News Analysis

Tuesday 2 September 2014

Ireland is at the centre of a European bond storm

Emmet Oliver in Brussels

Published 23/03/2011 | 05:00

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A catastrophic earthquake in Japan, military action against Libya and surging oil prices haven't been enough to distract the markets away from Europe's lingering debt crisis.

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These big geopolitical events in normal circumstances would fill up the trading screens of share, bond and commodity dealers, but it is Europe's failure to adequately address its own economic challenges that is worrying the markets yet again.

Ireland, yet again, is part of these concerns. Whether the new Government likes it or not, the bond market is guessing that Ireland will have to restructure its debts at some point in the next few years. The method of this restructuring, and its timing, is of huge interest to anyone sitting on an Irish bond portfolio.

As a result of an announcement on Monday night in Brussels, the EU is now prepared to countenance countries negotiating with their bondholders if their debt burdens simply become too heavy.

This announcement, setting up a new body called the European Stability Mechanism (ESM), has actually managed to raise fresh concerns on the bond market rather than eliminate them. The tensions reached such a stage yesterday that some observers even speculated that Ireland could default unilaterally on its sovereign debt.

This is not only unlikely, but also impossible as the EU Commission, the ECB and the IMF would never allow a unilateral act of default, at least as long as they are funding countries like Greece and Ireland.

Ultimate restructure

However, most observers believe Ireland and Greece's debt burdens are too heavy and will have to be restructured ultimately (effectively a default).

So the real obsession now on the markets is when will this happen and in what context? The ESM for many bond traders provides that €700bn context.

This new mechanism, which acts as a permanent rescue fund, allows negotiations with private sector lenders (banks and hedge funds) if debt burdens become unsustainable.

In other words debt talks, involving haircuts for bondholders, are possible from the middle of 2013 onwards. The new mechanism, we are told, won't impact on any bonds issued before 2013, so theoretically anyone buying an Irish or Greek bond today should be perfectly safe. But the markets do not believe this, and are worried about the safety of long-term bonds when the pressure really comes on in 2013 and Greece and Ireland simply have to restructure their debt burdens.

The added complication for Ireland is that the debt burden is not even known yet. The stress test results due next week should present that final bill.

In fact, many people who trade in European debt simply have no idea why the EU is waiting so long to tackle the debt problems in Greece and Ireland. Some conspiracy theorists believe it is because German banks are not strong enough to cope with an Irish or Greek default. Others believe European politicians simply want to pass the problem on to their successors.

Irish Independent

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