Assumption 1: NAMA bonds are off the public balance sheet and have no adverse impact on pricing, plus our liquidity conditions are in line with those of Germany (this corresponds to the dream scenario);
Assumption 2: NAMA bonds are on the public balance sheet, implying some adverse pricing effects, but out liquidity remains in line with German (this corresponds to 'markets are asleep' scenario); and
Assumption 3: NAMA bonds impact our balance sheet and yield shut down of the international borrowing markets for NAMA bonds (this is ECB buys NAMA scenario).
Chart below shows the resulting spreads over German 10y Bund:
One quick explanation is also due: 2009 levels are the fundamentals-implied levels of spreads under the ECB model. This is what the spread should be, were the markets pricing our bonds in line with what ECB says they are doing. ECB Monthly Bulletin does not report residuals, so I can't tell the accuracy of the pricing model.
Nonetheless, three things stand out:
- We are facing potential upward pressure on yield in 2009, should we go to the markets instead of the ECB;
- NAMA is posing serious risk of destroying our balance sheet in years to come as the cost of debt financing can soar not only for NAMA-own bonds, but also for all the bonds rolled over by the Government.
- It is relatively clear that any auction since January 2009 below 6.2% yield would have flopped, were it not for the ECB lending window circus.