12/1/2012: Q4 2011 Sovereign Bonds performance

Four charts covering Q4 2011 sovereign bonds (CDS) performance:

Data sourced from CMA Global Sovereign Risk Report Q4 2011

12/1/2012: Q4 2011 Sovereign Bonds Report

CMA released their Quarterly Global Sovereign Risk Report Q4 2011 which makes for an interesting reading. Here are some highlights:

"The Eurozone debt situation continued throughout Q4, with the region widening 9% overall. A bail out of Dexia at the beginning of the quarter was followed by continued concerns on Italy’s debt in November and risk of an S&P downgrade of the entire Eurozone in December.

"Nearly all global CDS prices widened during November’s volatile period, clearly indicating the significance of Western Europe to the global economy and the importance of finding a permanent resolution to the debt crisis.

• Italy’s austerity measures failed to move the market tighter in Q3, and the spread widened to a high of 595bp in-mid November. This prompted the end of the Bersculoni era, a new president [obviously, they mean PM] and a new set of austerity measures aimed at reducing the 2 trillion dollars of debt and 120% debt-to-GDP ratio. Implied FX devaluation from a default in Italy is around 17% according to CMA DatavisionTM Quantos.
• Spain and Belgium’s charts were a mirror image of Italy’s.
• Ireland remained relatively stable throughout the quarter, perhaps indicating a balance between a well capitalised banking sector and IMF concerns about the prospects for growth in exports to Europe."
• Greece was the worst performer worldwide (see tables below charts), while Portugal outperformed Ireland

Charts:

Summary of 10 highest and lowest risk sovereigns:

 

So despite our 'gains' in the bond markets, Ireland moved into 6th highest risk position in Q4 2011 from 7th in Q3 2011. 

And amongst the safest bond issuers there are just 2 euro zone countries: Finland and Germany (an improvement on Q3 2011 where only Finland was there).

Here's the summary of our performance since Q1 2009.

5/1/2012: 2012 Debt redemptions - select euro area countries

A very revealing summary of 2012 bond redemptions by country and month, courtesy of the zerohedge.com (link here):

Cracking! While Germany won't have (most likely) any problem rolling €193.1 billion worth of paper other countries are in for a potentially (an highly likely) bumpy rides for France at €289.9 billion, Italy at €337.1 billion, Spain at €147.9 billion and GPI at combined €79.2 billion. This year won't be the real test for Ireland, however, with just €5.6 billion of paper coming up for refinancing, but it will be a testing year for PIIGS in general with €564.2 billion worth of sovereign debt to be rolled.

And here's the data for scheduled rollovers relative to country GDP as projected by the IMF:

This can easily get ugly.

24/10/2011: Euro CDS disaster Redux?

A picture (table) worth a 1,000 words...

via CMA.

12/10/2011: Starting on the right footing

Two longer-term points to start the day (and renewing the EFSF debate) right, folks.

Point 1 - Global macro and long term - excellent posts today from the Guardian (here) and from barry Eichengreen for Project Syndicate (here) both dealing with EFSF as a non-solution to the crisis, regardless of the size. Both post, just as all other analysis I've read so far can benefit from one additional reality check. What happens if/when the EFSF in its enlarged form gets implemented?

The focus of everyone's analysis so far has been the banks and the sovereign yields/ratings. Let's take a peek further ahead, to say 2014. With EFSF in place, some €500bn+ of liquidity has been pumped into the markets. The banks have taken some significant share of recapitalization funds and dumped these into Government bonds, EFSF bonds, and risky assets around the world. The Governments, having received a boost from the sovereign bond markets via their own banks are back on track to 'stimulating' the economy and the households are now fully pricing in not only their still intact gargantuan debt levels, but also future Government-assumed liabilities in EFSF. The ECB balancesheet is loaded with EFSF paper and short-term lending is rampant, implying that unwinding short term liquidity supply becomes impossible for the ECB without risking a massive liquidity crisis in the banking system. Next trace of post-EFSF world is... stagflation in the Euro land:

• Banks rising capital means margins on loans will rise, while private investment capital is now being courted by the banks at the same time as the corporates go for more debt and equity.
• Governments borrowing resumed means rates are pressured up to sustain euro valuations, which means policy rates are supported to the upside.
• ECB coffers full of EFSF paper means policy rates are supported to further upside.
• States-supported banking sector in Europe means lending supply down, compounded by higher capital calls.
• Taxes on ordinary income and wealth up, means no growth, compounding interest rates effects, despite Government 'stimulus'.

With European economy bifurcated into state-dependent sectors kept alive via debt issuance and private sector economy still on the death bed, as rates creep up to (retail levels) double digits for prime borrowers,wat takes place?

1. Heavily indebted households are being squeezed on both ends of their budget constraint;
2. Heavily debt-dependent European corporates are desperately trying to raise funding via equity issuance which runs against banks looking for more equity investors. Resulting capital crunch puts any hope for recovery on ice.
3. ECB, unable to unwind short-term funding to the banks and holding vast supply of EFSF-linked paper keeps the rates higher than Taylor rule would imply.

The problem, is that absent a direct and robust writedown of private debts and some sovereign debts, and restructuring of the banking sector, EFSF or any other similar measure, no matter how large it will be, will not be able to break the dilemma of "either banks go bust or economy goes bust".

Which brings us to Point 2: What needs to be done in restoring the banking sector to health?

Instead of focusing on immediate funding and capital issues, we need to focus on the actual causes of the disease:

Cause 1: too much debt in the system (real economy) highlighted here.

Cause 2: insolvent banking institutions nursing massive losses going forward.

To deal with both we need a systematic approach to restructuring the banking sector and household balancesheets. The latter is a tough call - expensive and hard to structure. But it will be impossible without the former and via netting of balancesheets it can be aided by the former. So here's the broadly outlined roadmap for restructuring Europe's banking sector:

Resolving Euro area banking crisis requires bold and immediate action. An independent panel, under the aegis of ECB and EBA should review the operational, capital and risk positions of top 250 banks across the Euro area and independently stress-test the banks based on mid-range assumed scenarios of sovereign bonds haircuts of 75% loss on Greek bonds, 40% loss on Portuguese bonds, 20% loss on Irish bonds, and 10% loss on Italian and Spanish bonds. In addition, risk weightings must reflect specific bank's dependency on ECB / Central Banks funding. 

The banks should be divided into 3 categories based on this stress test assessment: Solvent and Liquid banks (SL), with post-stress capital ratios of 8% and above and ECB/CB funding covering no more than 15-20% of the assets, Solvent but Illiquid banks (SI) with capital ratios of 6-8% and ECB/CB funding covering no more than 30% of the assets, and Insolvent and Illiquid banks (II) with capital ratios below 6% and ECB/CB funding covering more than 31% of the assets base.

SL banks should be required to raise additional funding in the private markets and de-leverage post capital raising to Loans to Deposits ratio (LDR) of no more than 110% over the next 5 years. 

SI banks are to be restructured, stripping back some of the non-performing assets, reducing LDRs to 100% over the next 2 years and recapitalizing them through public injection of funds from the EFSF-styled vehicle warehoused within the ECB with a mandate to unwind the vehicle through a 50% writedown of liabilities to EFSF (debt write-offs via cancelation of some of the real economic debts held by these banks - debts of households and non-financial corporations) and 50% recoverable from the banks over the period of 15 years. Public funding for recapitalization must follow full writedown of equity and non-senior debt and partial haircuts on senior debt.

II banks are to be wound down via liquidation - their performing assets and deposits sold and non-performing assets written down against capital and lenders' liabilities (bonds). 

If followed, this approach will deliver, within 12-18 months a fully cleansed banking sector for the Euro zone and improve debt overhang in the real economy, while encouraging new banks formation and competition.

Economics 12/7/10: ECB - cooking up the (banks') books?

Something fishy is going on at the ECB. Having all but destroyed its own reputation (for the n-teenth time), the ECB has swung into its usual modus operandi – ‘We are tightening, tightening no matter what!’ First, in the face of clearly sluggish writedowns by the Euro zone banks, the ECB decided to close its longer-maturity lending window. Despite a clear warning from the Bank for International Settlements stating that there is a worldwide rising risk of a severe maturity mismatch on banks balancesheets.

Now, the ECB is signalling that it will cut government bond purchases – just in time for euribor climbing up and sovereign spreads shooting past their pre-Greek crisis highs. Last Friday, Jürgen Stark said that declining scale of the ECB’s bond markets interventions reflects improving market environment for sovereign bonds. In May the ECB was hovering ca €33bn in bonds per month, last week this has fallen back to €16bn in monthly purchase rates. “If the situation improves further, then there is no need to continue [with bonds purchases]”, he told FT.

Funny thing, the IMF has just urged the ECB not to discontinue bond purchases. But, to Mr Stark “The IMF has not caught up with the reality in Europe.” Oh, poor IMF, apparently a quick reprieve in some credit default swap indices last week (e.g. Markit iTraxx Financial, down 25bp, its largest decline in two months) is not exactly convincing for the IMF as far as prognosis of markets confidence in Europe goes. It looks like either the ECB is betting a house on its own forecasting prowess or setting itself up for another ‘Fool’s stumble’ through monetary policy. Expect bond purchases to resume once the summer is over and the markets re-open for business.

Oh, and just in case you might think that the IMF is really not getting the ECB’s “Europe is Great” vision, here’s the note from the WSJ blog (here) which shows that the ECB will be facing not just a steep sovereign bonds purchase curve, but will be getting more of the Euro area dodgy collateral into its vaults very soon. Apparently, the rest of 2010 through 2011, Euro area banks are facing a mind-blowing level of debt refinancing – the whooping €1.65 trillion worth of stuff. Don’t think they’ll be highlighting that in the shambolic stress-testing PR exercises that will be released July 23. I wrote about Euro zone’s banks propensity to stick their heads into sand when it comes to recognizing loans losses. But now, it also looks like they are doing the same with their funding sources – a dangerous game given the direction in which borrowing rates are going (see my earlier post on euribor).

Here is a nice pic I reproduced from the IMF GFSR database showing those dogs. The tail is wagging, noses are wet, barking mad… furry friends of ECB’s discount window.

I know, I know – Stark would say that the WSJ also ‘doesn’t get Europe’s great progress to prosperity’. But the little problem is – if the banks are to refinance these borrowings at current rates, between 2010 and 2015, Europe’s borrowers, consumers and investors will have to come up with a whooping €152-187 billion worth of interest rate cover. Yes, that’s right – while ECB is playing an outright silly game of ‘We are tough and things are great’, European economies will have to deliver almost 2% of their domestic output to plug interest rate hole alone.

But do not worry, the stress tests deployed by Europe are not designed to reckon with reality – they are simply a PR exercise. How else can one see a test that prices Greek default losses at 10% and Spanish at 3%, when the markets are pricing these at 4 times higher. Or how does one really test the banks if there are no scenarios for loans defaults and/or yield curve tests for debt refinancing?

If you need an indication just how shambolic these tests are, look no further than banks actions in refinancing markets over the last week. Clearly fearing that the investors might, just might, come to their senses and label the whole stress testing a farce, Euro banks have gone aggressively into the markets to raise €18.4bn worth of bonds last week, up from €4.8bn a week before. Do you think they are doing this because of cheaper cost of finance? Not really, costs remain high, though they are off their June peaks. So they are doing this only because they anticipate further increases in the cost going forward.

Yet, the ECB is drumming up the beat that the stress tests will reveal Euro area banks to be well-capitalized (haven’t we heard this before in Ireland? Ca 2008 from our own CB?). So the banks do not believe that the stress tests, which they all pretty much have passed already, per ECB assertions, are going to reduce risks perceptions in the markets. Why would that be the case, if the tests were honestly designed to really test their balancesheets? Last week’s survey of money managers by US-based Ried Thunberg ICAP found that 95% of the 22 survey respondents (controlling $1.39 trillion in assets) said most major European banks will receive positive test ratings.

Hmm… that, I would say, is a darn good evidence that the tests might be rigged. In which case, prepare for a rally in the banks that will turn South as soon as serious analysis of the tests assumptions comes through.

Economics 04/06/2010: Bond markets are still jittery

For all the EU efforts:

• Throwing hundreds of billions into the markets in bonds supports;
• Banning 'speculative' transactions;
• Talking tough on reforms;
• Bashing rating agencies into a quasi-submission; and
  
• Proposing a 'markets calming' [more like 'markets killing'] financial transactions taxes

There has been preciously little change in the way the bond markets are pricing sovereign debt of the PIIGS. More ominously, the crisis is not only far from containment, it is spreading. Following PIIGS, the attention is now shifting onto BAN countries - Belgium, Austria and Netherlands. And in the case of Austria, the unhappy return of the Eastern European woes is now seemingly on the cards.

How so? Look no further than Hungary. The country had taken IMF bailout money, promising to deliver severe austerity measures. It now faces a new round of pressures due to once again accelerating deficits. It looks like the cuts enacted were not structural in nature, amounting to chopping capital expenditure programmes rather than current spending... Sounds familiar? so here we go again (courtesy of Calculated Risk blog): spreads are rising (Ireland's position as the second sickest country by this metric remains unchallenged) and CDS rates are rising as well (Ireland's still in number 3 spot).
As Calculated Risk points: "After declining early last week, sovereign debt spreads have begun widening for peripheral euro area countries. As of June 1, the 10-year bond spread stands at 503 basis points (bps) for Greece, 219 bps for Ireland, 195 bps for Portugal, and 162 bps for Spain."

Let's get back to Hungary, though: yesterday, Hungarian officials said that instead of 3.8% of GDP deficit target, 2010 is likely to see the deficit widening to 7-7.5% of GDP. Who's to blame? Well, per Reuters report: '"fiscal skeletons" left by the previous Socialist administration'.

Economics 28/04/2010: More on Greece contagion

Contagion from Greece is clearly a problem for the EU at this stage. Looking back into some older data, February 2010 note from Credit Suisse (linked here)
Spot Ireland at position number 7? That was then. The figures refer to 2009, which means that since then, pressures on Iceland, Hungary and Latvia have receded. In addition:

• Our 2009 deficit has been revised to 14.3%
• Our CA deficit has worsened (as imports are falling at a lower rate and exports are now performing less robustly)

So re-weighting the score in the right hand column of the table, Ireland gets closer to 38.1-38.3, Portugal moves to 39.4-39.5, Greece to 45. We are number 3 on the list...


PS: If you want to see an example of absolutely and even alarmingly distorted logic - read this. One of the best examples of bizarre ramblings that pass for 'analysis' in Ireland. I mean what else can you call a note that:

• Admits that Ireland has record deficits of all EU countries;
• Admits that debt levels are very high;
• Admits that we are close to Greece;
• Admits that Greece is deep trouble, and then
• States that "The Greek recesion [sic] had been milder than the EU average, and recovering, before austerity measures were adopted" and thus
  
• Makes an implicit claim that the spectacular collapse of Greek economy witnessed by the entire world and threatening contagion to all of the EU has been caused by Greece not running enough deficits!
• And concludes that: "By contrast, other EU countries adopted fiscal stimulus measures [without identifying which states did so, what were the implications of these, etc]. Their debt has stabilised along with economic activity [a mad claim, given that stimulus measures were financed out of debt increases] and they have been rewarded with much lower bond yields than Ireland [absolute groundless claim, as none of the countries that adopted stimulus had the same fundamentals as Ireland going into the recession or during the recession and furthermore, none of the countries, other than PIIGS experienced similar bond yields dynamics to Ireland]"

I mean this stuff is actually factually incorrect and logically inconsistent!

Economics 07/03/2010: A long term view of the currency markets

With the euro unsteady against the dollar (post-10%+ drop in recent months from its highs over 1.50 in December 2009 to 1.35) there is a question to be asked - can dollar and euro act as reasonable hedges for each other. In other words, should euro-overweight Europeans hold dollars, while dollar-overweight Americans, Asians and Latin American hold euros? In my view – neither.

This view is formed by my belief that both currencies will continue to fluctuate along a short-term weakening of the euro rend, followed by an equally volatile, but flat trend in the medium term, moving into a dollar appreciation trend in the long run.

Why? Because two economies fundamentals are currently very similar, and only the long term view affords a potential for the US to pull away from the structurally sicker European partners.

In absolute terms, the EU27 is the largest ‘economy’ in the world – some 16.2% greater in terms of PPP-adjusted GDP than the US ($14.2 trillion) economy. But the eurozone itself is equivalent to just 74% of the US total output, despite being 10 million ahead of the US in population terms. Taken as such, one can argue that on average, the euro currency and the US dollar cores are roughly the same.

Both had pretty tough time through the downturn. 2009 US GDP was down 2.7% outperforming Eurozone where GDP fell 4.2%. Unemployment is running pretty much in line, but US unemployment is usually more willing to subside once recovery begins. On financial sector side, euro area has taken roughly 40% of the required corrections of the banks balancesheets as of Q4 2009, while the US banks have taken 60%.

Inflation in the US has been running ahead of the EU16 (2.7% as opposed to 0.6% in 2009). But this inflation differential means two things – it reflects differences in the timing and the size of fiscal and monetary interventions and it reflects the effects of devaluation of the dollar. US recovery has begun, while EU16 is still languishing at around 0% growth and there are growing signs of a possible double dip hitting Berlin, Paris, Rome and Madrid, not to mention the peripherals.

Greeks are the star performers when it comes to the circus of fiscal recklessness in the Northern Hemisphere: 12.2% deficit (more likely closer to 13%). Last week’s plan to trim 2% off that number is, assuming it actually comes into being, equivalent to being 5.875% short of the cost of financing the Greek debt annually. In other words, Greek debt is priced at 6.3% per annum. It stands at 125% of GDP, which means that 7.875% of the GDP is spent every year by the Greeks on interest payments on the debt alone. It will take Greece 4 years of consecutive 2% cuts to just cancel out the existent interest on the debt.

For Ireland, the figures are hardly more pleasant. 11.6% deficit planned for in 2010 Budget (a net cut of just 0.1% on 2009 figure) and with our debt (ex-Nama) heading for €90 billion (over €100 billion with recapitalization factored in) or 56% of expected 2010 GDP, at the latest yield of 5%, means that our debt burden is currently taking up 2.8-3.2% of GDP annually. At the current rates of budgetary adjustments (per Budget 2010), it will take Ireland Inc over 30 years to bring the budget into offsetting the interest costs on the current debt.

Ok, I hear your protests, the actual cut was closer to €3.3 billion or 2.04% of GDP, but further deterioration in expenditure due to social welfare and unemployment increases has scaled this back to 0.1%. Fine – at 2.04% cuts, it will take Ireland 1.5 years to offset the interest bill. Factoring in Nama and expected deficits in 2010-2014, 3 years of consecutive cuts of the same magnitude as Budget 2010 would do the job.

The important thing here, of course, is to remember that in both cases (Greece and Ireland) these cuts will not be denting the deficit at all, just offsetting the rising interest rate bill. And we made no assumptions about the direction of the bonds yields.

But Greece, Ireland and the rest of APIIGS aside, the EU and euro area are fiscally marginally better than the US. The EU16 average deficit will be 6.9% of GDP in 2010 – some 3.7 percentage points below that of the US. Similarly for the debt levels: euro area is currently at 84% of GDP, rising to 88% in 2011 and over 100% by 2014. In the US, current debt is already at 87% of GDP and will rise to 100% by 2012.

Of course, there are three things worth mentioning. EU forecasts are done by the EU Commission with historic accuracy record of tea leafs readers. US forecasts are done by the US Budget Office, with rather decent forecasting powers. The US is more willing to deflate out of its debt problems than the EU16.

Finally, the numbers above do not reflect the fact that there is a higher risk of a double dip in the euro area. Nor do they reflect the fact that EU16 banks are still facing severe liquidity and capital shortages amidst untaken writedowns.

In other words, expect euro area deficit and debt to go up erasing the difference between the US and EU in fiscal terms.

So what really perpetuates US dollar vastly more powerful position in the reserve vaults of the banks worldwide is the legacy. Central banks simply cannot unwind their massive holdings of the dollar without destroying their own balancesheets. This process will have to be stretched over time.

The thing is – with the latest revelations concerning Greek financial mechanics in the past and the EU’s inability to face the reality, majority of the central banks around the world which might have started reducing their dollar exposure in the recent past are now reversing that strategy. Going into dollar became fashionable once again.

But the dollar is not a safe heaven in the medium term. And neither is, per above, the euro. One analyst recently described the current shift back into the dollar as “exchanging your ticket on the Titanic for a ride on the Hindenburg”.

So really, folks, last time this happened – parallel inflation in the euro and the dollar and economic weakening of both, with public finances coming under pressure – back in 2007, the markets response was an age-old one. Gold and commodities went up, debt went down, stocks went out of the window. It looks like we are in 2006 once again, sans economic boom, but with a new rebalancing. I would expect gold to continue firming up, commodities to lag behind on the same trend and stocks and FX bouncing violently at the bottom.

Economics 27/02/2010: Double dipping

As of recent days, the media has become finally aware of the serious risk of double dip recession - here in Ireland (qualified below) and in the rest of the world. The reason for this awareness is most likely the ongoing crisis in the Euro area debt markets. But the real cause for concern should be the overall markets dynamics.

First, let me qualify what I mean by the double dip recession in Ireland. Officially, to have a double dip you must exist the first recession - which can only happen if Irish economy were to post at least a quarter of positive growth. There is an inherent asymmetry in the way we term the business cycle. While going into a recession requires two consecutive quarters of negative growth, recovery set in after just one quarter of positive growth. The second dip for a recession, however, requires again consecutive two quarters of negative growth.

Which, of course, means that were recoveries distributed following the same probability distribution as recessions, the risk of a double dip recession will be lower than the risk of a single quarter negative adjustment post-recovery. And lower still than a recovery. Statistics bear this out, with double dip recessions being relatively rare.

Of course, for Ireland, a double dip recession in current environment will simply mean that instead of turning first positive, then negative again, our GDP (or as I would prefer to measure it - GNP) growth turns more negative than it currently stands.

Definitions aside, what we do currently know points to a strong probability of a double dip recession in the US. Here is why.

As I pointed out in a recent article in the Sunday Times (here) I argued that residential investment is the leading indicator for both recessions and expansions. What we are now seeing the US and the UK are the first signs of renewed problems in this sector, as stimulus and tax breaks wear out.

• Resales of U.S. homes and condos fell 7.2% in January to the lowest seasonally adjusted levels in seven months. This marks two consecutive months of falls that ended an H2 2009 rise. Sales of existing homes have fallen two consecutive months after rising steadily through the fall on the back of a federal subsidy for first-time home buyers. Inventories of unsold homes fell 0.5% to 3.265 million, or 7.8 months of supply at the current sales pace. And this does not bode well with Irish data, where declines in inventories (see Daft.ie latest reports) were seen as an 'improvement' on the overall trends.
• Sales of new homes in the U.S. fell in January to the lowest level on record. Sales were projected to climb to a 354,000 from an originally reported 342,000 rate in December, according to the median estimate in a Bloomberg survey of 72 economists. The supply of homes at the current sales rate increased to 9.1 months, the highest since May 2009. Purchases of new homes reached an all-time high of 1.39 million in July 2005. January 2010 sales dropped 11.2 percent to a seasonally adjusted annual sales pace of 309,000 units, the lowest level on records going back nearly a half century.
• Foreclosures are continuing to rise and with them - banks failures (see a good post on US banks weaknesses here).

So overall, the US lead indicators are pointing to a double dip.

Ditto for the UK, where home prices are now hitting the reversals of recent gains. Average house prices in the UK fell 1% in February after nine consecutive monthly increases. Although average prices in February were 9.2% higher than in February 2009, according to the Nationwide Building Society, it is the dynamic, not the levels that matter.

And EU economies are now in the reversal as well:

• Confidence among German corporates contracted unexpectedly in February, according to the sentiment index released by the Ifo Institute - winter weather is being blamed, but there is little evidence this is really what is happening on the ground with exports tracing consumer demand downward;
• Italy's state-financed ISAE published a new survey showing that Italian consumer confidence is now in a free fall once again;
• Exactly the same is happening in France, where consumer spending is falling as the state cash-for-clunkers program ended, causing decline in car sales;
• Bank of France data shows that credit to the private sector have slowed down even further in January, while credit to companies was actually falling once again.

Since France and Germany led the Euro area out of recession last summer . That recovery was driven by government stimulus programs and a pickup in global trade. Domestic consumers, meanwhile, were left holding the bag - as usual - in the block which prides itself on selling premium stuff to foreigners and keep its own citizens as savings-generating serfs of the exports-driven economies. Net result? Q4 2009 Germany's GDP growth was flat in quarter-on-quarter terms.

This, of course, is bad news for Ireland. There are three major problems that lay ahead of our recovery and none are being helped by the weakening global economic climate.

First, there is a problem of fiscal deficits financing. Slowdown in the EU and US means that there will be no easing in the glut of new bonds issuances this year. Euro area alone is expected to raise its debt issues to roughly $2 trillion worth of bonds since the beginning of the crisis. A minnow, like Ireland, is bound to see its yields shooting straight up if we are to finance our deficits through open market placements. And there is no hope for placing these bonds elsewhere, as the ECB is hell-bound on clawing back on its quantitative easing programmes of 2009.

The ECB can do so in two ways - hike the rates, or reverse collateral inflows back into the banks. Alas, the former is out of question for now, with economic situation deteriorating. This leaves the latter as the only option. Irish banks - the most dependent on ECB lending throughout the crisis - will suffer heavily through such an exercise.

Second, EU growth reversal spells the end of our exports buoyancy and the hopes for foreign investment boost from the US MNCs aiming for EU presence expansion.

Third, absent growth in the Euro area, the markets will continue scrutinizing closely public finances of the member states. I will post on this issue later today/tomorrow, but the core message here is that Ireland is simply not in a very good position to escape severe downgrades from the markets, given the fact that our policies to-date have been heavy on squeezing all liquidity out of the households.