Getting Back in the Bond Market

It sounds like Ireland has spent a considerable amount of time in hospital but is eager to get back on the dancerfloor in Coppers and start pulling again. But it’s not credible and the nurses sense it.

Here is an independent assessment of the situation :

Are there any countries that have done a one-term bailout?

@ Colm

“This is not ‘getting back in the market’ in any sense which confirms debt sustanability. No new debt has been issued.”

Debt gets rolled over, thats how sovereign debt markets works.NEw debt is not the issue. If they extended by 10 years would you say it was not getting back in the markets “by any sense”? Its a small step, but its a step (or a hurdle over 01/2014) nonetheless.

Just create €3 Trillion.

Put the Euro Bank system into custody.

Clean it up.

Re-float it to the market.

No inflation ……. it already happened.

The point being that the banks are dead.

They have run out of “money”.

No professor of “economics” can create “money”.

Only a Class can Create.

Only a Class can Destroy.

Enjoy.

@ Colm McCarthy

Framing the argument from the government POV at European level.

“Technical re-arrangement of the badly designed Promissory Notes (no defaulting, no burden sharing), smooths the way for successful Irish exit to its support programme”.

Not, of course, that this willl necessarily follow.

From an Irish Independent report:

Yesterday’s buyers included Irish and international banks who borrowed three-year money from the ECB at 1pc and are now re-investing it with the NTMA at 5.15pc, sources added.

I’m sure the banks wanted to be able to obtain these profits for three years instead of two, and hence pushed for this extension. Free money while wearing a green jersey – it’s 2006 all over again!

There has already been a political agreement that bailout countries will continue to be funded until they regain market access, providing they fully implement the bailout conditionality, so the risk of default in 2015 is likely seen as about the same as in 2014. Unless there’s a complete meltdown, there is likely to be enough ringfenced money in the ESM to implement the political agreement and ensure rollover funding at that time, or another round of ECB LTRO, or some combination of the two.

The point is that this activity really amounts to trying to optimize the debt payments *within* the current EU support program (i.e. agreed bailout extension and LTRO). It provides no insight as to what will happen when Ireland needs to stand outside this support program. The real test will come when a new bond’s repayment is not being implicitly backstopped by the ESM and ECB.

@ Colm

Perhaps the ‘..we can swim just fine but we need to be rescued’ is the appropriate line. With Austerity making everything worse, isn’t the core in need of a ‘success’ story to facilitate reforms and austerity being pushed. Some ‘bank debt’ relief may copper fasten that ‘success’ story for the powers that be, providing more leverage to turn us all in to Germans.

@myself

Yes, I think you’re right about Spain:

“Spain’s Budget Minister Cristobal Montoro this morning says Spain is the epicentre of euro problems, and that the country is in a recession worse than Europe’s. ” …. as he reveals 5.4m unemployed

Drowning not waving.

@ Colm M 6:57

The danger is that the negotiating position on the PNs is weakened by every appearance of progress.

There is a tricky dilemma. The government appear to be saying ‘..we can swim just fine but we need to be rescued’.

Totally agree with that point:

I’ve struggled to make sense of the mess. On another post I made the following comment; also what you say is an inditement of our negotiations. Perhaps I say in more graphic terms what you have written there:

Its also worth considering if some Troika negotiators, perhaps those from the ECB, have made a calculated decision that Ireland must eventually default; so best to extract as much pound of flesh for European banks before, as it were, the ship sinks.

How else can you describe the incompetent mismanagement of Enda’s ‘we’ll pay our way’ when payment terms are extracted and designed by our paymasters based on our promise to comply and our refusal to say ‘no’; when we signal our paymasters to charge us at top rate, on whatever terms they choose to come up with, we’ll still ‘pay our way’.

Ballymagash …..sure its no matter what the payment terms are…. set whatever terms you like, you supply the finance to pay it back; we’ll pay it back with whatever you give us to pay it back…takes running on empty debt peonage/bondage to a new level…

After all, its not Enda’s money he’s playing with, the debt can be kicked on to later generations of Irish people; you never know our paymasters might even revisit the terms of the PN’s …what a tragic, farcical, sucker mess Irish Economic Mismanagement IS, lol

According to Dan OBrien in the Irish Times, everything is brilliant. Just all Noise as usual.

Our great leader via Bloomberg:

http://www.bloomberg.com/video/84935746/

Two questions, both cynical

(1) Did the pillar banks who are now benefitting from 3-year LTRO money from the ECB, buyers or roll-overs yesterday?

(2) What was the real interest rate on the rollover. If the coupon was 4.5% then a current 100 holding would earn 4.5 in 2012 and 4.5 in 2013 before redemption in Jan 2014. If the new buyer reportedly gets 5.15% and is to get 5.15 in 2012 and 5.15 in 2013 and 5.15 in 2014 before redemption in 2015, does that mean the true interest rate is 6.45 (5.15 + (5.15-4.5 in 2012) and (5.15-4.5 in 2013). This is simplistic, there’s surely an NPV calculation, but would it be fair to say the interest rate was above 5.15%?

@ Jagdip

eh, not sure what your maths was doing there but the “yield to maturity” (ie coupons plus any gain/loss on redemption at 100) equates to 5.15.

Sale price was 98.20
Coupon 4.5

So annually you get 4.5/98.20 = 4.5825% in your coupon

You also get an additional €1.80 on redemption (100-98.2), which is 1.80/98.20 = 1.83% return, which annually equates to around 0.6%

4.5825 + 0.6% = 5.1825%, which with some exact maths (its not exactly 3yrs, and you’d need to discount pricing for NPV etc), thats puts it in the 5.15% area.

I see the NTMA has now released some details of yesterday’s “bond switch”. The bond maturing in 2014 was paying 4%, the new bond will pay 4.5%, so presumably that it is how the 5.15% reported yield came about.

http://www.ntma.ie/Publications/2012/OfferingCircularForNewTreasuryBond.pdf

http://www.ntma.ie/Publications/2012/NTMABondSwitchResultsJanuary2012.pdf

Re yesterdays bond swap.

1. Was this limited to existing owners of these bonds?

2. And what was the timeline? i.e. when was the offering circular distributed? Generally upcoming auctions are well flagged; this one seemed to pop up out of the blue.

Joseph Ryan,
Spot on. Draghi talks like the BUBA and acts like the Fed. The replacement of the dreadful Trichet and the resignation of the most incompetant chief economist Stark has changed the dynamic. The track record of these guys was brutal.
The LTRO has put a bid in EZ sovereign debt markets and caused spreads to narrow. Last Autumn the communtariat was calling for QE. Now that we are seeing backdoor QE, the same communtariat are saying it will not work.
We are still a long way from the edge of the trees and debt sustainability is still an issue but it is better to be going one step forward as you say.
On another note, economic forecasts are now based on the premise of a weak global economy with EZ mired in recession. The latest data from the US and perhap[s Asia cast some doubt on that.

@ bond 1:38 @ ahura

also re Joseph Ryan,

“Ireland was losing out because it did not have bonds of suitable duration to match the timeline of the ECB money being pumped into the market”

Is there a spreadsheet somewhere giving the amount of government debt that needs to be rolled over in the coming 0-5 years plus timeframe/schedules; nothing to do with ELA/PN, but other bonds issued before the meltdown, that will have to be rolled over in that timeframe?

@ All

On LTRO, George Soros takes the view, as many do on this thread, that it cannot provide a permanent solution to the crisis in the euro.

He says (embedded link in link below);

“Today, we are observing a bond-run: a self-fulfilling crisis of confidence in the stability of most eurozone sovereign borrowers. This is driving long-term rates up, so that for more and more countries a temporary liquidity problem is becoming a permanent solvency problem. As regulators still treat government bonds as the safe core of the financial system, this vicious circle threatens the stability of financial institutions not only in the eurozone but also in the rest of the world. It intensifies the recessionary tendencies in the global economy so that in turn the financial situation of governments becomes worse. It’s a perfect vicious circle”.

http://blogs.ft.com/the-a-list/2012/01/25/how-to-pull-italy-and-spain-back-from-the-precipice/#axzz1kZpeINmZ

His idea is based on a proposal from the late Padoa-Schioppa and can be compared to the work of Winkler on the joint production of confidence; between central banks, on the one hand, that are responsible for liquidity, and governments, on the other, that are responsible for solvency. He is unlikely to get a hearing from Merkel not because the idea is not a good one but because it would be politically unsaleable in Germany. In the meantime, the ECB will have to try and achieve a parallel result by the back door.

Merkel seems to raise both the spectre of a disorderly default by Greece and to leave open the possibility for eurobonds once the necessary “austerity machinery” is in place in a recent interview with journalists from five leading European papers.

http://www.guardian.co.uk/world/2012/jan/25/angela-merkel-greece-financial-meltdown?newsfeed=true

A disorderly default by Greece, even a departure from the euro, might not seem the worst scenario against the background of Greek inability to deliver on any budgetary undertakings. It would leave the ECB with a loss on its bond-buying but there is legal provision for this which is more than can be said for sharing in a voluntary write-down which would undermine the justification advanced for the purchases in the first place. On the other hand, sticking to the position that it cannot participate in the present “voluntary” PSI undermines the status of the sovereign bond issuers as the ECB will be presumed to always have assured preferential status in any default scenario. Further evidence that the bond-buying programme by the ECB was not a wise step.

@Eoin,

Thanks! I missed your post somehow.

Any word on the street as to the buyers were? Any pillar banks treasury managing three year money from the ECB?

@ Jagdip

Davys said “significant majority of investors switching were the Irish domestic banks”, and it makes sense that if the Irish banks had 2014s in the LTRO, they may as well kick them into a 2015 and put them in the LTRO too. I think there actual was a good bit of international demand (guys wanting to pick up small bits, but which combined could have been significant), but pricing on it was very ‘rich’ from the investors point of view (and cheap from NTMA’s), so most shied away. Interesting to see whether they try and tap it into a wider international base ahead of LTRO next month.

What happens with the LTRO in the event of a crisis? Since the ECB is accepting lower quality assets as collateral now, in the event of a Lehman style crisis surely these will drop dramatically in value and lead to big margin calls for the banks from the ECB.

Would the ECB force banks to stump up for margin calls in a crisis? Surely that is the exact opposite of the intended effect of LTRO which is to provide emergency liquidity to the banking system. If the ECB does not make the margin call, it would be taking huge risk on to its own balance sheet. Does anyone know how the ECB resolves this issue?

if everything is ‘conditional on growth returning’ as I keep hearing, then the issue might be one of facing reality.
Growth is a long way off. Why the constant “if growth returns talk”?
2015 maybe
http://wp.me/28tG9

@ Jagdip

“Would the above be misinterpreting the bond-switch?”

I think it would be overinterpreting it. If the banks want more money to lend into the real economy, they can still get it at the ECB, its an unlimited facility accepting a very wide array of collateral, so yesterdays operation does nothing to curtail “normal” lending. I’d suggest the banks feel more confident in getting their money back off government bonds than they do SME loans. I’d further suggest that given the capital reliefs available on government bonds vs SME lending, they can buy a lot more government bonds than they can give out SME loans for each euro of capital they have at their disposal. I’d also suggest they’ll struggle to find relatively safe SME loan assets yielding 5.15%. The LTRO-govvie carry trade is a mutually beneficial transaction for both governments in need of funding and banks in need of easy profits to help recapitalise. International bond punters didn’t bite yesterday beause they believe they could get better value Irish exposure via either (a) holding their 14s as is, (b) buying other Irish government bonds on the secondary market and (c) the NTMA may offer at better terms at a later date.

@JP

Even if this is happening. Isn’t this part of the plan. The ECB surely hoped that the banks would use some of this money to buy sovereign bonds, which would lower the price that the government has to borrow. An indirect form of QE as such. Lending to business and households is of course part of the plan aswell. Whether that happeds yet remains to be seen.

@Patrick,

Indeed yes I believe it was part of the plan that the €490bn December LOTR wall of money from the ECB would in part be used to foster demand for sovereign bonds, and thereby take off growing pressure.

Irish banks are a little different to other EZ banks, no? Our domestic banking sector is dominated by state controlled or guaranteed banks. So in the Irish case, pressure or influence can be exerted on banks to buy sovereign debt.

Perhaps I am being too negative about this, but it seems to me that yesterday’s bond switch was a closed transaction. One arm of Govt was directed or influenced to buy sovereign bonds from another arm of Govt, and the free range independent international investors kept their wallets shut because the interest rate offered by the NTMA was too low.

Why would this be a success or sign of confidence. Surely the sign of confidence would be free range investors opting for the switch. Whereas the evidence is that “a significant majority of investors switching were the Irish domestic banks”

Oh grief! I’ve just read about JCT’s appointment to the board of EADS. The rewards and further appointments now start swinging his way to say thanks for his crusade to protect bondholders. Someone please pass the sick bucket.

Everything possible must be done for bondholders.

Here’s Oli this afternoon – you’d think JCT was still in place.

“Olli Rehn, Vice-President of the European Commission, says Greece is close to a deal with private bondholders on debt reduction. However, he believes more public money is likely to be needed to plug funding shortfall in the Greek deal.”

@ Jagdip

the argument above just now is a completely different one to “one arm of the Irish state directed another quasi-arm (ie the banks) to invest”.

The LTRO has seen (allegedly) domestic buyers of domestic bonds right across the EZ – Italy, Spain, Belgium. For Irish banks to do the same is to be expected. I’d suggest German banks have been directed to stay away from the periphery by their own shareholders, who happen to be the state in most situations.

Sorry forgot the link –
http://www.rail.co/2011/04/01/rail-link-for-loch-ryan-port-unlikely

And I guess high credit to money rations should read ratios but now I am not quite sure.
The banks do ration the money supply so that they can eat the credit surplus and if there is no credit surplus they get us to gnaw at ourselfs.

@jagdip

This is not about textbook investment management, it is about mainly local periphery banks being incentivised and financed to double down and do the ‘right thing’ by the local establishment. If Portugal or Spain or Ireland end up in default or in an ex-Germany Euro then those banks are expected to be insolvent anyway. They have little to loose by playing the game and quite a bit to gain (slow motion recap, retention of contracts of employment and pensions which include golf club membership etc) if it does work.

If you were running the book at one of these banks you would almost certainly be joining in.

After the Greek bailout was announced lots of EZ banks piled in to the short end in Greece. It would not be surprising, particularly now there is official talk of Euro exits, if it was more locals only currently.

The Landesbanks or Regional banks number 11 while the Lander (states) forming the federation number 16. The Landesbanks generally do not have the resources to independently assess the risk of investments outside their region. Some of them have been badly burnt by the PIIGS and the US MBS along with the whole smorgasbord of unsavoury investments promoted by NY investment banks. Hence, they do not now need to be told to stick to their knitting. One could say that the Irish banks were not able to assess risk even in the area of their core expertise.

The large Frankfurt banks are well resourced to assess risk world wide. I was told by Frankfurt economists years before the crash that Ireland could stand independently only if air became denser than water. They had chapter and verse down pat, houses of “quadrat metre xxx” being built in areas where there was no evidence of jobs paying enough to support houses even half that size. Similarly with the price of retail, industrial, commercial property.
Cost of labour, productivity, tax revenue, unproductive investments by gov’t while neglecting needed infrastructure all pointing to a bleak future.

When the Frankfurt banks start to make loans to Irish institutions then one can have confidence that recovery is underway. Until that happens we have to look with scepticism upon pronouncements emanating from 2 Kildare St., Central Bank of Ireland, and all the hanger on Quangos and Agencies feeding at the taxpayer trough.

I have asked myself why the Germans had a better handle on the state of the Irish economy than the natives of Ireland. Could it be that enveloped in that dense, convoluted forest of Celtic culture we could not see the forest for the trees. What has been done in the meantime to wipe the mist off our lenses, not much by the looks of it. There may be a lack of faith in Government but very little is being done to ensure that the same old, same old does not continue for another generation.

@bg, you say “hype” but the NTMA was quite circumspect. It was really the politicians that bigged it up as a return to September 2010. Press reporting also hasn’t seemed balanced.

@ bg

I think Grumpy has got it above. There is no big picture here. It’s just a few groups of pols, civil servants and bankers seeing an opportunity to serve their own petty interests to the strains of Ireland’s Call.
No offence meant to the followers of the oval ball. I enjoy it as much as the next man.

In itself the conversion of two year bonds into four year bonds is a minuscule event .It has absolutely no bearing to the fact that Ireland will be able,or not, to finance its budget deficit on the market a year from now. If it makes some people more optimistic,let them,there is no harm in that.

Observation on ‘the market’ and ‘risk appetite’ to bear in mind.

April ’07, then Feb, April, June and July of last year were the only occasions in the last 5 years when out of the money 3 month S&P500 puts were as expensive compared to out of the money calls.

This usually occurs when ‘risk on’ has driven risk assets to the point where downside hedging is being paid up for.

It’s merely a technical indicator, but it is often worth making a note.

Re “work out the target price for the 2025 bond in 2014. It is about 111.”Not sure this post will get any traction.

One of my alma mater was UCD’s Math department I attended for a number of years to add Math to a postgrad degree I had in English. It was a great course, but could in hindsight have done with Economics module; but arguably Economics lacks a scientific edge in some of its formulae 🙂

So I can use math formulae but rely on google to learn eg the standard formulae used in bond trading eg
http://www.investopedia.com/university/advancedbond/advancedbond2.asp#axzz1kcJcOQwG

My question is: what is the formula used to get 111 in the above statement? I’ve approached the question using a method I would need to verify, but I get 114.5

Also, if someone dedicates themselves to extending the knowledge of humankind, appreciate link to an online textbook they regard beneficial re questions similar to this? 🙂

@ Jagdip
“One arm of Govt was directed or influenced to buy sovereign bonds from another arm of Govt”
I agree with Eoin, its a bit more complicated than that.

Last year The ECB were putting pressure on Ireland to reduce their ECB exposure.
This could not have happened without the approval of the ECB.

@ Eamonn

i mentioned this a couple of months back, but i dont think people picked up on its significance at the time.

One of Draghis first act was to reverse the foolish position taken on by Trichet, namely that of “shaming” (not publicly) “addict banks” that were using large amounts of ECB liquidity. Draghi and Sarkozy (in a rare positive policy by him) actively encouraged EZ banks to take up as much as possible in the LTRO, and completely removed any stigma attached to its use. In essence, the ECB finally became a functioning LOLR to the banking system. Do not expect to hear the phrase “addict bank” any time in the next few years, if ever.

There are some very big positives with the LTRO. Though one aspect troubles me:

If Italian banks buy Italian debt. Spanish banks buy Spanish debt. Irish banks buy Irish debt, etc. It’s pretty clear that risk is getting concentrated. And it’s important to ask who is getting ‘off-risk’? You could argue that earlier ECB operations enabled German(/core) banks/wealth get safely repaid risky investments in the periphery’s banks. You could now argue that the LTRO is enabling German(/core) private wealth get safely repaid risky investments in the periphery’s sovereign debt. Could this be a Plan B strategy which makes it easier to eject countries?

@ Eamonn

re inflation – there’s so much excess supply out there, i dont see how government bond buying is gonna cause any/much inflation, especially when we’re gonna have deleveraging and austerity for the next 5yrs min. Deflationary pressures are much stronger than inflationary ones right now in the periphery. Inflation is something we can only hope to have further on down the line at some point.

Yes it’s all absolute b*s*
The banks should be using the money to invest in Private sector enterprise not in keeping this circular fraud scheme going.
The money given to sovereigns only “grows” through spending cuts and tax hikes. It is really dumb.
There has been a global coup by banks. The masses are defended by the likes of Enda (who is a well meaning school teacher easily seduced by the market)
Could people please stand back and look at the bug picture. 5% sov debt in a shrinking economy is just 5% more to extract from the peasants in that economy

@ Bond

And what government bond buying do you mean? Its not happening, the banks are now out to drag down governments in the EZ, see here:

“International banks cut their loans to fellow lenders and governments in Italy, France and Spain in the third quarter, hoarding German, Japanese and U.S. bonds instead, data from the Bank for International Settlements show.

French Retreat

French banks shed the most Italian government debt, reducing their claims by 23 percent, the BIS said. They also retreated from other European assets including German bunds and German and Italian bank debt, which they cut by 28 percent. Instead, they shoveled $41.3 billion into Treasuries, increasing their U.S. government claims by 39 percent.”

This not the EZ being abandoned by the core? The irony is the stock weight of US treasuries probably the only anchor the EZ has left.

http://bloom.bg/xdQ7qD

@PR Guy – how’s about we get some PSI wrt Bank senior debt? Not too sure about how the Greek managed default is supposed to work but, if it involves lenders to the sovereign being haircut, while senior lenders to Greek banks are made whole, then it’s an unconscionable nonsense.

@aiman

“while senior lenders to Greek banks are made whole”

I thought I read somewhere that most Greek bank bonds where held in Greece (pension funds etc.) but I could be wrong … but I take your point though.

My ‘growth watch’ (meaningless statements about growth and jobs from various so-called leaders) will have to resume soon because there will sure be a lot of hot air about it coming out of the next EU summit.

I was just reading that “Europe is confronting a descent into chaos and conflict. Soros predicts riots that will lead to a brutal clampdown that will dramatically curtail civil liberties.” I wonder if he’s aware that more than six million people are under “correctional supervision” in the US – more than were in Stalin’s Gulags.

It seems I may be off to do some work in Germany pretty soon. I must do some sampling of the man on the street out there during my time off i.e. in the bar in the evenings – see if there’s any truth in the rumours of a move afoot to ditch the Euro. It has been useful but now it is ze time to move on and draw a line under zat. Zer is no ozzer game in town unt no alternative. For you Paddy, ze economy is over.

Here’s the wording of the document the FT are basing that headline on.

Assurance of Compliance in the 2nd GRC Programme
I. Background
According to information from the Troika, Greece has most likely missed key programme objectives again in 2011. In particular, the budget deficit has not decreased compared to the previous year. Therefore Greece will have to significantly improve programme compliance in the future to honour its commitments to lenders. Otherwise the Eurozone will not be able to approve guarantees for GRC II.
II. Proposal for the improvement of compliance
To improve compliance in the 2nd programme, the new MoU will have to contain two innovative institutional elements on which Greece will have to commit itself. They will become further prior actions for the second programme. Only if and when they are implemented, the new programme can commence:
1. Absolute priority to debt service
Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access. De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.
2. Transfer of national budgetary sovereignty
Budget consolidation has to be put under a strict steering and control system. Given the disappointing compliance so far, Greece has to accept shifting budgetary sovereignty to the European level for a certain period of time. A budget commissioner has to be appointed by the Eurogroup with the task of ensuring budgetary control. He must have the power a) to implement a centralized reporting and surveillance system covering all major blocks of expenditure in the Greek budget, b) to veto decisions not in line with the budgetary targets set by the Troika and c) will be tasked to ensure compliance with the above mentioned rule to prioritize debt service.
The new surveillance and institutional approach should be formulated in the MoU as follows: “In the case of non-compliance, confirmed by the ECB, IMF and EU COM, a new budget commissioner appointed by the Eurogroup would help implementing reforms. The commissioner will have broad surveillance competences over public expenditure and a veto right against budget decisions not in line with the set budgetary targets and the rule giving priority to debt service.” Greece has to ensure that the new surveillance mechanism is fully enshrined in national law, preferably through constitutional amendment.

@PR guy,

Should give us the chills, amounts to nothing less than an annexation of Greece. I listened to the German ambassador on radio re Ireland the other day. Eurobonds are out, it would amount in Germany’s opinion to permitting members to continue the budget spree party. They want instead closer political and fiscal alliance, I suspect on the lines of that you have described are laid out for Greece.

We need a referendum. I suspect Irish people at his point know more of what this country requires, than other ‘sources of information’.

Epilogue:

Can Ireland expect to sell 10-year bonds, in size, in 2014, at 4% yields?

It turned out the answer was yes. Irish ten year debt is now trading at 3.8%

So if you think we will be back in the market in a meaningful sense in 2014, on terms as good as Belgium, you can pick up a nice 5.4% coupon twice, and a 30% capital gain, by taking a flutter

So anyone who did follow Colm’s sarcastic advice above did actually make 30% plus two portions of 5.4% within two years.