Irish government bonds are holding steadyish on Thursday:
The view in the market place is that Wednesday’s sell-off was as much technical as anything else.
Much of the selling can all be traced back to the decision by LCH.Clearnet to demand that banks or institutions wanting to use Irish bonds as collateral in the repo market find some cash to pay an extra margin of 15 per cent.
According to the FT’s David Oakley and Sam Jones that forced Irish banks to sell government bonds as they scrambled to raise the cash to meet the new margin requirement.
One large hedge fund manager estimated that the banks would have to lodge between $1bn and $1.5bn in cash with LCH.Clearnet in order to avoid default and the forced unwinding of repo transactions. Some banks dumped bonds into the market in order to raise cash and buy other bonds that they could still repo.
But, further selling from this quarter is unlikely:
Any further impact may be limited. Some traders expect Irish bond yields will stabilise. If Ireland’s banks have been able to close out enough of their LCH.Clearnet repo transactions, they can turn to the European Central Bank, which only has a 5 per cent haircut.
“This has been a technical rather than a fundamental move,” said one macro hedge fund trader. But Ireland’s fundamental problem of anaemic economic growth and a troubled banking system that may need an increasing amount of money – more than a projected €50bn – to save it from collapse remains.
Be that as it may, the damage has now been done and unless the situation stabilises very quickly Ireland could find itself beyond the point of no return.
Well, that’s the view of Gary Jenkins of Evolution Securities:
The most likely outcome now is that Ireland will need to receive assistance from the EU/IMF. Should this be the case we estimate a funding requirement of approximately €43bn over the next two years, to cover redemptions and fund the fiscal deficit. We have included the refinancing of bills in this calculation making the assumption that the rolling over of short term debt will be difficult due to the overhanging threat that the ‘son-of-EFSF’ will contain some sort of debt restructuring mechanism. (We note the comments made by French Finance Minister Christine Lagarde that “All stakeholders must participate…). This figure does not take account of the cash balance Ireland is said to have, or the potential pension fund purchase of government bonds. If it needed to cover three years of funding requirement the amount would increase to approximately €58bn.
Whilst there has been a lot of talk amongst Euro leaders regarding a new debt crisis management procedure from the EU, this might have unravelled too quickly for them to really change the basic principles established at the time of the Greek bail out. Certainly whilst the intention is that bondholders share the pain, in reality that is going to be difficult to achieve in the short term without risking investors withdrawing from the likes of Portugal as well. Indeed the quickest way to increase the risk of contagion at this stage would be to increase the rhetoric regarding bond investors. In any event, with yields on Irish debt above 8.5% bond holders might say they have suffered enough.
Update: 09.15am (London time) Irish bonds are now starting to sell off:
RTRS-IRISH/GERMAN 10-YEAR GOVERNMENT BOND YIELD SPREAD RISES 20 BPS ON DAY TO EURO LIFE HIGH OF 665 BPS
Pass the tin hat please.
Related links:
Top of the bond yield to you – FT Alphaville