So the ECB has, years late and trillions short, decided to act rather than to react. Having passively allowed its balance sheet, shrink By €1 trillion over the last two years it has now decided to inflated its balance sheet by €1 trillion over the next two years. One of the things that central banks are supposed to do is to ensure stability. Looking back from the end of 2016 the gyrations of the ECB balance sheet will hardly inspire. Nonetheless the proposal to engage in quantitative easing, of a sort, is welcome. But its more a constipated squeezing than real quantitative easing. Continue reading
So .. This is, as best I can figure, the profile of the main Irish bonds maturing in the next generation or so.
Yes children, NAMA… Ok, they’ll just roll it over but its still a bond (two actually) and still has to be dealt with…
Bear in mind … GDP 2014 is predicted to be c 170b.
Data : NTMA for Gov and EU, Reuters for the others.
There is a most interesting letter (of the Green jersey type) in the Irish Times this morning. It is from a Donal O’Mahony of Shankill and is on the wonderful performance of Irish government bonds. Ireland is truly lucky to have this sage, and also to have his namesake Donal O’Mahony the head of debt research at Davy stockbrokers (prime dealers in Irish debt). After all, they couldn’t be the same person, as who fly under false colours and not declare in a letter their interest and affiliation…. Anyhow, Shankill Donal states that we are addicted to “failure porn”, in looking backwards, which tells me that the mindset that in the 1970s cut out of the biology syllabi the parts on the human reproductive system (durty filthy durty shameful durty stuff) still lives. Dont look back as then you might see stuff you dont like…
Anyhow Shankill Donal (not I guess to be confused with Davy Donal) says
” a stunning 88 per cent return in Irish government bonds since July, 2011 has gone largely unheeded by the Irish media, politicians and, most disturbingly, an insolvent Irish pensions fund industry . . . unheeded by all, perhaps, except those clear-headed international investors who see the improving creditworthiness that we ourselves discredit. “
okkkaay. Lets look at that.
First, and presumably because Shankill Donal is not Dawson Street Donal, he might not be aware of the (from my ivory tower view anyhow) significant debate on the bond performance. Shankill Donal must be a bond trader somewhere though as he focuses on the price of bonds, when most people focus on the interest rate on bonds. Shankill Donal and Davy Donal should get together and talk….Even a casual perusal of the interwebs will throw up dozens and dozens of articles on the irish bond market. But maybe Times Letters Page Donal doesnt use the intergoogler. anyhow, here is the most recent article I could find, to assuage him that yes, this ignorance is all in his mind.
Second, the underlying assumption is that the fall in yields is down to improved creditworthiness. Hmm.. Maybe he is a trader but he is no economist. Bond investors care about creditworthiness only over the holding period. As nobody serious ever has to my knowledge suggested default on the actual NTMA issued government debt, as they were backed by the IMF and ECB for a period of years, as the strong likelihood is that some sort of (dont call it a bailout) deal will be in place from 2014 onwards, the strange thing is that irish bonds were ever so low (interest rates so high). Proof that he isnt really Dawson Street Donal is that he seems to think the fall in interest rates / rally in bond prices is down to ourselves alone. Maybe hes a member of Sinn Fein? The fall in interest rates is of course down to a mild increase in risk appetite a change in government from bumbling to fumbling, a realisation that the Euro is here to stay and the euro members seem willing to inflict and bear any pain to make that so, the continued efforts to stabilise the irish budget deficit, the apparent end (apart from clouds on mortgage debt and court cases on subbie toasting to bank bailouts and a carry trade. The carry trade is of course the irish banks taking cheap ECB money and buying higher yielding irish debt. This has boosted the irish banks holdings of Govt debt to 10% or more, from 5% of a much smaller number in 2011. Victor Duggans blog on this is a must read. In essence, as Business Insider says s
“Simply put, Irish banks have dramatically increased their holdings of Irish government bonds, from a very low base. This reflects the recapitalization efforts and tightens rather than loosens the linkages between the sovereign and domestic banks. The largely nationalized banks are funding a large share of the government’s deficit”
And those steely eyed wonderful international bond buyers that Shankill Donal loves? Well, theres one of em anyhow, Franklin Templeton, but that seems to be it. In fact, the NTMA said, and who can object
He welcomed the attention of US investor Michael Hasenstab’s Franklin Templeton Investments, which has become Ireland’s biggest private sector creditor over the past year-and-a-half by investing in bonds.Mr Corrigan said: “As an investor, Franklin Templeton are clearly very welcome in the positive view they have taken on the Irish market.”We would prefer if we had 10 Franklin Templetons, rather than one.”
In fact it seems that things might be the opposite of what Shankill Donal thinks. The NTMA very kindly publish a summary geographical holdings of Irish Bonds : the holdings of irish government bonds by non residents have FALLEN over teh last year, from 66b to 60b, from 78% to 74% of total. And this is with Franklin Templeton ploughing in. Dawson Davy Donal knows this of course, which is why he would never laud “clear-headed international investors” without caveat.
Finally of course there is the utter ignorance by Shankill Donal of diversification. No reputable or serious economist, such as Dawson Street Donal, would urge increased home bias, or the use of domestic pension funds to purchase and buoy up government bonds (a form of financial repression). Irish pension funds should of course have some assets in all forms . And they havent done badly over the 2001-11 period – a survey showed a return per annum of 8.5%, well over the 6% global average. So whatever they are doing its not too bad. Irish investors, including pension funds, need to be more, not less, diversified globally.
So, while its great that Shankill Donal is taking an interest and holding up a mirror to the facts, he should look up his namesake Dawson Street Dave and have a chat about whats really going on. Its not all bad news, but its not all good news, not by a long chalk….
The ECB yesterday unleashed another acronym, to add to the stew. This time (it’s different?) we have
Outright Monetary Transactions.
What this means in detail is dissected in the newspapers and blogs. See in particular Constantin Gurdgiv, the Irish times, and the guardian for good and differing takes.
In practice the ECB will purchase lots of govt debt in the secondary markets, subject to the countries whose bonds are being purchased in effect being under ECB and Commission scrutiny. These bond purchases will be sterilised: there will be no net addition to euro area liquidity.
That’s nice…but it’s not what’s needed.
First, who died (apparently modern capitalism…) and made ECB god? They’re a central bank, and it’s not at all clear that they should be overseeing fiscal actions. They should, like a good central bank, concentrate on monetary issues. Of course, absent reasonable or any actions from the governments, someone has to oversee the fisc, so perhaps we shouldn’t be so critical.
Second, it’s a time play. For states that can’t raises funds at reasonable rates the idea is that by the ECB intervening the rates will be driven down and the states can fund themselves. But that’s not the problem. Many states find themselves locked out because they have too much debt…cheaper det is not the solution, but LESS debt. In that regard for Ireland at least the next stage of the plan is to get the odious,in all senses, bank debt off the fiscal balance sheet. You cannot solve a solvency issue (yes, Greece, I’m looking at you) with liquidity operations (think , if you will, Anglo Irish Bsnk and 2008-9)
Third, the sterilisation will result in no new liquidity but will in effect shift existing liquidity towards more state funding and thus away from non state. It’s not clear that that is what’s needed now
Fourth, this is a beefed up version of the previous ECB acronym soup….each was unveiled as the solution, six months later they all had failed. Central banks and the currencies they supervise are in the end creatures of confidence. Serial overselling of a solution and serial failure does not inspire confidence. Combined with gross politicisation of monetary policy (if the Bundesbank wants to run Europe, they can’t…) confidence and indeed faith in the ECB and the euro is not high.