To have one bank trash your sovereign standing may be regarded a misfortune; to do it again with another one looks like carelessness.
And Oscar Wilde was Irish, natch.
Here’s a Markit chart of five-year CDS on Allied Irish Banks subordinated and senior debt over the last year. The sub spread — which Markit adds is already far less liquid than the senior — has markedly ticked up in recent days (click chart to enlarge):
Note this is Allied Irish, not Anglo Irish. Also note that Ireland five-year CDS blew out to a record wide of 527bps on Tuesday as well, according to Markit. Not a coincidence.
First, some background.
Ireland’s government was supposed to have kitchen-sinked the final costs of bailing out the country’s banks in September — cranking its deficit to 32 per cent of GDP, for goodness’ sake. Sorting out Anglo Irish is supposed to have been the hardest and riskiest job here. Witness those gory — trend-settingly gory — Anglo sub-debt exchanges.
While Allied Irish sub debt has therefore taken splash damage from Anglo’s troubles, Allied Irish is supposed to have left the kitchen-sinking as a more survivable bank overall than Anglo. This is meant to be thanks to a €10.4bn capital raising. More precisely, however — a capital raising underwritten by Ireland’s National Pensions Reserve Fund.
Which detail might quickly turn into a deadweight on the sovereign.
That’s because Allied Irish’s cash call has hit a slight hitch. The bank can’t sell off its UK assets. While whether the sale is actually dead or still under review remains unclear — returns on these UK assets made up a lot of the amount being raised from sales.
If the sale collapses and the NPRF has to chip in to make up the difference, the amount will only go on top of the fund’s underwriting of a straight share issue by Allied Irish later on this month.
Which is awkward for two reasons.
First, the NPRF already posted a 2.5 per cent loss on its portfolio of Irish banks in the third quarter — a portfolio which comprises €6.6bn of the fund’s €24.5bn total assets, depleted from €7bn in initial investment. As the Irish Independent explains, Allied Irish’s fixed-price issue is set to rip another €1.9bn off the NPRF’s investments based on how the shares are currently traded.
Even more awkward, the NPRF is being seen as Ireland’s great white hope around some parts, including ideas for it to buy Irish government bonds or for it to release cash as part of an economic stimulus programme. Unlikely.
Second, the more the government gets glued to Allied Irish (just as it starts austerity budgeting for the next four years, remember) the more attractive Anglo-style burden-sharing is surely going to look, especially if the NPRF is being squeezed like this.
Hence those nasty sub debt spreads. And hence another problem for Ireland. Here’s another record to ponder — Irish ten-year government bonds spread against bunds on Tuesday (Bloomberg chart):