23/1/2012: Extreme Events

Going through 2 charts and mapping the big themes of the ongoing crises, one has to be in awe of the volatility. Here are the maps of extreme (3-Sigma-plus) events with 'directionality' reflected:

Lovely, aren't they? But the trick in the above is: we are not at the decay stage of volatility on the sovereigns re-pricing stage. This, to me, suggests that once the sovereign crisis re-pricing draws to conclusion (whenever that might happen - isa different story), there will be the need for finding that 'new normal' (reversion-to-the-trend target) for the markets valuations overall. And that is the whole new game, dependent less on the previous equilibrium that should have followed the Great Bursting period, but more on the future risks and trends in post-debt economies. Which, itself, really depends on whether any given market can sustain growth without endless supports (implicit and explicit) from the Government borrowings.

Just thought I'd throw few thoughts out there...

22/1/2012: An update to Euribor risk premium post

On the foot of the previous post, I recomputed risk premia for 3 maturities: 12, 9 and 6 months euribor. Here's the chart:

And some top of the line numbers:

To compare against rates dynamics:

22/1/2012: What do interbank lending rates tell us about risk valuations?

Here is an interesting set of charts for euribor:

Notice that as maturity span shortens, there is an increasingly rapid decline in the rates in recent month. This, of course, is a reflection of two forces acting simultaneously - the ECB LTRO and the rate drop in December. You can see this here in the context of 12 months euribor plot for end-of-month (and end of last week for January 2012):

Sounds good? Indeed, the short-term end of liquidity curve improved dramatically, but... here's a trick - the long-term end of the curve is not improving as much as (1) the repo rate supports, and (2) LTRO (3 year facility) should lead it to. To see this - here's a chart:

And the above term premium is rising despite the risk premium falling:

Note: the last chart above is not seasonally adjusted and, with exception for 2010, euribor rates tend to fall seasonally in January compared to December.

In fact, current risk premia are well above the long-term relations and at more extreme end of the spectrum than during the previous months:

The above suggests to me that what we are observing in the liquidity markets is a combination of some improvement due to ECB's LTRO move (substitution along maturity curve) and the (very) incomplete pass through of ECB rate change to funding markets. There appears to be no evidence in risk reduction anywhere in sight.

22/1/2012: 'Markets are crazy', says market economy Ireland

So we used to have an 'Innovation Island' here that was run by the Deputy PM who confused Einstein with Darwin. She was directly in charge of Innovation policies.

Now we have a 'Competitive Market Economy' that 'Is Open for Business', as we constantly remind our potential foreign investors (domestic investors we have simply taxed into oblivion already and are even expropriating their wealth through Minister Noonan's 'levy' on pensions), run by the Minister responsible for the following statements (source here HT to @brianmlucey for flashing this one out):

"Michael Noonan, Ireland's finance minister, criticised the involvement of private creditors in the [Greek PSI] talks, arguing that it had made the crisis worse. Mr Noonan told the German newspaper Sueddeutsche Zeitung it had been a "fatal" mistake to involve the private creditors and this had "driven the markets crazy". He said that markets would only calm when they were convinced that eurozone countries were making serious efforts to solve their debt problems."

So, 'markets are crazy' and proper risk sharing with private investors in the case of insolvency is a 'fatal mistake'.

Does Minister Noonan believe in slavery? Because if he doesn't then there is no alternative in the case of Greek crisis resolution options to PSI. Of course, Minister Noonan believes in slavery - the modern variety of it - slavery that subjugates those who do not emigrate from Ireland to decades of involuntary repayment of privately accumulated debts they did not contract to accumulate. Minister Noonan has no problem with the Government of Ireland simply undertaking all private debts of a private insolvent banks and forcing ordinary people - not shareholders or lenders to these banks who were paid to take the risks in the first place - to repay them. Just like that. Without any consent: "Give us your money, granny, or else!"

But there's more to the statement above, which shows Minister Noonan in an equally unpleasant light. You see, Minister Noonan swears by the wisdom of the IMF and the ECB and the European 'partners' when it comes to his domestic policies. He did so officially earlier this week when he used Troika endorsement of Ireland's 'progress' in the programme as the reflection of their support for his policies. Yet, it is the very same Troika he so blindly follows into Ireland's economic oblivion which deemed Greek debt levels unsustainable - aka non repayable even were the modern day debt slavery terms (as imposed in Ireland) deployed in Greece as well.

So, for all our Irish concerns about the sanity of the Troika 'solutions' for Ireland, there's an even greater concern that should be preoccupying our minds - concerns for the positions taken by our own national leaders. And for all those would-be foreign investors into Ireland - please remember, you are about to invest in the economy run by those who think that 'markets are crazy' and contracts for risk pricing are 'fatal mistakes'.


PS: Never mind, Minister Noonan's only plan for Ireland is to attempt, asap, borrowing in the 'crazy' markets to finance his 'sane' fiscal management strategies.

20/1/2012: Non-News from a Road to the Second Bailout

This story in the Irish Times yesterday clearly requires a comment. So here it goes.

Here's the best time-line and explanation as to Minister Noonan's 'efforts' to secure 'savings' on the Promissory Notes.

Now, consider the following from the Irish Times today:

"We think there’s a less expensive way of doing [restructuring of the Promissory Notes] by financial engineering, and we’re not talking about private-sector involvement or restructuring,” said Mr Noonan in Berlin "...it is about pointing out to the troika that there are difficulties and that it could be less expensive – and everyone still gets their money.”


"A senior German official said Berlin could envisage extra programme funding being used for the Irish banking sector not currently earmarked for this purpose."

The above might mean many things:

1. Ireland still has some funds due under the original 'bailout' that were earmarked for banking measures, but were not yet used in the last recapitalizations round in July 2011. This will not in itself constitute any new measures materially impacting Ireland's Government debt projections. It will not constitute a second bailout (as the funds are already earmarked under the first bailout), but by reducing funding available for fiscal and other banking requirements it will increase the probability of such a bailout in the future.
2. Ireland can be allowed to borrow more from the EFSF/ESM, swapping the Notes for marginally cheaper funding. This too will not constitute any material impact on Ireland's Government debt projections. But it will constitue a second bailout.

Neither option involves any possibility for 'private sector involvement' and at any rate, Minister Noonan's reference to PSI is a red herring - there can be no PSI in relation to the Promissory Notes as these do not involve private investors or lenders at all.

However, both (1) and (2) have material impact in terms of Ireland requiring a second bailout - both increase materially the probability of such an eventuality.

Lastly, there is a catch. The problem of capital adequacy, highlighted by Minister Noonan, means that 'financial engineering' can only involve temporary relief in terms of payments timing, not material relief in terms of NPV of the debt assumed by the state under the Promissory Notes. We will be allowed to borrow more time. At a cost of longer loans, and more repayments in the end. Which, of course, does nothing to achieve sustainability of the 'solution' from the point of view of us, taxpayers, who Minister Noonan expects to pay for all of this. But it probably does give him a chance of holding a 'triumphant' pressie announcing some sort of a 'deal'.

So in the nutshell, the Irish Times story is... errr... a non-story. A sort of traditional Spin that comes out of the Government every time they are caught... errr... fantacising the reality. As NamaWineLake put is so excellently:
"...it has been four months since Minister Noonan’s meeting with the ECB and others in Wroclaw where he, to use his own words “had a ball to kick around” and has proposals. It is two months since Enda Kenny discussed the matter with Angela Merkel. It is more than two months since Minister Noonan said that “technical discussions” were ongoing. And yet the Troika yesterday downplayed any progress in the matter saying that Minister Noonan had merely “requested discussions”."


Or maybe, just speculating here, Minister Noonan is bringing up the Promissory Notes once again this week because next week we are about to repay another tranche of Anglo bonds? Last month, around the time of the repayment, there was much-a-do-about-nothing going on in referencing the very same Promissory Notes?

However, there is, in the end, something openly honest about Minister Noonan's windy trip down the 'Imagine the Superhero, ya Villain' lane.

"[Minister Noonan] said he hoped that the ECB would extend its programme of low-interest loans beyond next month to improve euro zone bank liquidity in the hope it would stimulate the market in longer-term sovereign debt papers."

Point 1: LTRO-2 was already announced, so Minister Noonan is either uninformed, or pretends to be uninformed to posit himself as a a heroic 'rescuer' proposing a real 'solution'.

Point 2: Minister Noonan clearly shows that his sole concern is how to raise more debt for Ireland. Not how to balance the books (in which case he shouldn't need banks to pawn their assets as ECB to buy Government bonds with this fake cash), or reform the economy (in which case growth would resume and the State shall not require the said scheme, again) and not with restoring functional banking system to health (since functional healthy banking system lends to the real economy, not to Minister Noonan).

At last, truth revealed?

20/1/2012: Deputy Peter Mathews v Minister Noonan

Here are some extracts from an excellent contribution by Peter Mathews TD (FG) from yesterday's topical debates in the Dail (full record available here). This was comprehensively overlooked in the media reporting which focused solely on the non-event (save for Vincent Browne's questions) of the Torika 'approving' Ireland's 'progress'. My comments in italics.


Deputy Peter Mathews: 
      Next Wednesday, 25 January, is the due date for the redemption of a bond issued originally by Anglo Irish Bank Corporation, now the Irish Bank Resolution Corporation. 
      We are at an important financial crossroads in the history of our country. Anglo Irish Bank has been insolvent and supported by financial engineering, promissory notes and the emergency liquidity assistance of the European Central Bank and funds from our Central Bank.  The debt that lies embedded in what was Anglo Irish Bank was not created by the citizens of this country.  It has been meted out onto their backs by a mixture of incompetence and mismeasurement over a certain period under the past Administration.
      We are at a moral crossroads.  We should bring to the attention of the creditors holding the bond the facts that the bank is insolvent and that, in effect, it is not a case of our not wanting to pay but of our not being able to do so...

      Consider the debt of €1.25 billion.  The attention of the creditors will be in sharp focus because the banking system, the Irish-owned banks, are in debt to the ECB and our Central Bank at a level of approximately €150 billion.  It is the forbearance and tolerance of citizens that keeps the financial edifice and engineering of the eurozone and the greater financial system of the developed world in place.  We have been doing considerable work, facing enormous challenges.  Through the great work of the Minister for Finance, Deputy Noonan, and the Taoiseach, we are bearing the load of trying to bring about a fiscal adjustment in line with the troika agreement signed in November 2010.  All that work is important and must be done but the legacy debt is outside the responsibility of the people of this State.

      One and a quarter billion euro is almost half the budget [measures] introduced in December.  It is eight times the sum that will be raised from the household charge and twice that which will be raised by the VAT increase.  The debt crisis in Ireland and other countries cannot be solved by adding more debt...  Loading more debt on this country to pay legacy debt is like suggesting a drink problem can be solved by another whisky.

Minister for Finance (Deputy Michael Noonan): 

      I thank Deputy Mathews for raising this very important issue.  The repayment of the bond in question is an obligation of the bank and will be repaid by the bank.  It is important to be clear that it is the bank and not the Exchequer which will meet this obligation. [Need anyone point the following to the Minister, that the 'bank' has no own assets or capital over and above that which has been committed to it by the State and that the Promissory Notes are being financed by the Exchequer?]

      The Government has committed to ensuring that there is no forced or coerced involvement by the private sector burden sharing on Irish senior bank paper or Irish sovereign debt without the agreement of the ECB.  This commitment has been agreed with our external partners and is the basis on which Ireland's future financing strategy is built.  While the cost to the Irish taxpayer has been and will remain significant, the Government clearly recognises the need to work as part of the eurozone in order to ensure a return to the funding markets in the future.  The only EU state where private sector involvement will apply is Greece.

      The following was agreed by all 27 member states at the euro summit last October:

      15. As far as our general approach to private sector involvement in the euro area is concerned, we reiterate our decision taken on 21 July 2011 that Greece requires an exceptional and unique solution.

      16. All other euro area Member States solemnly reaffirm their inflexible determination to honor fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.  The euro area Heads of State or Government fully support this determination as the credibility of all their sovereign signatures is a decisive element for ensuring financial stability in the euro area as a whole.

      This was agreed by the Heads of State and Government at their meeting in October, and Ireland was included in the 27 states that agreed to it. [Minister Noonan fails to note here that it was on insistence of his own Taoiseach that article 15 does not include Irish banking sector resolution-related debts. And he deflects the arguments made by Deputy Mathews on feasibility of repaying these debts.]

      It is not correct to state that only taxpayers have borne the burden of rescuing the Irish banks.  Holders of equity in the banks have been effectively wiped out in burden sharing while holders of subordinated debt have incurred a €15.5 billion share of the burden to date, including €5.6 billion since this Government took office less than a year ago. [Again, Minister Noonan is dis-ingenious in his comments. Equity holders and bond holders are contractually in line for these losses. Taxpayers are not. In effect, Minister suggests that there is some sort of equivalence between treating harshly contracted parties to an undertaking and treating harshly an innocent by-stander. There is no such equivalence.]

      To impose burden sharing on senior bondholders, or to postpone the repayment of this bond at this point in time, is not in Ireland's best interest.  What is in the Irish people's best interest is that we regain our financial independence and that we place ourselves in a position to re-enter the financial markets at the earliest possible date...  We do not need to scupper our recovery, scupper the goodwill generated or alienate our partners by taking unilateral action which in the medium to long term will prove wholly counterproductive. [This is an outright conjecture by the Minister that is unfounded in fact. It is not in the interest of the Irish people to simply regain access to financial markets. It is only of such interest if we can regain it at a lower cost than alternative funding provided. Furthermore, his statement assumes that not repaying Anglo bondholders will cause the detrimental impact on 'goodwill' and the 'financial markets'. This remains to be tested and proven.]

      If we were to postpone or suspend payments to creditors of IBRC, this would have a significant impact on both the bank and, ultimately, the State. The senior debt, unsecured as it is, is an obligation of the bank. If the bank does not meet such an obligation, it would lead to a default and, following that, most likely insolvency. Insolvency would result in a very significant increase in the cost to the State to resolve the IBRC. [What cost? The Minister scaremongers the public, but cannot name a single tangible expected cost. Why is the interest of the bank aligned with the interest of the State, Minister?] ... Further, the financial market's view of Ireland as a place to do business or invest would be seriously undermined. [Is Minister Noonan seriously suggesting that Ireland's reputation as a place to do business or invest dependent so critically on a bust bank with worst history of speculative decision-making ability to repay its insolvent borrowings? Would IDA confirm they are directly referencing Irish taxpayers willingness to cover private sector losses in any undertaking, no matter how risky, as some sort of the 'investment promotion' positive for Ireland? Can Minister Noonan confirm that he has done the analysis of the effects that bonds repayments by Anglo, and the resultant increases in the sovereign debt have on sustainability of our Government's reputation in the bond markets? Does he not know/ understand that any investor looking at his statements will immediately price into their valuation of Government bonds the possibility that the Irish Government can at will, out of the blue simply hike its own debt pile in the future to suit some other risky private sector fiasco? What does that risk alone do to our 'reputation'?]

Deputy Peter Mathews: 

      While I will not get into a long debate, Greece will be the beneficiary of at least a 60% write-down of its debt obligations. The Greeks got the attention of their creditors by going out in the streets and having riots and by people being killed. We have knuckled down to correcting a fiscal imbalance and, at the same time, we have stayed silent. We have been straitjacketed by the legacy debt. Our loan losses in the banking system were €100 billion. While I know the shareholders and some of the subordinated bondholders suffered, the remaining losses were in the banks without being declared. The ECB stepped in to redeem bondholders to date, which was a mistake. We are compounding the mistake by going along the same route now.

      We have got to be honest about it and open up the discussion. We are not defaulting; we are opening a discussion. I made the point that we cannot pay. I use the word "we" euphemistically or collectively in regard to the bank and the State. We cannot pay because of the guarantee that extends over the bank. It is a case of us lifting the telephone and asking, "Can we have your attention, please?"  We cannot pay and we want to open a discussion and explain to exactly how the creditor liabilities of our banking system remain, and how they should be written down. There is further writing down to do. We have a €60 billion to €75 billion of write-down to organise and negotiate.

      To use an analogy, we have a steeplechase race with about four miles to go.  We have big jumps ahead.  Normally, a steeplechase horse will start with about 12 stone on its back.  Ireland's legacy debt of private debt, non-financial corporate debt and national debt when it peaks out at €120 billion is the equivalent of 24 stone on the back.  It is not a possible race to run.

Deputy Michael Noonan: 

      I do not disagree with Deputy Mathews' analysis.  However, we are in a situation which we inherited from our predecessors, who entered into solemn and legally enforceable commitments in respect of Anglo Irish Bank, as it was then.  Of course, Deputy Mathews is correct that we should do everything possible to reduce the debt burden on the taxpayers of Ireland and to enhance Ireland's capacity to repay its debts.  We are working on that and making some progress. [So that's it, folks. The Last Refuge of the Scoundrel = the arguments the Minister puts forward for expropriating personal property and income through higher taxation and reduced services for which we paid and continue to pay is: We are where we are. This alone should be very re-assuring to the future investors here.]