Sovereign annuities

Comment on the launch of "sovereign annuities" [note: they aren't annuities] over at Irisheconomy.ie. 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.

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.

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.

Talking tough with Europe - the markets watch

As predicted and expected, it looks like a Fine Gael/Labour coalition government is in prospect for Ireland. While the two parties need to talk turkey before consummating their marriage, their is at least one policy area where we can already surmise the certain direction of the new government.


Debt restructure/negotiation. That means, reconsidering the position of creditors of those limited liability entities formerly known as Irish Banks. as well as some form of renegotiation of funding terms from the EU.


As has been commented on already be knowledgeable commentators, the only outcome of use to Ireland will be one that significantly reduces or curtails the prospective national debt burden, which is already at a level that arguably is not manageable.


So, is there likely to be any success on this score from FG/Lab? Monday morning gave us an early glimpse of the view of financial markets who are looking at nothing else:

So the early running on that question appears to be "no".

New year's predictions

Well, only one really.

What, one may ask reasonably, could be a potential political patch that would leave the German and French governments free and willing to expand their support of the European Financial support mechanism? (stump up promises to back lots more borrowing).

Here is a tip. Keep an eye on the corporate tax rate.

Let's say I wouldn't be too surprised to see somebody float the idea that a Eurozone (maybe, at the risk of enraging the UK, EU wide) corporation tax levy.

Most likely something drafted in such a way that it prescribes a centrally remitted tax of, say, 10% (initially) on corporation profits, subject to a total corporation tax burden in any country of something like 30%.

Surprise surprise, German (and French) domiciled companies would not be subject to any additional tax. Ireland? well....