Irish bond yields 'not manipulated'
Published 20/08/2010 | 05:00
The Irish Stock Exchange has rejected accusations that rising borrowing costs for Ireland and other eurozone countries are being caused by traders speculating on sovereign bonds.
Since the start of the year controversy has surrounded the role of credit default swaps (CDSs), a form of bond insurance. It has been believed they are responsible for driving up borrowing costs for indebted countries like Ireland, Greece, Spain and Portugal.
Because of these concerns, the German authorities have banned certain types of CDS trading and the EU Commission is also looking into the area.
Now the Irish Stock Exchange has written to the Commission, as part of a consultation, flatly rejecting the link between CDSs and rising bond yields among the likes of Spain, Ireland, Greece and Portugal.
"Permanent limitations or bans on naked short selling of sovereign CDS would only be justified if there were clear indications of a causal link between the CDS market and the sovereign debt market. There has been no academic evidence of such a direct link,'' states a document from the exchange.
The exchange, which hosts 62 quoted companies and 3,100 funds, said the reasons for rising bond yields were to be found elsewhere.
"The increase in sovereign debt yields probably has more to do with investors' appetite for risk and the state of EU member states' finances, than any impact of the much smaller sovereign CDS market,'' it claimed.
The exchange has for many months been speaking out against the Irish ban on short selling, even though the Financial Regulator remains in favour of the ban.
"The Irish stock exchange believes that short selling measures should not be applied to all financial instruments, but instead should be targeted at specific financial instruments where a significant risk for market mischief arises,'' it states in the document to the EU.
The document strongly argues against the ban introduced by Germany earlier this year and passionately supported by German chancellor Angela Merkel, saying it would distort the sovereign bond market and reduce liquidity.
Ireland's short selling ban means that nobody can short the shares of AIB, Bank of Ireland or Irish Life & Permanent (IL&P). This ban is likely to come under fresh scrutiny as the banks get re-capitalised and restore their profits. The ban was introduced at the height of the financial crisis and remains deeply unpopular with some investors and many stockbrokers.