Hi °C | Lo °C ALL that trouble figuring out what a bondholder is – and even more trouble finding out who they are – but it's about to get worse. Now we must get our heads round the bond markets themselves.
It has already started. That EU finance ministers' decision to ask the Troika to accept a delay in repayment of its loans to Ireland is aimed squarely at the bond markets. (It must be assumed that the Troika will agree, though with the ECB you never can tell).
The promissory note deal had the same purpose. We are not talking about grandchildren this time, since the Troika extension is unlikely to be for more than 15 years. It is worth remembering though, as we start to get our heads around this not-so-brave new world, that government bonds themselves used to be meant for grandchildren.
Rich people would lend money to governments, secure in the knowledge that the bond they received in return would be honoured many years hence, and in the meantime they would be guaranteed an annual income.
Pension funds did the same on behalf of poorer people, to give them an income when they became grandparents. The arrival of inflation in the 20th Century complicated matters, since the purchasing power of both the income and the loan was declining.
To get a real return it became necessary to ride the ups and downs of interest rates, which means the downs and ups of the prices of bonds paying a fixed amount of money each year. Welcome to the bond market.
Meanwhile, governments discovered the political joys of continuous borrowing. (Irish governments were the last to catch on, waiting until the Seventies. But, like many converts, they made up for their tardiness by the ardour with which they embraced this wondrous scheme).
As the size of the market grew, government bonds became the oil which greased the financial system. If they were kept in the vault, they were officially risk-free. If they were traded, there could be juicy profits.
All that has changed: changed utterly. Bonds are no longer seen as risk-free. In many countries, especially in the eurozone, there is a threat of default where loans are not repaid. There is the threat of inflation in countries which print their own money. Britain has just lost its risk-free AAA status from one of the credit rating agencies.
Paradoxically – although paradox does not seem a strong enough word – the British and US governments have never been able to borrow cheaper on the bond markets. But much of the time, they are borrowing from their own central banks.
That should be scary for lenders, but fear of default has trumped fear of inflation. People have even paid the German government to take their money, on the grounds that both default and inflation risks are small.
This is far from the bond market from which Ireland was unceremoniously ejected in 2010. It could be said that the global bond market is no longer functioning: certainly not as it is supposed to, or used to.
Reading text books on the subject as Ireland tries to re-enter the market next year is of limited use. The text books are out of date.
It will be some time before new editions can be prepared. In the meantime, little old Ireland, and perhaps little old Portugal, must enter this maelstrom of fear laden with debt, just back from the brink of default, and using an uncertain currency.
It ought not to work. Efforts are concentrated on giving Ireland a financial profile which might have sufficed in the past. Feasible (just) annual interest payments and limits to the loans which have to be repaid and replaced in any one year – which is where the extensions come in.
Yet, in a world of fear, why would lenders bother? This is where it gets difficult. Investment and pension fund managers may be frightened, but they are also desperate for "yield". Getting less than 2 per cent on long-term loans to creditworthy governments is no good. The Irish will pay more.
How much more is the critical question, for the markets and us. By the end of next year, if all goes to plan, Ireland will be borrowing only to pay interest on its debt, rather than to pay the bills. There is a neat little formula to calculate when that is sustainable but it is hard to believe the markets will lend that cheaply.
The ECB may then use its untried bond-buying programme to keep Irish borrowing rates at what could be deemed sustainable levels. The artificial support system could supplant the bond market while Ireland reduces its borrowing requirement over the course of many tough budgets.
Nobody knows. The bond market might refuse to play ball; the ECB might refuse to play ball. Even the Irish electorate might say no. The Government's cherished aim of re-entering the bond market would be an achievement – a remarkable one in many ways. But other remarkable achievements will have to follow.
Irish Independent
