since 2000.

- far from an upturn, the global economy is being further destabilised by a currency war - the US is about to issue 600 billion in printed cash, to burn off its debt and to become more competitive as an exporting country. This will have various global effects but will inevitably hit EU exports.

- the D o F and the Government have no idea what to do, as their whole strategy for the last three years has been to try to conceal the problems and hope for an upturn in the world economy. They are scrambling from the wreckage of one crumbling device of postponement and concealment after another. They have less than 20% support in the Country, have been exposed in the Courts as having appallingly breached the democratic requirements of the Constitution. They are reduced, in the absence of a General Election, to cracking the best of our young people over heads with steel batons. They have failed, after two years, to produce a plan to reduce waste and to shift the tax burden to those who can afford to pay.

I think that this needs to be treated as an unprecedented emergency for Ireland, with the welfare of the population both short and long term as the top priority.

Megangreene - I am trying to think of any other country historically that has gone through a similar simultaneous fiscal landslide and banking explosion, and I can't.
Any suggestions?

And given the above, if you, personally, were in the Irish Government, what would you do?


.

Clearnet have activated their margin requirement. This is serious.
http://www.businessweek.com/news/201...quirement.html

LCH Clearnet Ltd. said it will increase margin requirements for customers trading Irish government bonds after the yield on the nation’s debt soared.

The additional margin requirement of 15 percent will be charged on investors’ net exposure from Nov. 11, and the change will be reflected in a margin call on Nov. 12, LCH, the world’s second-largest fixed-income clearing house, said in a statement on its website.

LCH told its clients on Oct. 5 that it may increase the requirement after the yield on Irish 10-year bonds rose to more than 450 basis points above a euro-region AAA benchmark bond. Ireland’s bonds have tumbled on concern the cost of bailing out the nation’s banks has made the government debt load unsustainable.

“This is LCH recognizing that the markets are quite serious about the potential for Ireland to default or restructure,” said Simon Penn, a market analyst at UBS AG in London. “They telegraphed this, so traders are not surprised by the move.”

[DCon]

The WSJ are writing honestly about the good ship Ireland Inc

But now, investors are betting the bill could be higher still and could reignite Europe's sovereign-debt crisis. The unpopular government is bracing for collapse, and on Tuesday, Irish government bonds continued a week-long slide to a fresh record low. The debt is judged as risky as Greece's was this spring just before that nation begged for a European Union bailout.

Mr. Lenihan, racing to ease those fears, proposed Thursday shrinking the country's 2011 budget by €6 billion. Proportionally, that's as if the U.S. suddenly eliminated the Defense Department.

Ireland's troubles are Europe's. The 16 euro-zone countries have agreed to guarantee up to €440 billion in loans if any among them is unable to borrow from private markets.

It wasn't supposed to be this way. In October 2008, Mr. Lenihan boasted that his government had devised "the cheapest bailout in the world so far." Ireland's financial regulator pronounced the banks "more than adequately capitalized."

The miscalculations are severe. In December 2008, the state laid plans to pour €1.5 billion into Ireland's sickest institution, Anglo Irish Bank Corp. Over the next two years, the government upped the figure a half-dozen times, pumping in a total of €22.9 billion. In September, the central bank said Anglo might need as much as €11.4 billion more.

In an email, Mr. Lenihan said the cost estimates announced in September had put an "upper end" on the price of the bailout in order to "eliminate any uncertainty in the market." The cost rose over time in part because "the information provided by the banks was not a true reflection" of the health of their loans. His 2008 comment that the bailout was the cheapest in the world didn't imply, he said, that "there would be no cost to the bailout."

http://online.wsj.com/article/SB1000...LEFTTopStories

[DCon]

Graph here, courtesy of Brian Lucey

the tick by tick history of the irish ten year bond (bids) since start of week.

http://twitpic.com/35jl49

[ang]

10 year has risen by 3% this morning 8.18% and rising.

There seems to be no worry or panic in Government over this so I assume all is well.

[Ah Well]

10 year has risen by 3% this morning 8.18% and rising.

There seems to be no worry or panic in Government over this so I assume all is well.

Yeah, sure is ....

[DCon]

Rumours being twittered about the IMF

WARNINGl THIS IS RAW. TOTALLY SPECULATIVE. "hearing talk of possible IMF DEAL for Ireland", traders.

http://twitter.com/humenm

[megangreene]

LCH.Clearnet's move this morning certainly provides a kick in the teeth for Irish banks. I am particularly concerned about AIB, which looks like it could be fully nationalised next year (I know, some people might argue it already is. I'm talking about de jure and not de facto though).

I am surprised more people haven't made a bigger deal about Olli Rehn's message after his meetings in Dublin. In addition to saying that cross-party consensus is needed for the 2011-14 budget, he emphasised that Ireland will need to become a normal tax country. Ireland's 12.5% corporate tax rate is well below the EU average (currently around 22.7%). Ireland can therefore afford to raise its corporate tax rate a few percentage points without driving all of the MNC's out of the country. Investors could worry that this is the first in a series of hikes, however. I expect the government will go to extremes to leave the corporation tax untouched. If it must capitulate to gain access to the EFSF under a conditionality agreement, the government would need to send a very clear message that this is a one-off measure. But given the government's penchant for repeatedly revising upwards, I'm skeptical it has the credibility to achieve this. A significantly higher corporation tax rate would require me to revise my forecasts downwards, and I am already well below the government (official forecast is that GDP will grow by 2.7% in 2011-14. I think it will be more like 1.1% at the moment).

[ang]

@megangreene I believe your growth forecast of 1.1% through 2011-14 to be a more realistic expectation in comparison to Government expectation.


Meanwhile 4yr bonds are now at 7.26% and 2yr are now at 5.52%.

There is no market confidence in Ireland all credibility is gone now a GE is our only hope of instilling confidence.