Flee ‘safe’ sovereign debt, says Hasenstab

This post was written by Philip Lane

FT article here.

48 Responses to “Flee ‘safe’ sovereign debt, says Hasenstab”

  1. seafóid Says:


    Premise No. 4 is the description of what happens in a structural crisis, which the world-system is in at the present time, has been in at least since the 1970s, and shall continue to be in until probably circa 2050.

    The primary characteristic of a structural crisis is chaos. Chaos is not a situation of totally random happenings. It is a situation of rapid and constant fluctuations in all the parameters of the historical system. This includes not only the world-economy, the interstate system, and cultural-ideological currents, but also the availability of life resources, climatic conditions, and pandemics.

    The constant and relatively rapid shifts in immediate conditions make even short-term calculations highly problematic—for the states, for enterprises, for social groups, and for households. The uncertainty makes producers very cautious about producing since it is far from certain that there are customers for their products. This is a vicious circle, since reduced production means reduced employment, which means fewer customers for producers. The uncertainty is compounded by the rapid shifts in currency exchange rates.

    Market speculation is the best alternative for those who hold resources. But even speculation requires a level of short-term assurance that reduces risk to manageable proportions. As the degree of risk increases, speculation becomes more nearly a game of pure chance, in which there are occasional big winners and mainly big losers.

  2. Michael Hennigan - Finfacts Says:

    Hasenstab has a big enough fund to be diversified.

    On Ireland he maybe lucky or not.

    As for:

    “If there’s a tidal wave coming from a credit event in Italy, then it doesn’t matter how great your thesis is on Malaysia, the ringgit’s going to get blown up,” he says.

    China yes but not Italy.

  3. crf Says:

    That is a silly article. Maybe a reason you’re printing is as an aide-memoire, so that if his predictions don’t come to pass, and you’re making an argument about why we shouldn’t listen to this man, you can quickly find the link again.

  4. Fiatluxjnr Says:

    “So while the typical effective duration – a measure of sensitivity to interest rates – for global bond mutual funds run by peers is five or six years, his is less than two years.”

    Does this mean his attention span is nearly over?

    The other question is..how he would react to no deal on PNs or a Mickey mouse deal?

  5. grumpy Says:


    No, it means he is holding, on average, shorter dated stuff generally than most funds. That’s what you do if you are essentially bearish bonds as he appears to be, since losses due to a sectoral shift to higher interest rates will be smaller at the short end of the curve.

    Obviously significant deal is more bullish for Irish gilts, but so long as the basic assumption that should there be a choice between the a) the probability of default on gilts, or b) a further fudging or tweaking of Ireland’s debt profile, b) is very likely, then a Mickey Mouse deal needn’t panic Mickey.

    The Irish public though, aren’t bond holders only interested in coupon payments being made. They have an equity stake in the country despite the determined efforts of the industrially muscular to pretend they are sovereign creditors too.

  6. seafoid Says:

    The ‘great rotation’ from bonds ino equities is only a goer if the world economy leaves the crisis behind it , interest rates return to some kind of normal and growth takes off. What is likely to drive the growth the markets think is possible? Oil will soar if growth returns. The supply of credit will be restricted. There is no sign of plutocracy being dumped as the political economy model du jour. And there is all that debt left over from the last orgy.

  7. Eureka Says:

    Very interesting. He must be hoping to buy some safe bonds or sell some Irish bonds. Ah I dunno

  8. DOCM Says:

    The extract which concerns Ireland.

    “Franklin recently became the largest private holder of Irish sovereign bonds with almost a tenth of the market, raising fears that prices would tumble as soon as he stopped buying. This month, however, Ireland sold €2.5bn of five-year bonds paying 3.3 per cent, a sign of relative financial health. There was €7bn worth of demand, with 90 per cent of the buyers coming from outside the US.

    “This recent access to the market I think finally closed the door on a lot of the naysayers,” says Mr Hasenstab.

    Some investors are less sanguine. Myles Bradshaw, a portfolio manager at Pimco, says that Spanish bonds offer better value. “Getting the budget deficit down now depends on growth, but it’s a small, open economy that needs global growth to pick up, and I can’t really see that. So Ireland will need more austerity and I think that will be difficult to implement.”

    On the one hand, on the other!

    A press item that will certainly interest dealers behind their Bloomberg screens.


    Long live the Croke Park Agreement!

  9. Tullmcadoo Says:

    How would a bond vigilante react to non payment of the PN? What would the quality money do on the initial spike in yields?

  10. DOCM Says:

    @ All

    Also posted on the thread dealing with Ireland’s adjustment programme.

    @ All



    As Merkel said, the ECB has moved to “the edge of its mandate”. It will go over that edge if the ELA advanced by the CB, with the blessing of the ECB, is NOT paid back.

    How likely is it that the main players will allow this to happen?

    Some more ingenious method will have to be found. Megaphone (or legal) diplomacy will not provide it.

  11. grumpy Says:


    Its been pointed out to me that Stephen K of this parish appears to disagree with me regarding investors’ likelyhood of panicing:

    “Any deal on this debt would include pushing out the term of repayment from 10 years to perhaps 30 years, perhaps converting the notes into fully fledged government debt by issuing a government bond. Reducing the annual payment on this debt to manageable levels – €1bn instead of €3.1bn per annum, say – is the Government’s objective as this would make Ireland more creditworthy in the eyes of foreign bondholders, from whom we’ll need to borrow in the future….

    …If the Government doesn’t get a durable deal on the promissory note, which is acceptable to the ECB, the Irish people and the international markets, it will be a legal and political argument that wins. The economic argument is undeniable. If the Irish Government doesn’t get a deal, then its domestic and international credibility will implode.”


  12. DOCM Says:

    @ All

    Before the PN deadline imposed by the current government on itself is actually reached, Europe is not going to come to halt.


    As to “implosions” in Ireland of one kind or another, they are unlikely to be of a scale that are likely to disturb the progress of European history.

  13. anewdawn Says:

    Not just Stephen K
    Karl W has also begun to express some musings on the likelyhood of armageddon or not in we delay the payment
    Of course, others, notably Brian L and Constantin G and David McW have been saying variants of that for a long while.
    Not looking seriously at not repaying is not sensible.

  14. grumpy Says:

    Now anewdawn, you have to be careful not to mix 2 different things up there.

    Stephen K is saying a failure by the Irish state to get a significant deal will implode international confidence. I think it is more likely the market will be given reason to assume that if Ireland becomes to look like it might be unable to pay its gilts, then another iteration of a PN deal, or some other deal, will be pulled out of the EZ hat.

    That is not the same as failing to pay the PN in March.

    With regard to Tull’s question above, why would the smart money be considering that, when they can guage the extent of Ireland’s radical leanings from Docm’s link?:

    “Mr Begg said he was not suggesting Ireland default on its repayments, but insisted an agreement should be reached on its restructuring - through a write-down on its absolute value, altering the duration of the loan, or reducing the interest rate.”.

    Stephen’s article also seems to start with a highly significant error:

    “IRELAND’S leaders have betrayed every single promise they made en route to power – except their express commitment to get a better deal for the taxpayer on the odious debt represented by the repayment of €31bn in promissory notes.”

    So far as I’m aware, they have kept their promises to Mr Begg.

  15. anewdawn Says:

    Mr Grumpy may have several points.
    Is David Begg still on the board of the central bank?

  16. DOCM Says:

    @ grumpy

    Mr. Begg might start by at least tilting at the right windmill. He seems oblivious to the fact that Europe will not come to a halt while the trade union movement in Ireland ties itself in knots trying to defend the indefensible i.e. maintaining the absolute rights of those in employment at the cost of those without it (or having emigrated).

    In fact, the link to Le Monde above contains some good news for Ireland in that it confirms that France and Germany are in the process of tuning their violins - as the French say - before the next European Council and are likely to confirm long-standing agreements which include maintenance of direct payments under the CAP.

    In short, by the time he gets his tilting organised, the political scene as far as Europe is concerned may have changed considerably.

  17. David O'Donnell Says:


    Pressure for a Deal: Berlin Opposition to Cypriot Aid Weakens

    German leaders are concerned that emergency euro-zone aid to Cyprus will merely serve to help the Russian oligarchs who use the island nation as a tax haven. With pressure growing to approve a bailout deal, however, Berlin now appears to be changing its tune.


  18. Tullmcadoo Says:

    I was not suggesting exploring or talking about or marching around calling for negotiation. That is a BS strategy,
    I was referring to the impact in Gilts if Enda said straight out we will not pay the PN on the date appointed. Would the market panic for more than a day?

  19. Tullmcadoo Says:

    Not accusing you of advocating the BEGG strategy of waving a small stick in a non threatening manner.

  20. grumpy Says:


    If I was advising on strategy I would have made it clear before now they would have to have a fall-back communications / PR position for the international audience. You are more of a FGphile, do you think they are capable of having this worked out, with it all war-gamed out, correspondence ready to leak, tit for tat moves covered, public approval so as not to be undermined by talk of question marks over precautionary official funding for CP2?

    For investors, I think key would be the German/core reaction. The option where they talk themselves into having to interpret as proof that periphery states cannot be trusted and given an inch will take a mile, would be the one reigniting EZ break-up sentiment.

    A technical perspective on the latter, you will recall the usd eur rate got to around 1.2 and you couldn’t turn on any form of financial media without an ‘expert’ telling all and sundry the Euro was going to 1.10 or parity. At the time I pointed out how exposed the record net speculative positions were to a short squeeze. Now at around 1.34 and those positions have finished being closed out - they have actually recently gone past flat and into long Euro. The Yen now has short positions last registered in mid 2007 - and you will have noted the slide.

    There is quite a bit of downside potential if momentum developed therefore.

    Number of of other quantitative indicators suggest it unlikely there is more than a few weeks of bullishness left before saturation point even if Enda does as instructed and people have started being prepared to pay up for puts.

    Do you think that Enda, Patrick, Eamon, Joan, Lucinda, Brendan Leo, and their advisers from the MOF think that they have enough familiarity with international markets in flux to allow them to have the confidence to think they can anticipate the reaction to a bold move like default on an obligation to a Euro System central bank, taking the heated and expletive filled telephone calls in their stride - or do you think they are more likely to seek the conformity and shelter of the herd?

    Pat Rabitte don’t forget, defined last year’s arrangement as “not paying the PNs”. That and David Begg’s insistence no apple carts are overturned has to suggest ‘furious spinning’ - of either how good the deal is, or how the PN isn’t being paid when it is - would be the reaction to whatever the ECB tells the Irish government it will agree to.

  21. Michael Hennigan - Finfacts Says:

    @ grumpy

    First quarter GDP in the US could shrink again possibly because of further cuts in public spending . The automatic sequestration will kick in on March 1st and Paul Ryan sees it as the only leverage that the Republicans have.
    So being back in recession would undoubtedly throw a soggy blanket on sentiment even though China and housing are holding up well.

    While the ECB can squash any optimism on the Anglo PNs, the restructuring options of other debt are the responsibility of the politicians and it’s unlikely that the good ‘pupil’ will be left high and dry.

    It should have been easier to have got longer terms on the support for Anglo in 2009 than now.

    The addiction to spin results in seeking very short term gain at the expense of expectations.

    The adjustment to a developed world of long-term sub-par growth of 2%, means a political process that is behind the curve for several years more.

    Pre-2008 is not coming back and emerging economy growth will continue to be higher than that of developed countries with debt on average much lower and their demographics more favourable.

    Among the top 500 multinationals worldwide, 202 companies are from developing countries as of 2012, compared with only 19 in 1990. India and China together are projected to account for 42% of the total number of new multinationals established over the next 15 years.

    Still, companies in the developed world have cash hoards totalling almost $8tn.

    In December 2009, Apple and Microsoft had cash and near equivalents of $79bn and three years later the sum had risen to $205bn - -  more than a third higher than Ireland’s GDP.

    Company cash hoards rise to $8tn; Taxes, squeezed labour and ‘trapped’ cash


  22. tullmcadoo Says:


    thank you for an excellent analysis. You are essentially right. Even if the govt decided to go radical, it would be subject to a torrent of official analysis to the contrary. Who knows, some SGs might even threaten to resign. There would be party splits, given the europhile nature of both parties. And of course the opposition would be screaming. Looking at the ex Bank director Begg, it is clear that a sizable bunch of the debt relief constituency want it to be a cost free exercise which it might not be. Easy to protest, issue a few statements and go home.

    So the constituency for a truly radical solution is small and squiffy. Therefore, the herd over there looks comforting.

    However, I think this is the point of no return, payment condemns them to a miserable two years in govt which will be worse than FF’s last year. in those circumstances, an ageing pol, on his last lap of the cabinet table might do something for the history books and tear up the letter. What is the real downside, if it works you may just succeed and get a deal. Or you could trigger a wave of unintended consequences like exit from the euro, true fiscal reform which might not be too bad in the long run.

  23. Joseph Ryan Says:


    “the reaction to a bold move like default on an obligation to a Euro System central bank, taking the heated and expletive filled telephone calls in their stride”

    “heated and expletive filled telephone calls”! Where did you dream that up. Shure the last time we missed the call and did not not return it, and just did what the ECB wanted anyway!

    PS. Politically you may be underestimating what may happen to no deal or a very bad one. There are a few old Labour ministers, whose contribution to the State will be recorded as very negative indeed, if the PN is paid and Ireland continues its grinding descent into emasculated penury.
    It will be the last chance they will have, this side of their well feathered retirement, to get on the right side of history.

  24. Geronimo Says:

    Back to Hasenstab, he is giving free investment advice. Emphasis on FREE. You get what you pay for.

    If he is right, we can anticipate global economic growth, the great rotation into equities will occur, interest rates will rise (i.e. government bond prices and bond funds will fall), and we can look forward to better times ahead. I sure hope he is right. I got my money on a 2013 recovery in the Global Economy.

    Ireland: who knows. If a good deal on the Anglo promissory notes occurs, IRE (American Depository Receipts) will explode to the upside, otherwise it will be a long painful slog.

    But be aware I’m the dude who bought INTL at $73 in September 2000.

  25. Geronimo Says:

    Again back to Hasenstab and his free advice,

    You just got to wonder who owns BKIR (IRE ADR) right now. And who has insider info on the promissory note final deal. Serious money to be made here lads.

    Awfully tempting to trade on insider info if a good deal for dear ole Ireland is struck.

    This will be an interesting few weeks.

  26. Eureka Says:

    @ Geronimo
    Motives are interesting. I think that behind the scenes there’s a change in sentiment from fundamentally solid poster boy to being f****ed.
    the only people who’ll buy his bonds are the ECB but that depends on Ireland sticking to the targets. So…maybe there’s a nervousness here.
    I think there’ll be a change in the nature of the commentary over the next month or so. Reading between the lines those in the know suspect a half baked debt deal for Ireland.
    Oddly enough we could overtake Greece as a fault line -

  27. Michael Hennigan - Finfacts Says:

    @ Geronimo

    You must have hit the jackpot during the bubble?

    What Irish shares would ‘explode’ if good news materialised? Ryanair? — more than a reversal of the net emigration of 34,400 in year to Apr 2012?

    As for the global recovery, US may grow at 1.5%, lucky at 2%, Eurozone?, Japan?

    Wonder what China’s growth was when its Shanghai Composite fell over 60% in 2007-2012 - - reasons of course.

    In March 2000, the S&P 500 first closed above 1500. Since corporate profits are up 135% but stocks have made virtually no gain over the last thirteen years.

    2011 rises:


  28. seafóid Says:

    @ Grumpy

    “Number of of other quantitative indicators suggest it unlikely there is more than a few weeks of bullishness left before saturation point even if Enda does as instructed and people have started being prepared to pay up for puts.”


    “The physics of markets and economics can be strange. Trends continue in motion long after they should have halted. It can take years for ineffable logic to work itself out in market prices. External shocks take time before they are reflected in inevitable damage to the overall economy.
    There are reasons for this. Hope springs eternal; investors, executives and all other economic actors tend to hope for the best. Once they are down, excessive pessimism can depress economies and keep asset prices low. And in markets, prices are now largely set by investors with a strong incentive to latch on to a trend and prolong it as long as they can because they are paid to do so. That is what the pay structure for hedge fund managers and banks’ proprietary traders encourages.
    So market trends can carry on far longer than logic dictates before correcting, and economies can take a while to bow to the inevitable.”

    so cheer up !

    Altogether now ..


  29. eamonn moran Says:

    @ Michael Hennigan


    Great article with so much to think about.

    The McKinsey report mentions that European private investment is down 15% since 2007 which it says is a much bigger part of the reason for our growth problems than most commentators have recognized
    It goes on to mention that the figure for Ireland is a drop in private investment of 64%.

    Trade union membership is now at 11% in the US.

    Legal rights to collective bargaining have been repealed in many states.

    Very depressing stuff.

  30. David O'Donnell Says:


    ‘… or do you think they are more likely to seek the conformity and shelter of the herd?

    Rhetorical I assume.

    Irish hardballers are an endangered species - they have been emigrated out over the past two centuries. The gene pool is now supine in the extreme.

  31. David O'Donnell Says:

    Prominent figures at forum say State should ‘hold firm’ for deal

    At last year’s forum Prof Joseph Stiglitz, the Nobel economist laureate, described as “unconscionable” Ireland’s repayment of unsecured bondholders.

    This year he criticised the Government for harbouring false illusions and approaching its partners as “beggars”.

    “Ireland is still [operating] under the belief that, if it is good enough and doesn’t say nasty things, that virtue has a reward,” he said.

    “But virtue in this case is, I think, doing the wrong thing. Doing what the ECB wants is bad for the Irish economy and bad for the Irish people . . . eventually it will become transparent that this austerity package isn’t working.”


  32. Fiatluxjnr Says:

    Thanks. Interesting analysis.

    Looks like the High Court regards the Promissory Notes as sacrosanct.
    “He noted Mr Hall contended that the appropriation of revenue or public monies by the Minister for Finance without a vote of the Dáil authorising that is unlawful. It is common case no such vote or resolution was passed by the Dáil, he also noted. He also said the delay by Mr Hall in bringing the case “must be afforded particular weight” having regard to the “solemn undertakings” entered into by the Government concerning the notes, now operational for some three years.” From IT report.

    Could that finding make it difficult for MH?

  33. Fiatluxjnr Says:

    Could that finding make it diddicult fot MN.

  34. Paul W Says:

    On the dismissal of Mr. Hall’s case, the delay factor undermines any future Irish attempt to take an ECJ action….If the Irish High Court says it’s time barred, how does the country argue against that to an ECJ /other tribunal?

  35. Fiatluxjnr Says:

    @Paul W
    It appears the challenge was rejected on the narrow grounds of locus standi although the delay looks like it was taken into consideration. Does it now mean that any citizen is barred from taking any action against the governments conduct of fiscal affairs and that this right is now reserved to members of the Oireachtas. Seems so…for the moment…the decision is being appealed according to rte news.

  36. Paul W Says:

    The limitation of the locus standi to Oireachtas members is bizarre.

  37. Paul W Says:

    Does this precedent now limit the right of citizens to seek judicial review of Govt actions (whichever part of Govt).
    One way or the other, this judgment is ‘unhelpful’, in unduly limiting the possibility of future legal options.

  38. David O'Donnell Says:


    ‘In a system of multiple states, there are rather long cycles in which one state manages to become for a relatively brief time the hegemonic power. To be a hegemonic power is to achieve a quasi-monopoly of geopolitical power, in which the state in question is able to impose its rules, its order, on the system as a whole, in ways that favor the maximization of accumulation of capital to enterprises located within its borders.’ Wallerstein

    Hmmm 7 letters, begins with G

  39. Mickey Hickey Says:

    Reported today.

    Deutsche Bank $3 Billion surprise quarterly loss.

    Hopefully this is not the beginning of a trend.

  40. Mickey Hickey Says:

    Here is the link to DB $3 billion qrtrly loss.


  41. David O'Donnell Says:

    They musta paid the Promissory Note!

  42. David O'Donnell Says:

    fyi Angela’s Election

    Fear of Contagion: Merkel Steps Back from Coalition Partner FDP

    Following her party’s failure in a major state election, Chancellor Angela Merkel is distancing herself from her junior coalition partner, the business-friendly Free Democrats. It is a risky move, and could indicate that she is aiming at a partnership with the opposition Social Democrats. By SPIEGEL Staff


  43. Michael Hennigan - Finfacts Says:

    @ eamonn moran

    The Irish Government is leading the way with a dual labour system in Ireland.

    Private sector pension coverage is already low and the nube of slef-employed with occupational pensions is now likely below 30%.


  44. Bond. Eoin Bond Says:

    @ Fiat/Paul W

    the prom note case was not really based on the notion of the prom notes being a bad idea, it was based on the idea that the Dail didn’t vote on it properly. So the ‘decision makes perfect sense - only the disenfranchised (ie members of the Dail) can claim disenfranchisement (there was a similar issue in the recent childrens referendum i think, when there was a claim that innaccurate or biased literature impacted on “early” voters - in that situation those bringing the case actively sought out some of those early voters to be joined to the case and so represent someone actually disenfranchised). This has no bearing on the ability of citizens to query government decisions in general. The judge’s decision calls into question David Hall’s preparedness of the case tbh.

  45. Paul W Says:

    @ BEB
    Judicial review usually involves a cliam that proper process was not followed. The lack of a Dail vote was therefore a departure from usual and proper process, irrespective of whether the PNs were a good idea or not. The limitation imposed is therefore bizarre. That is why it will be appealed to the SC….There is still a strong arguable case.

  46. Fiatluxjnr Says:

    @Paul W/BEB

    Only the disenfranchised?..is the citizen not disenfranchised when the Executive makes decisions of such import that the solvency of the State is threatened without having same approved by the representative of the citizen.
    Locus standing is always the first line of defense…get rid of them without fully debating the merit of their argument.

  47. eamonn moran Says:

    @ BEB

    We are all disenfranchised if those who are charged with representing us are not given the right to vote.

  48. Fungus the photo Says:

    FRB, fractional reserve banking, including Ponzi and pyramids and derivatives of maybe 10,000% of the underlying liability, always creates mal-investment and does not create wealth, in aggregate, but re-allocates it. Indeed, it destroys much investment, revealing it to have been stupidly endorsed by the claque of rentiers that springs up with a credit bubble.

    Developing countries, as the name suggests, actually create wealth.

    The long, slow Japanese process is now being repeated in EU and America. The debt treated as an asset, will eventually be left as naked paper, assetless, with winners of derivatives claiming from insolvent entities. Possession will be 99% of the law. Those storing gold etc will have paper protections as with Corzine, to ensure that this happens.

    The third world will then be far more equal, in terms of real assets, with the world of make believe that says FIRE creates wealth. No doubt these real assets will attract those who have a “cunning plan” for the owners!

    What effect will the collapse of all banking interaction have upon Ireland and the EU? I suspect 2013 is the year for a major run.

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