Tuesday 24 April 2018

Massive increase in traders betting against Irish bonds

IMF figures indicate a 77pc rise in credit default swaps

Emmet Oliver

The number of financial bets against Ireland has risen by 77pc over the last year as concerns grow over the stability of smaller eurozone countries.

Data from the International Monetary Fund (IMF) show that traders have hugely increased the amount of bets they are taking out against Irish bonds, which are among the cheapest in the eurozone after Greece.

The amount of Irish credit default swaps (CDSs) bought by traders has gone up by 77pc in the year to February 5, according to IMF statistics.

A CDS is similar to an insurance contract and it pays out if an underlying bond goes into default. However unlike an insurance contract, traders can buy a CDS even if they don't own the underlying bond.

This has left many economists and investors nervous about the giant CDS market, although many others believe that ultimately it doesn't move the main bond market. However, the CDS market does allow traders to "short" a country, which means that if that country defaults or moves towards a default, the contracts they hold become more valuable.

The gross amount of outstanding Irish CDSs was €34.2bn, according to the IMF statistics. While bets against Ireland have been rising fast over the last year, bigger increases were recorded in the level of bets against Greece, Portugal and Austria.

According to the IMF, the CDS market generally is growing rapidly. "After a decade of static market share relative to the broader CDS market, sovereign CDSs underwent a rapid expansion in 2009 and into 2010". The gross amount of CDS contracts purchased leapt by 31pc.

The IMF said it would be hard to regulate the CDS market to stop what it called "naked shorts''. This is when somebody speculates on a country using a CDS, without actually owning the underlying bond of that country. Any ban on this may "hamper legitimate financial activity,'' said the IMF. It is believed that this "naked CDS" trading represents the vast majority of the market.

The market in CDSs only really began in the 1990s, but has grown massively since then.

The protection bought only pays out when a so-called credit event happens and a country goes into default.

This moment is decided by an international body called the International Swaps and Derivatives Association.

The IMF released a report this week on the threat posed by fiscal deficits in various European countries, including Ireland. But it does not believe the CDS market is a major threat.

"The size of the sovereign CDS market and the amount of net protection sold are negligible compared to government debt outstanding," it said.

Irish Independent

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