Getting Back in the Bond Market

Official funding runs out at the end of 2013. Today’s manouvre by the NTMA has converted some two-year debt into three-year debt, at a cost. This is not ‘getting back in the market’ in any sense which confirms debt sustanability. No new debt has been issued. The ability to sell new three- or six-month T-bills is not relevant either.

Think about Belgium. The ten-year bond yields 4%, having been briefly higher during the panic. Belgium has a debt ratio about 100%, GGB deficit about 4% and primary deficit about 1%. Belgium is likely (not certain) to be OK and could probably sell 10-year paper in some size. The 4% interest rate is just about consistent with debt sustainability given 2% inflation and a little bit of economic growth.

Ireland’s exit debt ratio will be higher, there are contingent liabilities we all know about and a deficit down to 4% in 2014 would be doing rather well. Can Ireland expect to sell 10-year bonds, in size, in 2014, at 4% yields?

There is a 2025 bond in issue with a 5.4% coupon. It will be an 11-year bond in 2014. The curve should be flat in this zone. So if you think yields on mediums will be 4% in two years time, you can work out the target price for the 2025 bond in 2014. It is about 111.

The bond has recently been trading about 85. 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.

Alternatively you can insist that Ireland can (sustainably) ‘get back in the market’, and stay there, in size, at higher yields. This is entirely conditional on economic growth resuming quickly and at decent rates. The debt sustainability analysis in the IMF staff report to the executive board should issue in a few weeks and will be a must-read.

100 replies on “Getting Back in the Bond Market”

This is not ‘getting back in the market’ in any sense which confirms debt sustanability.

Perhaps not, but like the debt junkies we are, all Ireland is looking for is “one more hit”. If this bond swap accomplishes that, then the government, NTMA, and commentariat will be sedated for a few days at least, having gotten their “hit” for the day.

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

I don’t think it will matter. The Government is probably prepared to pay 8+% or more yields on bonds in 2014, and can probably tax the population enough to do so. It’s either that or go straight back into a second IMF programme.

In either case, those hits are too far in the future to even be worth considering. Junkies only think about the next one, specifically today, the one we get for paying out the Anglo-Bonds.

The debt sustainability analysis in the IMF staff report to the executive board should issue in a few weeks and will be a must-read.

Why? What makes you think it won’t get the Pravda editorial treatment that every other publication, press release and news report gets these days? After their inflated GDP growth figures in the last memorandum review, I don’t see frank appraisals coming from the IMF any time soon.

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 :

When I hear people talking about “getting back into the bond markets” it reminds me of other phrases from economic history such as, “seeing the green shoots of recovery.”

Nostalgia isn’t what it used to be.

Am I right in thinking Portugal is going to require a bigger bailout bucket soon and that Spain keeps saying aloud that nobody is listening to them and that they really really need some help?

Is it all too late?

I agree that this doesn’t demonstrate debt sustainability but it is a small but important step in the right direction.

If we could get some real, tangible and immediate reductions in the burden of the payments on the promissory notes we would move another step closer to that point.
Spreading those repayments over 30 years rather than 10 plus another few of these switches could get us past the 2014 repayments.

Also not sure focusing solely on the 10 year bond is correct. The 5 year benchmark bond is hovering just above 6% today. Still too high but not by that much and it does allow the NTMA to maintain a reasonably safe maturity profile.

@ 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.

“Getting Back In The Bond Market” is meaningless.

The debt (creation of money) cannot be repaid.

It is very simple.

As previously posted ……

So what’s the liability incurred by the CBI when it created the ELA? The answer is that money it magicked out of thin air is considered a liability of the CBI.

So the whole lot is “in the system” and it did not cause inflation. No?

It can be written off completely without any damage to the economy. No?

Why not just magic up €3 Trillion in the same manner and sort out the Euro Banks balance sheets.

Take those banks that are bankrupt into custody.

Break them up and re-float them with clean balance sheets.

Why do MacroEconomists insist that “money” is a permanent thing when it is obvious that it is crested from nothing, as was Anglo Irish Debt/Credit.

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.

@Colm McCarthy – I’m not sure any country – Belgium, Germany, USA, Ireland or whoever – can expect to sell 10-year debt at 4% in 2014. The rate will depend on where interest rates and inflation (and inflation expectations) are at the time in the issuing country – along with a few other things like repayment expectations and ratings. If 10-year yields in Germany and the USA stay at current low levels for the next two years it’s a pretty poor look out for any Western growth in the period, or growth expectations for the subsequent few years.

I don’t know how correct it would be to tie re-entry by Ireland into the markets to a particular long-term sustainable rate, and then deem any re-entry above that rate to be foolish. It would be a bit like taking the price at which Ryanair might sell its first 10 seats on a given flight, and assuming all the remainder would be sold at the same uneconomic price, rendering the firm bust.

I’ve little doubt that if/when Ireland does look to raise term money in the bond markets the rate it will have to pay on first issuance will look uneconomic, if extrapolated to all subsequent borrowing. It will, however, be the average cost of the total borrowed over a period that will determine sustainability.

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.


The debt sustainability analysis in the IMF staff report to the executive board should issue in a few weeks and will be a must-read.

I’d love to see the revision number on that document. They should show the Word edit history when they release. Even better if it was track changes.

A conspiracy theorist would say that to have Ivor the Driver arrested and this bond swap done on a day featuring the madness of debt service for insolvent banks is a stroke of almost Haugheyesque genius. But those people are crazy.

Eoin Bond:

‘If they extended by 10 years would you say it was not getting back in the markets…’

Of course it would be. Until this can be done at a sustainable interest rate, very little is achieved by shuffling the deck at the short end. The danger is that the negotiating position on the PNs is weakened by every appearance of progress.

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

Why is success only measured in terms of the 10 year? I agree long term we must borrow for this length but to start with surely the 5 year is reasonable long term bond to begin with.

I guess the next strategy of the NTMA could be to switch more of the 2014 bond but next time maybe into a new 2017 bond. They may even start switching some of the 2013 into 2017.

If we can push out the maturity profile to the point where we avoid a second bailout it would be a success IMO.

@ 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.

Rather than a tricky dilemma, it might be that the Government is saying ‘..we’re swimming OK at the moment, but we won’t be able to sustain it with this mill-stone attached to our ankle..’.

The other side of this, of course, is that, insofar as they contemplate Ireland, I just can’t see that the EU’s Grand Panjandrums and, specifically, the ECB want to ‘stick it to’ Ireland. I’m not saying that’s the view being expressed by the ‘grown-ups’ here, but I sense that continuously highlighting the reluctance of the Grand Panjandrums and the ECB to move on the PNs/ELA issue is contributing to a public view that these bods are deliberately trying to down Ireland down. This is very dangerous territory.

I know the economists like to keep their stuff pure, but there is a huge politcial hurdle to be surmounted. My sense, and this is on totally anecdotal evidence, is that politcians and officials in the nothern EU states, on those occasions when they are minded to, relate the legacy costs of Ireland’s bank melt-down to its extent. They may say, yes, we had problems with our banks, we still have problems with our banks, but it’s not all our domestic banks, it’s only some banks and we’re dealing with them – maybe not as fast as we should, but we’re getting there. You, in Ireland, had a complete meltdown of your entire domestic banking system. You should not be surprised that the legacy costs are much higher proportionately than ours.

This, by no means, justifies the foot-dragging on sorting the PNs/ELA, but it may provide some context.

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.

ECB LTRO money from the banks

BTW did any one pick up the slip by Simon Coveney last night on the V Brown Show about re negociating the the promissionry notes stating that instead of paying 48 Billion we may only pay 36 Billion

@ 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.

@Bryan G

the objective of NTMA’s bond swap was to enable jesuitical schoolboys to argue Ireland is a player again.

it was good our state-owned banks to help ensure this objective was achieved.


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

You said ‘think about Belgium’. Here’s a thought:

Belgium has a debt ratio about 100%, GGB deficit about 4% and primary deficit about 1%. Belgium is likely (not certain) to be OK and could probably sell 10-year paper in some size.

In normal times your figures could be said to be good, but these are interesting times, if not extraordinary.

Figures like yours there are frequently set out to dampen speculation on the eurozone. But what they don’t reveal is
the certain impact of a major default crisis in Europe.

Think of the impact of an asteroid wiping out the dinosaurs 65 million years ago; Greece is a financial Everest asteroid ready to impact, that current bank recap in Europe is preparing for. Dinosaurs will be wiped out.

Belgium has a big Anglo Dinosaur, Dexia.

From October last:

“The Belgian government will buy the bank’s division in Belgium for 4bn euros ($5.4bn; £3.4bn).

Dexia also secured state guarantees of up to 90bn euros to secure borrowing over the next 10 years. Belgium will provide 60.5% of these guarantees, France 36.5% and Luxembourg 3%, the bank said in a statement.”

Oops, state guarantees of up to 90bn …..

So, the figures you give are those of Belgium calm waters without the Greek asteroid splash; throw those figures out the window when it does 🙂

@ 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

There are a number of aspects to this discussion which leave me entirely at sea.

The first is that one may speculate as to what may happen in the future but there can be no certainty. All we know is that the foray by the NTMA was successful.

The second is that comparisons with the Belgian bond market seem to me to be rather irrelevant given the major differences between the two economies to which investors can hardly be blind.

The third is that there has already been a return to the status quo ante in the bond yields of countries in the Euro Area i.e. before the markets mistakenly equated the sovereign risk status of all participants.

A chart showing comparative yields for the 10-year going back to 1994 in respect of the peripherals compared to Germany is at page 27 of Professor Sinn’s recent CESIFO paper on Target 2 balances.

“Right back where we started from” but “ten years older and deeper in debt”!

There is absolutely no trade-off, in my opinion, between getting back into the markets and the issue pf the promissory notes. If there is movement on the latter, it will be because of developments in delaing with the crisis extraneous to Ireland, as was the case in respect of the interest rates payable,

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

Only 1/3 of the bondholders availed of the extension option and Davys has indicated that the significant majority of them were Irish banks ( no doubt on instructions from on high).

Clearly this is a hugely successful return to the markets!

I think Brian G has the key point in all of this.
The NTMA would not have made this move if they had not been assured before they did it, that banks would take up the offer at, no doubt, pre agreed rates. They could only take up the offer if they had permission from the ECB. The ECB is leaving no stone unturned in finding ways to increase the amounts of debt without there being a default. Everything except actually buying the debt directly themselves.

Once the banks in europe agree to buy government debt at 4-6% using ‘dud’ assets as collateral for 1% money from the ECB it will all be dandy.
Banks get rid of their dud assets and Governments get to roll over their debt to infinity. What do the rates matter once you know you be allowed to roll them over for ever?

Sure there may be a day of reckoning but its a long time away and by that time all the Euro banks will have to give a lot of their dud assets to the ECB and all the real investors will have been repaid.

I said it yesterday on another thread. Any pretense of any kind of real market is now 100% BS. Its all politics.

@Colm McCarthy I think it would help if you came out and admitted that.

The boys on newstalk this morning were fairly scathing. Ivan dismissed the whole thing as Spin saying that it was the Irish pillar banks had allowed this rollover. It seems most of the print media is captured at this stage.
However we had Simon Coveny on VB last night and no one had the facts to challenge his contention that the news of the extension of the Jan 2014 bond was much more significant than paying the 1.25 billion to the unsecured anglo bondholders.

But they are all missing the bigger picture. When we look at what is actually happening at a European level it is impossible to be cynical enough.

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%?

@Eamon Moran

Before I start, economics 101 here. the ECB lent basically free money to the banks 450 billion and they now in turn are buying up govt debt, like yesterday with the NTMA. Am I correct here?.

@ 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.

LTRO has probably been more successful than even the ECB have imagined. The ECB pointing to its balance sheet saying they are not buying the bonds reminds me of Bertie showing Albert Reynolds his voting paper for the FF presidential nomination back in the day.

Would be interesting to see a chart showing movement in sovereign bond yields across euro along with a graph of the LTRO becoming available.

My gut instinct says this cannot be a real solution but my head hurts trying to think the consequences through. Can anyone clearly explain what the consequences are? How does Eamon Moran’s “day of reckoning” arrive and what does it look like?

@Eamonn Moran

But under Draghi, the ECB appears to moving away from the moralising, moral hazard and peripheral demonization arguments beloved of Trichet, LBS and Stark to doing ‘what must be done’.

The ECB pumped three year money into the bank market and European bamks invested in their own country bonds. Why should Ireland exclude itself from this new liquidity source. 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.

This move does not mean that the crisis is resolved. Ireland’s deficit is still the major elephant in the room. And, on a political level as well as an economic level, the PN and Anglo debt are bleeding wounds that will not be healed.

But the bond swap was a step forward as distinct from reeling backwards, which we have been doing for years now.

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?

Liquidity wise it’s all good. Average maturity increased, average interest up a tad but…
Question; is it a liquidity problem or a solvency one? IMHO it’s still a solvency issue. Anglo could have been let limp on for weeks post 2008:sep w a special liquidity regime (LTRO anyone) but would have still been insolvent, nuh?

@ 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”.

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.

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.

The banks are quite literally being carried, to carry the states. Nothing really new here, it is standard practice for slow motion banking recap, see post S&L Fed rate policy etc.

Carry is what banks do. In the case of Greece, any Greek government debt shorter than 3yrs was Hoovered up by the industry – they had the access to funds to repay so why not? was the standard rationale.

The only reason to not join in with the lasest carry bonanza is if you think debt unsustainability will become self-evident for the issuers a la Greece. But first, the people making the decisions are bankers who have little option but to join in and a decision not to would raise questions about their existing books. Second, important and powerful people and groups are aligned with the tactic and contrarians know the market is a dangerous place for them which can be rigged and manipulated ruthlessly by the pillars of society.

The can is back.


We may need to have to move on from the ‘kicking the can down the road’ analogy. This is more like a never ending waltz with the banks and governments holding each other in a vice-like grip. Neither side can let go as both would simply crumple. The music won’t stop until voters are brought on-side to consent to what needs to be done. The problem is that the cost of what needs to be done increases as politicians seeking re-election fail to level with their voters.

It’s down to which one the politicians want more, since they can’t have both simultaneously now. Do they value doing what’s needed to save the Euro more than re-election, or is it the other way round? I reckon it’s the latter, but they seem to be hoping against hope that they can postpone levelling with their voters until after they’ve been re-elected. Sarkozy biting the dust (it looks likely, but I wouldn’t write him off as he’s a formidable campaigner) might change the dynamics for Merkel. She’s probably looking at a ‘grand coalition’ with the SDP (2005 redux), since the FDP are unlikely to clear the 5% threshold. But the nuclear about-turn has brought the Greens within her reach. If Sarkozy goes down she may bow to the inevitability of a failure to secure a CDU/CSU overall majority and simply focus on remaining chancellor – irrespective of the complexion or colour of the governing coalition.

And we may then get a better idea about when and how the music will stop.

@ 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.

At Joseph Ryan

“Why should Ireland exclude itself from this new liquidity source?”
I dont know why should someone who is clearly killing themselves from their alcohol lay off the sauce?

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?

@ Eamonn

“I dont know why should someone who is clearly killing themselves from their alcohol lay off the sauce?”

Heroin vs Methadone

@Eoin, thanks for that.

So would it be fair to say the €3.5bn bond switch yesterday mostly involved State-controlled or guaranteed banks using 3-year LTRO money – which was part of that wall of €490bn cash in December 2011 – from the ECB costing the banks 1%-odd a year.

So rather than lending the ECB 3-year LTRO money into the real economy, the banks – presumably under the direction or influence of the Govt – bought Govt debt which will yield a certain 5.15% income over the next three years.

So the banks are relatively happy because they borrow at 1% from the EB and get 5.15% on low overhead cost certain Govt bonds. The Govt is happy because it has reduced the funding hump in 2014, is paying a relatively low interest rate and can broadcast a success. But the households and businesses that might otherwise have benefitted from the cash, not so happy because €3.5bn that might have been available for loans has instead gone to Govt coffers.

And as for non controlled or influenced international bond punters, they didn’t bite yesterday because the interest rate offered was too low?

Would the above be misinterpreting the bond-switch?

@ 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.

@Eoin, thank God or Yahweh that you contribute on here!

Do you think Anglo (or IBRC) would have been a taker of the switch. After all, it has a 8-10 yr life expectancy, and even if it is paying 3% for ELA, it would be profitable to invest that at 5.15%?


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.

@ Jagdip

re IBRC – hmmm, suppose its possible, but would think unlikely. While “5-10yr” is still the baseline timeline, i think they’re also examing ways of winding it down quicker. I wouldnt have thought they’d be playing around in the switch to any large degree. But ya never know.


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”

@ Jagdip

“One arm of Govt was directed or influenced to buy sovereign bonds from another arm of Govt”

that part of your argument would seem to be pure guesswork in fairness, and incorrect in my opinion. From what ive heard, the Irish banks were more than happy to take part. It was a no brainer for them.

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.”

@Eoin, fair enough.

But why would German banks for example, which also get LTRO from the ECB at 1%-odd not have bitten. After all, surely 5.15% cf 1% cost of funds would be as attractive to a German bank as a covered Irish bank? Isn’t an inference that the Irish banks which predominantly operate in the Irish economy have already bet their farm on the country not defaulting. But a German bank which is unconnected with the Irish economy takes a more detached view, and decides the interest rate offered doesn’t compensate for risk.

@ 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.

I remember when the political geography textbooks switched from national to “regional zones” more then 20 maybe years ago now – it was all part of the post 1987 Basel world of course.
The bedrock for these changes was laid during the 60s & 70s as international oil based credit flows flooded all compartments.

There is little internal redundencey of nations or even regions, everything was made too efficient , too brittle – but in nature as in banking there are great costs & risks to this high credit to money rations.

I am now always struck by how international corporations now have more cash then goverments – this is a very odd change of fortune from mid 20th century activities & harks back to the great rail malinvestments of the 19th century.
This means Goverments must always consult with these entities before making strategic policey , indeed I am not sure they make strategic policey anymore.
A classic example is the great Stranraer / Cairnryan f$£k up – this has resulted in the destruction of a huge collective fixed asset (the rail connection) but everything is all right because the private ferry company can save half a hour on its journey.
We are blighted with the Ryanair externalise the losses , keep the profits model on these isles – we are lost really.
PS – go to the ” £80m Loch Ryan port near Cairnryan” video , it harks back to the Fail times – the SNP like the Fianna are so naive – its touching really.
Its all about keeping both the activity & stupidity together in one giant & growing snowball.
In the case of Ireland various low cost , cut throat transport companies now control our international sea ways & airways – their artifcally low labour cost masked our greatest problem.
We are a island – as oil prices rise (although they may fall sharply over the short term) we will slowly return to a agrarian lifestyle after the social implosion phase.
We will look back in wonder why in Gods name we spent 20+billion a year on houses “while remaining fiscally conservative”.

@Eoin, indeed it is a separate angle.

Can I ask you a final question? The bond-switch yesterday wasn’t an “auction” was it in the traditional sense? Existing holders of the 2014 bond had a fixed offer, no? Or was it an auction because the strike price was 98.2? So some international investors might have been interested but may, for sake of argument, offered 95, is that how yesterday worked?


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.

You had to hold the shorter bonds to switch. However, a foreigner could buy in the secondary or if he was a big buyer, NTMA would open a tap. Then they really could claim they were back.
As far as I know, core banks are under pressure to use the LTRO for their own domestic bonds & loan books. Credit Ag said as much. They still don’t trust us.

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.


Hyping the participative of captive domestic banks in a short duration bond swap as a “return to the bond markets” is mere financial spoofery. Nearly as embarrassing as yesterday’s anglo bond debacle.

@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.


“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”

Not as wide an array of crap as the local banks were accepting onto their own books, however, such as 4 acres of bog in Connemara valued at E2 million, or a stake in a Bulgarian bank valued at E235m and subsequently written down to 100K . The ECB can’t absolve all sins ,unfortunately.

@ 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.

@domk – what criteria do you apply to “investment grade” bonds? And what is your considered opinion of each rating agency’s opinion on Ireland?

On another note – do you think that Irish taxpayers’ money, as has been injected into the Irish banks, should be invested to drive down yields in Germany, or where do you think it might best be placed?

Who knows – your answers might steer the ship of state, and all who sail in her, to a better place. Or a worse one. But at least those reading your posts would have an inkling that you knew what you were talking about, or otherwise. It just could be a win-win.

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.

@ All

An interesting view from Davos by Jeremy Warner.

There is, however, a major hole in his reasoning. German goods sell because of their quality and value for money and this is the competitive challenge that other countries, notably the UK and the US, have to meet. Neither is Germany entirely dependent on the European market by any means and can probably see out the looming recession in the manner of the last one.

Nevertheless, with a common currency, the situation is unsustainable (as Larry Summers, of whom Warner is evidently not a fan, pointed out in Davos).

The goings-on in the markets are but a symptom of this underlying malaise of current account imbalances between the nations of Europe.

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

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? 🙂

@ Colm

did you value you as at today, or as at 2014? Bloomberg gives me around 112.42 fwiw, with a 4% yield, as at 1/1/14. The high coupon on it explains the high price. But such a discussion ignores where relative rates are at that time – ie if Bunds are at 1%, then a 4% Irish yield is not particularly cheap or different to now. If Bunds are at 5%, we could never expect Irish yields to be at 4%, and so having them at 6% would be “good”. Its a rather pointless debate in many ways.

BEB: at 2014 and I got 112 as well – no point over-egging the pudding, and it depends on coupon dates etc. Higher figs reinforce my point, as does the prospect of higher German real rates.

@ Bond,

Re “Its a rather pointless debate in many ways.”

Nope, I appreciate your expertise in evaluating those yields; but also would appreciate any links off list or on list to help plaster over any holes in my own understanding. I don’t work in a trading house 🙂

@ 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.

@ eoin

Do you expect to see significantly more inflation in the Eurozone as a result?

Given what the ECB are now saying, why are Portugal’s Bond yields continuing to sore?
Wouldn’t we expect Portugese banks to be buying up bonds and bringing the bond rates down as Ireland’s seem to be?

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?

Lots of talk over the past two days about ‘public sector involvement’ i.e. ECB having to take a haircut on Greek bonds to make the PSI talks come to an agreement but does anyone know if Draghi (or any ECB official) has made any statement about the ECB’s view on taking such a haircut?

What are the consequences if the ECB does take a haircut? Especially for Greek banks, who presumably use Greek bonds as collateral to raise money from the ECB? I don’t know but interested to find out. And if the ECB does end up taking a loss on their Greek bonds, who ultimately picks up the bill for that?

I was reading some speculation that the ECB could avoid taking a haircut by selling them on at purchase price to the EFSF/ESM and letting them take the hit…… hang on…. haven’t we been there before…… packaging up a load of dodgy debt and passing the parcel on to others to shoulder the subsequent losses? Isn’t that how we got into this mess in the first place?

History has a bad habit of repeating itself….. 🙁

@ 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.


You are right. Pre EMU ‘risk free’ assets meant your local government bond market basically, everything else had at least FX risk.

Post EMU you had a veritable smorgasbord of supposedly ‘risk free assets, and even the others had no pesky FX considerations. Lots of analysts then didn’t bother thinking about the things that used to allow them to gauge FX risks – or in some cases, any kind of risk.

Asset books became very international and that process is reversing.

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


ECB has said ‘no’ to that and Germany backing currently.


No one outside Germany or the Harvard history department thinks the current bond buying will cause inflation. Investors are aware inflation may become a deliberate (on the quiet) policy to address debt overhang at some point.

@ 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.

@ Grumpy

“Investors are aware inflation may become a deliberate (on the quiet) policy to address debt overhang at some point.”

…and vs potential defaults, are absolutely fine with that inflation risk.

@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.

@ B-E-B/ Grumpy

The Greenspan Fed was all about shifting inflation from consumer prices to asset prices. The inflationary process was disguised and the myth of the Great Moderation took hold.

It’s all about shifting losses around now, and we only find out where the thimble is after we have been stung.

When Draghi prints 500bn, he is significantly altering the dynamics of the credit system. The guy means business, but whose business is he running ?.

What assets is he inflating, and what kinds of claims is he devaluing as a consequence. Where is the concealed inflation this time ? Answers on the back of an envelope please.


“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.

There will be blood on the streets if this happens

Those proposing it know that so it must be the final sign that they want Greece to exit. Curtain up for the third act of ‘Back to the Past’ as we watch Greece hurtle back to the 1900’s and poverty – and probably a coup later down the road. I presume they will have to force their exit from the EU too so that Greeks can’t leave the country in droves and look to settle in other EU countries.

Portugal must be looking over its shoulder right now. How far behind might we be – or will we be kept on as the poster child?

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’.

Could Ireland’s debt situation change if Greece has a messy default? Many in the United States are wondering that if Greece enters a messy default, Portugal and Ireland will want to follow as opposed to following the parameters of the EU tranche. Any thoughts?

-Common Sense Capitalism


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.

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