BY Wills – Seem today is a significant day in reality testing on how far can irish government go with bond issuance and moving paper ‘back to the future* to bail the insider crony network at the power centers bail it out to preserve their rigged market system going forward. Links below covering this.
>FT on Irish Bonds status –
Irish bonds fall on bail-out fears
By David Oakley, Capital Markets Correspondent
Published: September 17 2010 15:22 | Last updated: September 17 2010 15:22
Irish bond prices fell sharply on Friday after fears increased that the country will need to turn to the international community to bail out its economy.
A report from Barclays Capital which said the Irish government may need to seek outside help if further unexpected financial sector losses materialised and economic conditions deteriorated, sparked the selling.
Eields on Irish two-year bonds, which have an inverse relationship with prices, rose by half a percentage point to 3.63 per cent, forcing the European Central Bank to intervene to prop up the Dublin markets, traders said.
Although the ECB was only seen to be buying small amounts of Irish bonds, it further emphasises the difficulties faced by Ireland and other weaker eurozone economies.
Domenico Crapanzano, head of euro rates trading at Jefferies, said: “There are just no buyers out there for Ireland because of worries over its economy.”
Worries over Ireland also put Portuguese bond markets under pressure because there are also concerns that Lisbon will have to turn to the international community for financial assistance too.
Portugal, which is also considered a problem by many investors because they fear the government is not introducing economic reform quickly enough, saw its 2-year bond yields rise nearly a quarter of a point to 3.50 per cent.
Other eurozone bond markets were stable as they are not perceived to be in danger of having to seek bail-out money.
Separately, analysts stressed the selling in Irish bonds was nothing to do with controversy surrounding Irish prime minister Brian Cowen.
He promised to socialise “more cautiously” after being forced to apologise this week for a stumbling media performance given just hours after he finished partying with colleagues at an annual conference.
“I will be a bit more cautious in terms of that aspect of how I conduct my social life,” Brian Cowen, who has repeatedly denied he was drunk or hungover during a radio interview, told the national broadcaster RTE on Friday.
> FT BLOG – ON IRISH GOV BONDS
This is why Barclays Capital’s warning over Ireland’s medium-term debt sustainability matters. Note that phrasing. Ireland will not be going to the IMF tomorrow — but there’s more uncertainty in the next few years.
Uncertainty over how much is left to support Irish banks, that is — Anglo Irish above all, even as it faces winding down.
So note Moody’s downgrade of Anglo Irish’s covered bonds to AA2 from AAA on Friday (emphasis ours):
Today’s rating actions on the covered bonds are due to concerns over the liquidity of the commercial assets backing the covered bonds. Given the difficult environment for the refinancing of commercial assets, Moody’s believes that the probability of timely payments on the covered bonds is unlikely, after issuer default. Moody’s has therefore lowered the TPI [Timely Payment Indicator] for both programmes from “Probable” to “Improbable”.
It’s rare stuff for a covered bond to be downgraded in any case, but — as we’ve noted before – Moody’s lowering of the TPI is more telling still, as the move goes against the point of this particular debt type. In a covered bond, the investor should get rapid and full repayment in the event of an issuer’s default. This isn’t just Anglo Irish’s unsecured creditors suffering.
As Moody’s notes, the TPI lowering is for two reasons:
(i) The difficult environment for refinancing commercial assets. Both cover pools are made up exclusively of commercial real-estate loans underwritten by Anglo Irish. Moody’s view of the collateral quality is expressed by the Collateral Scores of 37.6% for Anglo Irish Mortgage Bank’s programme, and 44.2% for Anglo Irish’s programme. Liquidity for large commercial pools of this quality is limited in the current market and would come under further stress if Anglo Irish defaulted.
(ii) The recent downgrade of the Irish government to Aa2 from Aa1. When assessing any TPI, Moody’s takes into account the respective government rating. This is because under Moody’s rating method, it is assumed that the ability and willingness of the government and financial institutions to support covered bonds weakens as the credit strength of the sovereign declines. Following the downgrade of the Irish government, Moody’s has lowered its assumptions on the likelihood that the government and/or other financial institutions would support the covered bonds following a default of Anglo Irish.
Which is the whole point Barclays Capital were getting at. If the Irish real estate crash goes on, and the recovery rates on bank assets weaken – the Irish state is vulnerable because it’s pegged its support to certain levels of recovery in bank assets.
It’s a very uncertain process — but a dangerous one, because the extent of the bank rescue so far doesn’t give the Irish government much more room in 2011. So when you see things like this from the IMF on the wires:
RTRS-IRISH AUTHORITIES CONTINUING SUPPORT FOR BANKING SYSTEM HELPS MAINTAIN FINANCIAL STABILITY- IMF SPOKESPERSON
Know that this ‘continuing support’ is the entire problem.
> FT BLOG
The Rock of O’Sisyphus
Posted by Joseph Cotterill on Sep 16 17:07.
Have we been missing the Irish forest for the (ahem) Anglo Irish trees?
Uncertainty over how much the Irish government will have to fund Anglo Irish’s liabilities before it’s wound down has stalked the market recently.
That’s been wedded to fear that the country’s bad bank will take losses on the assets it’s taking off Anglo and other banks, despite heavy haircuts — but really, more bank losses than expected = ongoing crashes in real estate = fewer fiscal receipts for the Irish state.
Which, as Barclays Capital’s Antonio Garcia Pascual and Piero Ghezzi noted on Thursday, means the Irish sovereign is facing an even stickier situation in the medium term (click to enlarge chart):
In a relatively benign macroeconomic scenario, with medium-term real GDP growth of 3.0% and nominal yield of 5.0% and no further significant unexpected bank-related losses, the cumulative primary fiscal balance adjustment required over a five-year period (2010-14) is 11.5% of GDP…
…under a slightly less favourable macroeconomic scenario (real GDP growth of 2.5% over the medium term and nominal long-term yields at 5.5%), the cumulative primary surplus adjustment required to reduce debt to GDP to 60% by 2050 increases to 12.4% of GDP. Under a slightly more severe (but plausible) macroeconomic scenario (real GDP growth of 2.0% over the medium term and nominal long-term yields at 6.0%), a cumulative primary balance adjustment of 13.3% of GDP would be required over a 5 year period.
The difference between an 11.5 per cent adjustment and 13.3 per cent is more or less that between Ireland’s last big fiscal adjustment in the 80s, and… well… Greece under its current bailout. The more benign version is pretty tough in itself:
Under our more benign macroeconomic outlook, the proposed government fiscal programme would deliver a primary fiscal adjustment of about 10% of GDP over a five-year horizon. Therefore, even under the “benign” growth scenario (ie, with real GDP growth reaching 3% by 2015), the current government fiscal consolidation plans, while ambitious, would require additional measures to put the debt dynamics on a sustainable path. The fiscal plan would only manage to reduce the overall estimated fiscal deficit from about 12% in 2010 to about 6% of GDP by 2014.
And if Ireland added further cuts to its fiscal menu, this would provoke a difficult trade-off in terms of pushing growth even lower — which would depress fiscal receipts even further.
Similarly, the government has fewer and fewer ways left to support banks, having extended a short-term guarantee to help them cover a refinancing wave this month. External aid to banks — ECB liquidity — won’t be lasting forever, either.
Pascual and Ghezzi thus make quite a striking call (emphasis ours):
At this juncture, given the near-term liquidity conditions of the sovereign and the completion of funding requirements for 2010, we would argue that the Irish authorities’ do not need to seek an EU-IMF package…
However, the lack of fiscal space over the medium term to tackle future unexpected losses in the banking system does constitute a source of market instability. In our view, if the macroeconomic conditions deviate from our baseline recovery scenario and unexpected losses crop up in the financial sector, then the government’s best option at stabilising adverse market dynamics would indeed be by drawing on financial assistance from the EU-IMF to create further recapitalisation buffers and resolve unexpected financial sector losses.
It’s striking because Ireland is indeed funded for 2010 — not to mention that rates on its debt can be brought down (for now) by the ECB’s bond buying programme, and (indirectly) by investor perceptions that the EU will support Irish policy. But again — these policies can’t last forever.
Ireland would be a particularly good candidate for help because it already has a strong list of fiscal cuts (amounting to 5.5 per cent of GDP in 2010), Pascual and Ghezzi argue, and is making progress on fixing its banks. But it’s just too much to carry on the government’s own.
Whereas IMF help is looking much more practicable:
On the IMF side, the enhanced Flexible Credit Line facility recently approved by the IMF Board appears to be a suitable funding vehicle. Indeed, part of the financial assistance could be in the form of a flexible credit line, which could be drawn if the contingent liabilities acquired by the government do materialise.
This could be the case if the estimated 50% average haircut would turn out to be insufficient on the NAMA-transferred loans or, more importantly, if further recapitalisation would be required as a result of unexpected losses in non-NAMA portfolios – a likely scenario under current growth prospects…
BY Constantin – Paper on free markets and human capital
BY Boston.com – Art and maths
Brock, who has a brisk mind, is a man on a mission. He read mathematical economics and political philosophy at Princeton (he has five degrees in all) and is the founder and president of Strategic Economic Decisions Inc., a think tank specializing in applying the economics of uncertainty to forecasting and risk assessment.
But phooey to all that; Brock has deeper things to think about. He believes he has cracked the secret of beautiful design. He even has equations and graphs to prove it.