By Neil Shah
Investors are betting that Ireland’s debt crisis is about to climax, but nobody seems to know what that climax is going to be.
Ireland’s government bonds soared on Friday as expectations grew that the small European country might give in to pressure from the European Central Bank and some national governments to take emergency aid to prevent its problems from infecting other euro members like Portugal and Spain. On Monday, the “Ireland-is-getting-a-bailout” rally continued, with financial stocks leaping higher and the cost to insure Irish bank bonds – even risky “subordinated’ bonds – dropping massively.
A day later, the rally has halted. The yield on Ireland’s 10-year government bond, which moves inversely to its price, is 8.13% compared with 8.10% on Monday. Ireland’s two-year bond yield, meanwhile, is 6%, a tad higher than Monday’s 5.93%. The cost to insure Ireland’s government bonds against default using derivatives called credit-default swaps is also higher: As of 11:45 a.m. in London, it costs $515,000 a year to insure $10 million of Irish government debt for five years compared with $504,000 on Monday, according to data provider Markit.
Europe’s broader financial markets are also in a holding position, waiting for news from a key meeting of euro-area finance ministers in Brussels Tuesday evening. Ireland’s banking problems, and possibly some sort of banking-related European rescue, will be discussed. (There’s also a meeting of European Union finance ministers on Wednesday.) The euro is trading at $1.3590, a little higher than its $1.3585 level on Monday, but it’s flat against the Japanese yen, British pound and Swiss franc. Spain and Greece sold Treasury bills Tuesday without a fuss, though they paid steeply higher interest rates to borrow.
Irish government ministers continue to claim that the country has not requested a European Union or International Monetary Fund bailout. However, Irish Prime Minister Brian Cowen’s latest comments do highlight the fact that Irish officials have been talking on some level with European officials about the latest euro-zone turbulence and what can be done about it. According to Chris Turner, an analyst at Dutch bank ING, the market is expecting (read: hoping for) a €60 billion to €80 billion bailout effort. Irish media reports and some analysts say Irish finance officials may be trying to find some way to get the E.U. to effectively re-bail out Irish banks, which are the source of the country’s debt crisis. While Ireland’s government has enough cash to make it through to the middle of next year, its banks are surviving only because of the generosity of the European Central Bank, along with Ireland’s own central bank. The problem is that the E.U.’s emergency-rescue fund, designed amid Greece’s debt crisis earlier this year, funnels cash to governments, not national banks. Irish officials, meanwhile, may be open to some aid, but are desperate to avoid any semblance of a sovereign default.
Markets, which don’t know what to think, are largely staying put. Sure, the euro-zone’s latest woes are weighing on the euro. That’s why it’s down from nearly $1.43 a few weeks ago. But the currency’s decline could equally be about dollar-buying, rather than euro-selling. Interest rates on U.S. Treasury bonds have recently jumped higher after falling in the wake of the Federal Reserve’s $600 billion money-printing revival. Rising rates make U.S. dollar-denominated fixed-income investments more attractive.
And even the recent drop in Ireland’s credit-insurance costs should be viewed with some skepticism. Gavan Nolan, analyst at data provider Markit, noted on Monday that the drop was largely due to “short-covering.” In other words, investors with bearish bets against Ireland have been extracting profits by closing out their trades, which effectively involves selling insurance to other parties, lowering its price. That is different from positively betting that Ireland’s creditworthiness has improved.
Investors are betting that Ireland’s debt crisis is about to climax, but nobody seems to know what that climax is going to be.
Ireland’s government bonds soared on Friday as expectations grew that the small European country might give in to pressure from the European Central Bank and some national governments to take emergency aid to prevent its problems from infecting other euro members like Portugal and Spain. On Monday, the “Ireland-is-getting-a-bailout” rally continued, with financial stocks leaping higher and the cost to insure Irish bank bonds – even risky “subordinated’ bonds – dropping massively.
A day later, the rally has halted. The yield on Ireland’s 10-year government bond, which moves inversely to its price, is 8.13% compared with 8.10% on Tuesday. Ireland’s two-year bond yield, meanwhile, is 6%, a tad higher than Monday’s 5.93%. The cost to insure Ireland’s government bonds against default using derivatives called credit-default swaps is also higher: As of 11:45 a.m. in London, it costs $515,000 a year to insure $10 million of Irish government debt for five years compared with $504,000 on Monday, according to data provider Markit.
Europe’s broader financial markets are also in a holding position, waiting for news from a key meeting of euro-area finance ministers in Brussels Tuesday evening. Ireland’s banking problems, and possibly some sort of banking-related European rescue, will be discussed. (There’s also a meeting of European Union finance ministers on Wednesday.) The euro is trading at $1.3590, a little higher than its $1.3585 level on Monday, but it’s flat against the Japanese yen, British pound and Swiss franc. Spain and Greece sold Treasury bills Tuesday without a fuss, though they paid steeply higher interest rates to borrow.
Irish government ministers continue to claim that the country has not requested a European Union or International Monetary Fund bailout. However, Irish Prime Minister Brian Cowen’s latest comments do highlight the fact that Irish officials have been talking on some level with European officials about the latest euro-zone turbulence and what can be done about it. According to Chris Turner, an analyst at Dutch bank ING, the market is expecting (read: hoping for) a EUR60 billion to EUR80 billion bailout effort. Irish media reports and some analysts say Irish finance officials may be trying to find some way to get the E.U. to effectively re-bail out Irish banks, which are the source of the country’s debt crisis. While Ireland’s government has enough cash to make through to the middle of next year, its banks are surviving only because of the generosity of the European Central Bank, along with Ireland’s own central bank. The problem is that the E.U.’s emergency-rescue fund, designed amid Greece’s debt crisis earlier this year, funnels cash to governments, not national banks. Irish officials, meanwhile, may be open to some aid, but are desperate to avoid any semblance of a sovereign default.
Markets, which don’t know what to think, are largely staying put. Sure, the euro-zone’s latest woes are weighing on the euro. That’s why it’s down from nearly $1.43 a few weeks ago. But the currency’s decline could equally be about dollar-buying, rather than euro-selling. Interest rates on U.S. Treasury bonds have recently jumped higher after falling in the wake of the Federal Reserve’s $600 billion money-printing revival. Rising rates make U.S. dollar-denominated fixed-income investments more attractive.
And even the recent drop in Ireland’s credit-insurance costs should be viewed with some skepticism. Gavan Nolan, analyst at data provider Markit, noted on Monday that the drop was largely due to “short-covering.” In other words, investors with bearish bets against Ireland have been extracting profits by closing out their trades, which effectively involves selling insurance to other parties, lowering its price. That is different from positively betting that Ireland’s creditworthiness has improved.
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