Thursday 23 November 2017

'No evidence' to pay out on default cover for Irish debt

International Swaps and Derivatives Association issues opinion after anonymous query

Donal O'Donovan

Donal O'Donovan

THERE is no evidence to justify paying out on bond default insurance for holders of Irish government debt the International Swaps and Derivatives Association (ISDA) said yesterday.

ISDA was responding to an anonymous request asking whether a "restructuring credit event" occurred on Irish government bonds when IMF loans were drawn down.

IMF loans rank above ordinary government debt in seniority and the anonymous request asked for a ruling on whether drawing the loan counted as a technical default.

ISDA is the trade body representing investment banks and bond investors involved in derivatives trading. Committees of ISDA members vote to determine whether or not sellers of Credit Default Swaps (CDS) that insure bond investors against losses have to pay up if a borrower defaults. Decisions of ISDA committees are binding.

Yesterday an 11-member committee said unanimously that there had been no default on the bonds. They said there was no evidence that a restructuring of Ireland's sovereign debt had occurred. The decision was arrived at in unusually quick time.

The ISDA committee was made up a slew of heavy-hitting finance houses, including Bank of America/Merrill Lynch, Deutsche Bank, Goldman Sachs and Morgan Stanley.

They said no credit event has occurred that would entitle CDS holders to a pay out as a result of Ireland accepting IMF bailout loans. CDS pay out if a default, or what bond investors consider to be the equivalent of a default, occurs.

It was the first time that ISDA had ruled on a sovereign debt issue since rules governing CDS payouts were formalised in 2009.

Meanwhile, Spain sold €5.5bn of short-term government bonds yesterday as the country's cost of borrowing continued to fall.


Spain sold €3.97bn of 12-month bonds at a yield of 2.128pc, compared with a yield of 2.4pc at its last auction in February. It sold €1.53bn of 18-month bonds at 2.436pc.

The deal was priced after the yield on Spain's 10-year bonds fell for two days in response to European leaders' agreement to broaden the size and scope of eurozone bailout mechanisms. The 10-year yield fell to 5.211pc last night.

The markets remain mixed, however. Belgium postponed a sale of six-year bonds yesterday. Its treasury agency said market volatility after the Japan crisis made pricing debt too difficult.

Belgium did auction €1.8bn of 12-month securities that were priced to yield 1.526pc.

European government bond yields fell as the threat of nuclear fallout in Japan prompted investors to buy the safest assets available.

The yield on German government bonds fell to the lowest level in almost two years after Japan's prime minister warned of more radiation leaks. Yields on 10-year German bonds fell nine basis points to 3.14pc having gotten to 3.10pc at one stage

The yield on Irish government bonds closed up slightly at 9.341pc from 9.338pc.

Irish Independent

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