It’s not just the Irish sovereign that’s experienced a — erm — market deterioration.
From Suki Mann, credit strategist at Société Générale:
As a testament to the virulence of the sovereign weakness, the Bank of Ireland did a three-year government guaranteed deal on 27 October which is now trading at 90% which equates to a 1% loss per trading day. So unsurprisingly cash spreads have been widening and [Thursday] they were weaker but none more than the [Tier 1] sector which dropped another three points on average, making it some six points since the beginning of the week. Sub-insurance followed suit, dropping around two points and [Lower Tier 2] bonds were under some pressure as well, widening on average around 25bp…
At that rate the bonds will be worth zero in about … oh, we don’t know.
We’re being facetious, but the pace of Irish bank bonds’ decline is nothing to be scoffed at. The above deal — €750m worth of debt — was actually the first public benchmark bond an Irish government-guaranteed bank managed to get away after some six months of market closure during the summer. It came with a hefty premium too — 420 basis points over the benchmark mid-swap rate at the time.
The horrible thing — as Mann’s first sentence alludes to — is the feedback loop between Ireland and the banks it guarantees. Bank of Ireland is one of them but so too is Anglo Irish and Allied Irish. Allied’s Lower Tier 2 notes due in 2019 were trading at 47.1 euro cents at Thursday’s close, while five-year senior CDS hit a new high of 908bps on Wednesday. The Anglo equivalent was up over 1,000 basis points.
On the plus side, we’ve had that Friday joint statement aimed at restoring confidence in Ireland. And as Gary Jenkins notes over at Evolution Securities notes:
… the European Commission announced [earlier this week] that it has approved the extension of the government’s guarantee scheme for another six months to the end of June 2011, which will extend the period over which banks are allowed banks to issue new government-guaranteed paper. Although a government guarantee doesn’t sound like the greatest selling point at the moment…
Whoops, there’s that feedback loop again.
Related links:
Backing away from Ireland – epistemically – FT Alphaville
The ECB exit hurts — hurts like negative €12.6bn – FT Alphaville