Monday, 28 March 2011

Sovereign annuities

Comment on the launch of "sovereign annuities" [note: they aren't annuities] over at I can't seem to comment over there. Not sure if I've been banned or something, but this worth noting. While the sarcastic tone is well deserved for the accompanying launch commentary - "there is no risk of default" (I wonder how the Financial Regulator feels about statements like that??), it might be worth noting that there could be some traction for the index linked issues if they pay Irish inflation, something to which Irish pension schemes are currently exposed to and against which they only have a rough hedge in the form of Euro inflation. Pension schemes would of course be sensible to combine such assets with appropriate Credit Default Swap cover.

Friday, 11 March 2011

Ireland's nuclear button

There is a popular theory going around that Ireland has some form of nuclear button at hand in the event of negotiations with EU partners on our debt problems and their assistance don't go as we had planned.

The hypothesis is that if they don't give us what we want we will default and German banks, or the German economy will be at threat.

Just a quick reality check here. While the sums involved are indeed extremely large and will be fatal to the Irish economy, they are a fatal threat to neither the German banks involved nor the German economy. What they would be is a severe financial irritant.

What those debts are, under potential default, is a massive political concern for Angela Merkel and the German electorate. Irish default would be enough to be extremely annoying politically the very people we are trying to get something out of.

So the more we talk about such a possibility, the more trenchant the German government is likely to become as they attempt to send the message to their voters that they (Germans) won't be picking up the tab. That strikes me as completely counterproductive from an Irish perspective.

Thursday, 10 March 2011

Markets sense a Euro end game

If you want to see the best indicator of market expectations for the likelihood of widespread fiscal failure in Europe, you need look no further than the shorter end of the Irish yield curve.

Ireland is supposed to be backed by a line of credit that will float our finances for maybe 2-3 years. You shoud (should) feel relatively comfortable about lending to the Irish government over such a term given that they the EU/IMF credit line will provide funding for close to that period. And up until only a few months ago markets appeared to feel that way. Not so now. 3 year Irish bonds are yielding 9% to maturity.

Markets have a high expectation of a default event. The only way you could be fearful of such a scenarion would be if you believe the much trumpeted EU support fund, the EFSF, will burn through its €750 billion leaving nothing additional for Ireland to call on. The only place such demand will be coming from is Spain pretty much.

And this fear doesn't really appear to have hit the media headlines yet. This is the markets say that the Eurozone is going to default.