Tuesday 21 October 2014

US trader's punt on Irish bonds may net €4.75bn profit

Stunning gamble straight out of 'The Big Short'

Published 25/11/2012 | 05:00

MICHAEL Hasenstab, the star trader at €700bn fund manager Franklin Templeton, which now owns 10 per cent of Ireland's debt, may make a profit of as much as €4.75bn on his staggering gamble on Irish bonds.



In a ballsy move backed up with hard cash, Hasenstab has taken an extraordinary contrarian bet against the market by backing Ireland.

It is a daring €8.1bn gamble that is looking so lucrative it could make an extra chapter in the Michael Lewis best-seller The Big Short, where traders made billions betting against sub-prime mortgages at the start of the financial crisis.Hasenstab's €8.1bn investment on Irish bonds is the biggest private punt on this country's future. Bond analysts have told the Sunday Independent that – subject to certain assumptions – Hasenstab could make as much as €4.75bn in profit if he holds the bonds until they mature.

The bonds could generate nominal interest returns of €3.7bn on top of capital returns of around €1.045bn, based on current market rates. It is thought that the trader is already sitting on paper profits of around €1.53bn.

Fears that such a concentrated ownership of Irish bonds could be destablising were dismissed by NTMA boss John Corrigan last week.

Corrigan said he "would prefer if we had 10 Franklin Templetons, rather than one," adding that an early and large-scale sale by the firm was unlikely.

"The idea that they could exit in size from before those bonds fall for maturity would be self-defeating," said Corrigan. He added: "Clearly, Franklin Templeton, in their own terms, have placed a big bet – so to speak – on Ireland."

Bond analysts have told this newspaper that Hasenstab would only net a paper profit of €1.8bn if he offloaded his entire position this week. His bonds may have generated coupon payments of up to €270m, according to their calculations.

Writing to Franklin Templeton clients, Hasenstab notes: " I believe the Irish model could be an ideal prescription for problems in the other parts of Europe.

"What has been happening in Ireland is positive. The country, despite facing great adversity, continues to make progress on fiscal reform and is increasingly getting recognition as a model for other countries.

"It can be summarised as a pro-growth and pro-austerity package, where growth is facilitated through structural reforms and competitiveness and austerity is facilitated through fiscal responsibility, which Ireland has put forth and executed well.

"While there is still progress that needs to be made, the fact that Ireland was able to regain (international bond) market access after years of not being able to, is a clear sign that it is getting credit for a lot of the progress it has made."

Hasenstab believes that conditions will remain grim in Europe for quite some time. However, he strongly believes that the eurozone will not break up.

Meanwhile, the IMF/EU/ ECB troika may be considering providing a "precautionary credit line" for Ireland as we seek to exit the bailout programme in a year's time.

The troika is examining a number of options associated with Ireland's exit from the formal bailout programme, with a document due to be presented to the Government.

"Presumably, one of the items in the paper could be a credit line," NTMA boss John Corrigan told Bloomberg.

Sunday Indo Business

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