Creditworthy?

John, your post is making the point that few are arguing for defaulting on sovereign or guaranteed debt. However, I don’t see anything in O’Mahony’s article to suggest that he is making the distinction between different types of “Irish liabilities” that you are. Perhaps I’m wrong but I read the Global Strategist as arguing against defaults on any debt.

In this sense, O’Mahony is right about the chorus and, as I understand it, your disagreement with him is that you don’t consider non-guaranteed debt to be untouchable. If you’re going to disagree with Davy’s it might be worth clarifying what it is you’re disagreeing with.

Harold Wilson used to blame the gnomes of Zürich for the travails of the pound and Donal O’Mahony effectively says bondholders are fools because they took fright from a headline in the Independent.

As John points out, his criticism of Opposition politicians is misplaced. Were the Government induced headlines from Galway positive during the week?

Wonder why he ignores the weak political leadership and the 2 -year slow motion Government response to the banking crisis?

This is why the sovereign crisis flared up in recent months and the Government responded by making a recent announcement on the Anglo Irish issue.

It’s true that solvency is not a short-term issue; Belgium and Italy with creaking political systems can manage high debt levels.

However, it would be foolish to ignore the uncertain outlook in the medium term with high unemployment and no obvious engine of growth apart from a faith-based ‘smart economy’ project.

Maybe Donal O’Mahony should call for a general election.

It’s interesting how we lap up the often misinformed but positive coverage but cry foul when it’s negative coverage.

More blurring of the lines between a sovereign default and a default on non guaranteed bank debt

@All

A certain adjunct ayneen_randite ‘man of the year’ {$2,500 a pop} advocating bringing in the IMF during week in Irish Examiner …. a good few ‘self-promoters’ around on economics these days ………. will link later – rugby and the fabulous Katie Tailor await ……. [

24 months on ……..
http://krugman.blogs.nytimes.com/2010/09/17/irelandspain-update/?src=twt&twt=NytimesKrugman

“Ireland’s banks were arguably second only to Iceland’s in their irresponsibility, and the Irish government’s blanket guarantee has exposed it to huge losses. But bear in mind that when Ireland seemed, briefly, to have regained the trust of the markets, this was touted as proof that austerity will be rewarded. Funny about that”

With respect to Dr. Gurdgiev’s post, I think Irish bond yields reflect some trust that the Goverment will live up to its promises on tackling the fiscal balance rather more quickly than fiscal balance problems have been tackled in the past by comparable countries. They may also factor in a significant chance that others will provide a backstop in extremis.

Yeterday was a very interesting day. It offered a test of the theory that defaultin on non guaranteed unsecured senior bank debt in failed/failing banks would lower the risk premium on our sovereign debt. FG proposed it again in their letter to Almunia. The FT advocated it. I think Barclays (on page 9) referred to it as a possibility & Buiter’s think-piece on Sovereign defaults for Citigroup may have alluded to it (not certain though). So what happened, our sovereign spread blew out to record levels for this crisis.

This appears counter intuitive but there are two plausible explanations. i) the market views that a default on senior unsecured marks a crossing of a Rubicon. No Irish bank will be able to access markets then in the near future. This creates a form of bank run whereby liquidity is withdrawn from the system. ii) the market in its infinite wisdom does not distinguish between sovereign and bank debt, so Ireland will be locked out of sovereign markets for some time.

Who knows if this is even a plausible rationalisation and if it will persist for anytime. However, markets have an uncanny ability to follow a path that inflicts pain on those holding a consensus view.

BWII ….not sure is the answer. Subbies, legacy seniors for sure for the pyre, legacy…not sure. Would love to but would require harder negotiation than I suspect the state could provide.
As for guarantees …put not thy faith in princes.

@ Brian Lucey

“I think few people think we will be forced to or should default on the state debt.”

Again, just so we’re all 100% clear, the revoaction of a state guarantee would be considered a state default by the markets and the ratings agencies, and there definitely have been people advocating that course of action. I assume Donal was including that sort of suggestion somewhere in his argument.

@Kevin
Slowly getting there. Wishful thinking?

@Karl

Okay, apologies. I guess even I am vulnerable to a bit of paranoia.

Long time back. Posh English racehorse owner mused about his nags. “One feeds Fivers (those big white jobs) into the front end and bags of poo come out the rere end.” Fast-forward to to-day. Substitute credit for fivers and debt for poo.

Now credit is virtual money (electronic sort), but debt is a real (like legal) obligation. And how does one’s pay debt? Yep, from future income.

Methinks that there might be a tad of a problem with our future income. Like, it might be more than a smidgen less than we think!

So: Pay back one’s debts. Very doubtful using the Business-as-Usual model. What are the alternative options then? Defaults of some sort? Looks that way – though money inflation is good too! Or will it be a mixture of ‘Hide-the-Parcel’ and ‘Kick-the-Can’? Just watch the cash flow!

Brian P

Politics, politics….about the only thing I have learned about the bond markets is that a bond price is as much driven by flows as it is credit fundamentals. So in the early part of the decade when massive amounts of cash were sloshing around the system, governments could sit back complacently and pont to the almighty market as proof positive that everything was A OK. In reality, the flows were the price setters, more money was flowing into bond funds than governments and corporates needed, so demand moved to other areas (mortgage backed, emerging market etc)

Today the flow is in the opposite direction and the very same people that praised market discipline five years ago are now ranting about speculators, when in reality the flow of money to bond funds has reversed and even if an individual bond investor wants to buy Irish bonds, shue doesn’t have the inflows to fund it. Very very dull, but also very true.

So what we have is politicians and their mouthpieces doing their very best to support a good faith attempt to hold up confidence and drum up demand for bonds. In doing this they are deliberately conflating sovereign and bank debt because they have to. If there is a default in the system, then that is a further loss to the bond fund that is already suffering outflows and it represents a hit to banks across Europe and they still can’t afford a write off.

The market has mechanical flow problems and it know it. It also suspects that the whole system is close to catastrophe. They key is to work out which domino falls first and that one is likely to be the first that has to refi.

The last time I saw so much talk about international observers not understanding Ireland’s position was when the Irish banks’share prices were were diving in early 2008 (quite rightly as it strangely turns out, though I remember any number of spokesmen (sorry I meant ‘Chief Economists’) for Irish financial institutions going on air explaining how these people did not understand the unique Irish success story).

What a Davy’s employee is writing inthe Irish Times today is less important a question than the larger question of why the Irish Times is accepting articles from such sources at all. The journalists’ motto ( and the academic economists’) motto should be something like the legal motto ‘Let justice be done, though the heavens fall’). Academic economists and journalists have only one duty, that is to the truth.

@hoganmahew – I can’t quite get my head around the “secondary yields of Irish bonds matter little except in how they influence primary issue costs” part of your post.

Leaving aside (as if we could) the higher cost of additional borrowing over the next 3/4 years, there is over 30% of existing bond issuance to be refinanced between Nov 2011 and Jan 2014. (See http://www.ntma.ie/GovernmentBonds/Daily_Bonds_Outstanding.pdf)

That means secondary yields matter rather a lot.

ECB-wise, there has been a plethora of guesses about the composition of the their c.€61bn purchases. Figures of over €18bn have been mentioned as being the amount of Irish debt bought.

The ECB don’t give a breakdown, and neither confirm nor deny any reported estimates made by commentators – of which there have been quite a few.

The €18bn number doesn’t really stack up though, no more than its proponents, I can’t back that up. If, however, one looks at the reportage of intervention, one can see that there have been numerous (usually via Bloomberg) reports through August/September of ECB buying of Greece/Portugal/Ireland which, when checked against the ECB’s published numbers (they come out each Monday afternoon), never stack up.

The €18bn number, to be true, would mean that ECB intervention was confined solely to Greece, Portugal and Ireland, and pro-rated according to market sizes. However, the main intervention sizewise was back in May and, at the time, was reported to be directed mainly at Greece, Spain and Portugal, with possibly some Italian debt also being bought.

If one looks at the relative sizes of the bond markets in these countries, Italy is 23% of eurosovereign issuance, Spain 9%, Greece 4%, with Portugal and Ireland 2% each.

Back when the main intervention occurred in May/June I’d have thought that the EU/ECB were a bit more worried about Spain and Greece, due to the greater size (and importance) of Spain and the greater suspected imminence of default in Greece, and would have concentrated the bulk of their buying there. Greece, in particular, would have seen a significant number of passive-type holders forces to disinvest after it lost its A-rating, and was dropped from the main bond indices. The ECB would have been one of the few potential bidders around for the size of selling entailed.

I suspect that the actual number for Ireland can only be a fraction of the €18bn and, at the risk of being made a liar of by next Monday’s data, I think the ECB were in little evidence this past week, let alone month. Why not? Your guess is as good as mine, or may even be better.

http://www.nakedcapitalism.com/2010/09/guest-post-american-businesses-and-consumers-are-not-deleveraging-they-are-going-on-one-last-binge.html

Interesting! By not writing off the debts that will never be repaid, are US and Irish financial institutions delaying recovery and prolonging the agony, enabling some to continue to pillage the broken money machine?

The policy vacuum that is Ireland, can only increase concerns of ability to repay.

Every new debt can only increase concerns about ability to repay.

So stop borrowing!

Fix the current deficit and the increasing loss of tax revenue. NOW!

More austerity ……..

Some of the rubbish written here is incredible. Ireland will not default on any senior bank debt, full stop. The EU wont allow it, it would cause a panic flight of capital from all non core euro countries and the EU would collapse in recrimination within weeks. However, they cant say that explicitly as Germany cant be upfront to its citizens and say they are going to print away the problem and they need also to force the PIGS to get their budget deficits under control (threat of economic ruin gives local politicans the necessary armory) so this game of buying time continues. Liquidity will be providedvia ECB as longbasis needed for both sovereign and banks. The US, UK, Japan have all printed the equivalent of €3 trln or more to stop a financial collapse, EU will do the same. Donal is right that Irish bonds are mispriced and the debt not out of line with other states, particularly when you look at off b/s obligations incl pensions.

First time here, B Lucey you regulary pop up criticising NAMA and the guarantee, yet all I can think of is your suggestion in April that the Anglo deposit book be sold for 20 odd bio and be used to fund the other liabilites??

The problem that most people miss ( Davy’s O’Mahony above but ever more so Honohan and Lenihan), when they look at “economic fundamentals”, is that even if the odds are in your favour, you end up defaulting if there are modest odds against you. A 20% risk of default over five years sends five year interest rates up by roughly 2-4%. Those higher rates must be reflected in other lending by banks (apart from times when you think the local businesses and mortgage holders will do fine despite sovereign default!), so business and mortgage credit dries up. That drives the economy into recession, and the recession makes the default more likely. To survive we need to have 5%, not 20%, default risk. We are far from that 5% due to fundamentals of large budget deficits and unknown bank bailouts. Barring decisive and very painful policy actions to stem default risk, our “modest risk” of default will rapidly trash the “economic fundamentals” that some people claim are, today, ok.

I wasn’t condoning EU policy, in fact in isolation the Anglo bond holders and depositors should bear the pain, they took the shilling via higher rates and the bet didnt pay off. But the wider implications for Irl and Euro probably override this. The EU made it clear when they forced the austrians to bail out the piddly little bank last year and Minister Lenihan is speaking on behalf of EU when he says there will be no default, every penny of senior debt repaid. Lehman means no bk will ever be allowed fail unless they have high degree of certainty of implications and who will bear the losses. The INBS retained ELG bond is the mechanism when collateral runs out, its unsecured money printing and shows that this will be the plan when needed. not suggesting its right or wrong, but it is what has and what will happen

@ Paul

‘When the faction that supports restructuring feels banks are well-positioned, and contagion costs are less than restructuring benefits, they will shift to back the hard-liners within the EU/ECB/IMF, and then restructuring will actually happen’

Do they mean ‘when the major Eurpoean banks manage to reach some semblance of solvency ‘ ?

@ Aiman

completely agree about the 18bn Irish “bought by ECB” figure that Barclays came up with last week. It sounds way way too high. Spoke with a few guys about this on Thursday, and we each came up with guesstimites of more like 7-10bn. As a background for this, consider the following – Depfa Bank, the Germans bigger version of Anglo, had around 45bn in Greek govvies on their balance sheet. Depfa has been explicitly (though discreetly) guaranteed by the German state. What odds that the Bundesbank has been directly buying large chunks of these holdings via the EFSF? I’d guess around 40bn of the EFSF has been used to buy Greek bonds.

Second theory – with secondary yields on Irish debt having spiked, the cash value of the Irish govt debt has fallen off significantly – you can buy a lot of the bonds at 90 cents now. What odds the following – the EFSF buys the bonds at c.90 cents, and only asks for 90 cents back off the Irish state at maturity? 10% restructuring done straight away, ‘off-market’, with no loss to the EFSF, no panic in the market, with the loss crystalised when they bought the bonds on the secondary. Essentially an EU “buy back” of the bonds ala the banks buying back subordinatred debt? This method of restructure would be even greater for Greek debt given that it trades as low as 60 cents if you go out long enough! Just throwing it out there…

@JohntheO
“The slow growth in core retail sales in 2010, at a time when the wealth-producing sectors are roaring ahead, is the most disappointing feature of the economy currently, and the feature that should be receiving most attention from policy-makers.”
This and the paragraph that follows it (before the strawman of “talking confidence”) is key, IMO. Employment levels are not increasing with output – the gap between GDP and GNP is widening. Until we get growth in GNP, we will are not seeing an economic recovery. Far from missing the wood for the trees, I think international markets have woken up to this fact. This is the cause for concern – GDP growth does not translate into an improvement in public finances except in a single metric debt:GDP. This is an optics measure that does not address the issue of whether the debt burden is growing faster and to a higher level (as a result of the bailout costs and the already baked-in deficit) than the economy can grow to service.

@hoganmahew – the price of secondary market bonds dictates the price of new bonds issued in the primary, as close as makes no difference. There is no premium for newness.

I don’t understand to what Spanish experience you refer. Issuance there has been priced tight to the prevailing secondary levels. Where else do you think it might be priced?

@Aiman
Yeah, perhaps so. My impression, though, is that once debt costs approach ‘ridiculous’ levels, a disconnect emerges (between primary and secondary – there is reasonably solid buying at the primary level, with buyers lined up before auctions; only the Germans risk fails) and perhaps the opportunity that Eoin alludes to is at play.

@JTO

Surely falling house prices are also affecting consumer spending – not just negative sentiment causing low levels of consumer confidence.

There has been a real and substantial destruction of wealth amoung the property owning classes in Ireland. In response they are spending less and saving more – trying to rebuild their devastated balance sheets. This is not about confidence or animal spirits – it’s the real deal baby.

Unemployment levels have also substantially increased and consumption levels are clearly linked to this.

Further cutbacks in the budget are inevitable and will be deeper, the longer they are postponed.
FACT

The sooner they are made, the sooner we will have a sustainable, sound economy. To influence the eventual shape of that economy, the taxes imposed must be on land, in all its shapes and forms. Bad news for those still hurting from their delusion that land is better than money! The cutbacks can come in the areas attached to lauding land too. Agriculture, buying sites for foreign investment, “armed forces” occupy land. Education over the net. All have an impact on land as they have grown to incorporate land as part of the great subsidy to the middle classes. LAND is not a religious icon! It has a use and Ireland has more of it, thanks to our neighbour’s policies, per capita than most in Europe. The public servants affected can be allowed trasnfers to more useful areas.

Please remember that this is not a recession and that Japan style depression will affect our markets for a similar length of time, two decades and counting. This debate will, sadly be relevant for years to come!!!!!!!!

Until the reforms are made, Ireland will lose competitiveness on many fronts even as wages fall. Until then, any investor, with a choice of putting money into $Au or Irish bonds will have an easy choice! Equities are out of the question, we all agree?

The article may also be of interest to Sarah Carey, who thinks public sector property rights may be taken at the whim of a sad government!

http://www.guardian.co.uk%2Fmedia%2Fgreenslade%2F2010%2Fsep%2F20%2Fdownturn-ireland

The MSM start to die. Why? They helped fund the bubble and steal from everyone who believed their irresponsible BS. The rest will follow ……

The idea that some news is only worth a euro and a lot of lies disguised as news, may need revision. The supports of a free credit economy are slowly dissoling as the rot has progressed too far.

Do not lend to newspapers or buy their shares! Hot tip!

Thx for arresting discussion. A few points pop out. No charts on the guesstimates of debt reparation as a proportion of tax yields against given parameters, such as no deterioration in unemployment, say over the years 2012-14. One figure I got elsewhere approached 37-40%. Wow!

@Paul mentioned the possibility of restructuring of sovereign debt: “This has always been the strategy according to one faction in the EU/ECB/IMF: “Give banks some time to sort out their balance sheets, then restructure sovereign debt if needed” If we had a decent government, they would be demanding a resolution of our crisis along these lines.

EFSF http://bit.ly/9RcfL3 Eoin Bond’s theory advocating the purchase of Irish bonds at 90% value and reselling them to Ireland Inc at a lower maturity cost. How come our government is not pursuing active intervention to access EFSF aid to relieve our debt burden along similar lines

I would like to quote JohnTheOptimist in full as he is I belive making an error of judgement of gargantuan, Greenspan proportions that can create and I believe is already creating massive damage to our economy:

“Basically, the economist from Davy is saying that, even on the basis of modest 3pc annual growth between 2011 and mid-decade (far less than Ireland’s long-term average annual growth rate between 1958 and 2010, which was about 4.5pc), the debt will be entirely manageable. His figures, again on the basis of modest 3pc annual growth between 2011 and mid-decade, show that by then debt as a percentage of GDP would be just a little above the EU average, that annual interest repayments would be just a little above the EU average, and barely half what they were in Ireland in the early 1990s. Again, if people wish to dispute his figures, let them do so. But, so far none have.”

Next ten years we will do well to keep our heads above water. Declining GNP punished by debt reparations of savage proportions fed by an economy that to survive will have to readjust downwards, rather than upwards. Before growth becomes an issue we need to sink a lot more than we have even begun to do! Talk of growth is nonsense! Never mind a good season for agriculture, we are being forcibly downsized!

Sorry if post is too long:(

Here’s an interesting piece in relation to the likelihood of sovereign default around the peripheral eurozone:

“A further worsening of the crisis could lead to (partial) sovereign defaults in one or several countries.”

Others would launch come to the rescue. The “No-Bail” clause in the Maastricht Treaty would be ignored. The EU would instead use the “exceptional occurences beyond its control” clause (Article 100.2) to do whatever it wanted.

There would be a price. “The country in question could be partly warded and have to fuilfil strict controls”.
Quite. This is another long-held fear of eurosceptics: that EMU would lead to vassal states.”

“Mr Stein’s piece is a study of break-down mechanics. What would actually happen? The country’s parliament could pass a law redenominating debt into the new Lira, Drachma, or whatever. But there would be a pre-emptive run on bank deposits long before then. “Anyone not desirous of losing money would presumably see the writing on the wall and transfer any funds beyond the reach of the state. In other words, close down that account with Monte dei Paschi di Siena and open a new one with Commerzbank in Germany”.
Such a wholesale shift would lead to a collapse in the money supply, perhaps equal to the 38pc contraction in M3 from October 1929 to April 1933 in the US — but concentrated in a much shorter period. “Banks would be forced to call in outstanding loans, bring about a collapse in the country’s business.””

If we had a decent government they would already be negotiating with EC on the following:

““exceptional occurences beyond its control” clause (Article 100.2) to do whatever it wanted.”

In summary of the above points, our government for some unfathomably dark reason refuses to contemplate dealing with our banks especially Anglo, along the sensible lines.

These ignored and denigrated paths for restructuring, renegotiation, intelligent intervention indicate our biggest problem on Ireland Inc is a crisis of leadership, that is hell bent to support malpractice, corruption of the banking sector, while sending the bill for this to the taxpayer.

@Paul Quigley

I think they care about whether the major european banks will be able to keep access to private funding markets despite an Irish default. That could come about as those banks recapitalize more over coming months.

An alternative, and much worse situation where they would need to act, would be to see Spain start into troubles again. That will force actions too, and reopen the question of whether the euro zone can hold together.

Either way, I suspect we will be cut loose because the pragmatic faction that currently supports us bailing out our banks will change its views if we don’t grow fast enough to ensure solvency soon.