Wednesday, February 18, 2009

Aha, DofF - and the PIIGS will fly...

This is from Bloomberg (here):

Credit-default swaps (CDS) on Irish government bonds climbed to 386 today from 378.5... Irish swaps last week surged 95 basis points... Contracts linked to French, German, U.K and Spanish debt also rose to all-time highs.

CDS, conceived to protect investors from default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase signals a deterioration in the perception of credit quality.

Ireland’s Finance Ministry said it’s incorrect to draw conclusions about the “soundness of Ireland’s public finances” from credit-default swaps.

“The credit default market is small and opaque,” the Dublin-based Ministry said in an e-mail today. “It is generally used as a speculative tool by a small number of market participants to gamble on movements in the CDS market itself rather than to insure against default.”

Oh, yes, and the DofF would know what they are talking about. After all, they do have on their staff:
  • no financial markets economists at a PhD level;
  • no financial risk economists at a PhD level;
  • no finance professionals at a PhD level;
  • no finance practitioners in fixed income with any reasonable senior private sector experience, and so on.
In fact, the DofF can't even forecast its the figures under its own remit. Forget making markets pricing statements.

But, hey, a good preemptive strike at the markets before things go further South is a way to go amongst Irish officials now days. And what a timely preemption this one was. The latest figures from CDS markets for inter-trading period show: 390-405 spreads. As B. puts it, "we are 50% up in a week, and its only Tuesday!"

And what about that ages-old deus ex machina of all incompetent polticians - the referencing to some
"small number of market participants" keen on speculating in the financial markets. Surely we've seen them being proved wrong before... many times... hmmm, like with the EMU crisis. It is clear that our DofF boffins are simply too economically illterate to understand that no small handful of speculators can win absent real arbitrage opportunities. Thus, if the small numbers of such speculators still exist in the market, there is something true to their gambles. In other words, there is no smoke without a fire. Dough!

Of course, it is not just the markets that are noticing Irish fairytale story of 12+% deficits and unbelievable DofF-cooked-up figures showing 3% deficit rule being met by 2013. Germans are noticing it too (see above mentioned Bloomberg report). And about time (see my comment to the WSJ blog here). What would Mrs Merkel have to say about the German taxpayers having to rescue our DofF from the clutches of the handful of market speculators?


Anonymous said...

Why don't they raise the top rate of tax already? They brought it down when they didn't need to and now they are doing nothing while Rome burns. They need to prove to the public servants that the pain is being spread before they have to row back on the pension levy (nevermind the overlooked tax aspects of that move). And what about lifting the PRSI ceiling or removing it altogether? I don't understand this government at all, is there anyone home?

Paul MacDonnell said...

I notice also that the Department of Foreign Affairs has set up a 'unit' to counter 'misperceptions' about Ireland's economy abroad. This was announced by the Foreign Minister when he was in Mexico. If the Gov't is putting effort into 'perceptions' whilst ignoring substantial reform then it suggestes serious disengagement and denial. It's only a little bit of ice on the deck. Nothing to worry about. Please return to your cabins.