5/11/15: Euromoney on Irish Sovereign Risk Ratings

Euromoney Country Risk scores for Ireland have been improving significantly in recent months, while some ratings agencies' view of sovereign risks here remain lagging. Euromoney takes a look at the matter here: http://www.euromoney.com/Article/3503504/Category/14091/ChannelPage/8959/Country-risk-Why-Moodys-is-wrong-on-Ireland.html?LS=Twitter

8/2/2012: A more pleasant Sovereign arithmetic

And for a rather more pleasant sovereign arithmetic, here's an interesting table from the Global Macro Monitor (link here) summarizing yoy movements in 5 year CDS:

Frankly speaking, all of this suggest some severe overshooting in CDS and bonds markets on upward yield adjustments over time followed by repricing toward longer term equilibrium. What this doesn't tell us whether we have overshot equilibrium or not... Time will tell.

7/2/2012: An unpleasant risk arithmetic

Here's the guys Irish authorities trust so much on risk assessment, they contracted them to do banks stress tests - PCARs - back in 2010-2011. Note: this is a statement of fact, not an endorsement by me. The Blackrock folks produce quarterly report on sovereign risks and this the summary chart from the latest one - Q1 2012. Negative numbers refer to higher risks:

So Greece leads, Portugal follows, Egypt and Venezuela are in 3rd and 4th place worldwide of the riskiest nations league and then, in the fifth place is Ireland, followed by Italy. And here's the summary of the euro area ratings:

Yes, bond yields have been improving significantly, including due to both fundamentals and banks liquidity steroids, which is a good news. The bad news, yields have been declining for other countries as well and investors' relative sentiment is not improving as much as the absolute levels of yields declines suggest.

Today, one of the Irish Stuffbrokerages claimed in a note that: "The country’s success in meeting its targets under an EU/IMF bailout without social or political unrest and its export-focused economy has enabled it to dodge the recent Eurozone downgrades by S&P and Fitch and distance itself from fellow bailout recipients Greece and Portugal. " Distancing we might be, but the neighborhood we are lumped into is not changing as the result of this distancing. At least not for now.

Please note, the assessments above are consistent with CMA analysis based on CDS spreads, covered here.

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

04/03/2011: Default probabilities

Some people were asking me recently to give an estimate of the sovereign default probabilities for Ireland based on bonds yields. Here are two tables providing an answer -

1. The first table covers yesterday close yields on generic IRL bonds by maturity
2. The second estimates probability of default, using, as risk-free rates German yields on comparable paper

Basically, there is a 90% chance of a default (20% haircut) within 10 years and 15% chance of such an event within the year.

The estimates are very much approximate as we use only yields.

Economics 25/8/10: S&P & the horrific cost of banks bailouts

As you all know, Standard & Poor (S&P) downgraded Irish sovereign debt to AA- from AA with a negative outlook. The downgrade was mainly motivated by the fact that the cost of the Irish banking bailout has increased significantly over previous expectations. S&P now estimate the cost of recapitalising the Irish financial system at €45-50bn, up from €30-35bn.

In my view, this is still behind the news curve in terms of estimated total costs.

My projections for total losses are as follows:

• Nama - net loss of (mid-range) €12bn, rising to €19bn in the worst case scenario (although I have not redone estimates for this scenario for some time and they reflect 55% haircut applied on Tranche 1);
  
• Anglo - €33bn in mid-range case, rising to €38.6bn in the worst case scenario (another update is due once the bank reports its results in the next few weeks);
  
• INBS - €6bn, no range as we have little clarity as to their balance sheets details;
• AIB - €7bn mid-range, assuming successful disposal of M&T and BZBWK, worst case scenario €9bn;
  
• BofI - €2bn.

So the total expected banks losses are €50-55.6bn in my estimates.

Importantly, S&P's negative outlook allows for the possibility that the rating could be cut
further if the Government fails to deliver on promised fiscal stabilization. This can occur either due to significant continued deterioration in underlying economic conditions or due to the failure of the Government to actually implement planned cuts, or both.

S&P's current position rates Ireland at the same level as Fitch and one notch below Moody’s, but both of these are keeping Ireland on a stable outlook.

S&P latest estimate is for Ireland net government debt / gross GDP ratio reaching 113% in 2012. Forever cheerful folks at DofF projected this ratio to be 83.9% in 2012 in their Budget 2010 figures. This shows just how much can change in 8 months time. S&P's estimate for debt implies Ireland is facing greater debt mountain than similar rated Belgium and Spain.

But here comes a tricky part. Remember that our debt is currently yielding in excess of 5.5% for 10 year notes. This implies that in 2012, we can expect to pay out 6.215% of our GDP in interest payments alone, or 7.52% of our domestic economy total income. The bill will be €10,241 million - using DofF forecasts - or 20.5% of the total current expenditure planned by the Government. All in, even by rosy projections from DofF for tax revenue, our interest bill alone will be swallowing every third euro revenue will bring in.

This puts into perspective recent ECB research that concluded that debt levels above 90-100% of GDP are, "on average, harmful for growth" and that porblems could arise at the debt levels of as low as 70% of GDP. ECB currently projects that euroarea-wide average debt levels will reach 88.5% in 2011. Does anyone believe anymore that Ireland can run 2.5-3% annual growth rate in the current conditions as projected by the IMF? Or 4.5-4.3% (2012-2013) real GDP growth as projected by DofF?