Yesterday was a day of wild swings in markets as sentiment met a combination of the view that they had gone far enough in the short-term and talk of central bank action in response. If we look at events via the Italian government bond market we saw this. Prices fell heavily such that the yield rose above 6% on her ten-year maturity but then a story whipped around the markets that like the Terminator the Securities Markets Programme of the European Central Bank rather liked the phrase “I’ll be back”. We will only find out the extent of any intervention early next week when the number of trades settled this week is anounced but as a minimum the ECB was checking market prices. Accordingly Italian government bond prices rose and the yield fell back to 5.6%. If we move onto my comparison of yesterday we saw UK government bond prices surge – believe it or not but it was a flight to quality- and our ten-year yield fell to 3% at one point before it all turned arouns in response to the Italian yield fall and we ended the day where we started having rallied a point and a half.
I have discussed the Securities Markets Programme and its problems on many occassions as for example in my articles pointing out that it has pushed the ECB towards insolvency. Let me just leave you with two points today. Firstly we were told it has ended and secondly whilst at times it has been a tactical success it remains a strategic failure.
Moody’s downgrades Ireland
Just as everyone was clearing up after a volatile day which had shown some improvement in the latter part for the Euro zone Moody’s dropped this bombshell. If nothing else it will make more wonder if the ratings agencies do this sort of thing deliberately.
Moody’s Investors Service has today downgraded Ireland’s foreign- and local-currency government bond ratings by one notch to Ba1 from Baa3. The outlook on the ratings remains negative.
In case you were wondering this takes Irish debt into what is officially called sub-investment-grade and unofficially junk. The rationale for it is something that is becoming increasingly familiar as it has been used previously with Greece and Portugal.
The key driver for today’s rating action is the growing possibility that following the end of the current EU/IMF support programme at year-end 2013 Ireland is likely to need further rounds of official financing before it can return to the private market, and the increasing possibility that private sector creditor participation will be required as a precondition for such additional support, in line with recent EU government proposals.
In other words it is the way that the Euro zone “rescue” effort is expected to pan out which is making the situation worse! Some rescue eh? I find it an ever bigger irony that one of the architects of this failing policy Christine Lagarde is now head of what is in effect the worlds bail out or rescue organisation the International Monetary Fund. Until we sort out the problem of rewards for failure we are going to struggle to extricate ourselves from the economic problems that we face. Also on the subject of ill-conceived rescue plans I notice that the French plan for aid for Greece has gone very quiet with the signs being that it has been kicked into the long grass. I analysed and indeed was very critical of this plan on the 28th and 29th of June for those interested in the detail of it.
We find ourselves in a quagmire here on so many levels. Firstly we have the fact that the ratings agencies should have ben reformed after their failures in the run-up to the credit crunch. Secondly in a sign of increasing desperation we see Euro zone officials and politicians talking of setting up their own ratings agencies along with some anti-American rhetoric in the mix. This has both comedy and tragedy in it. The comedy comes from the fact that Fitch,ahem, is in fact French owned and the tragedy is that there is a very short list of options which would be worse than the current situation but by choosing themselves as a prospective ratings agency they have managed to pick it! So right question but wrong answer.
If we look at the underlying problem that faces Ireland her property and banking sector there was in fact some genuine bad news yesterday. The Jones Lang Lasalle commercial property index fell by 5.7% in the second quarter of 2011 making a total fall of 7.2% in 2011. This matters because these are the assets which are backing much of the Irish banking sector and are the assets which its bad bank NAMA purchased in a failed attempt to bail the banks out. The analyst Jagdip Singh who follows these matters closely feels that it is now likely that the adverse stress test scenario for falls in commercial property prices that was used by the Central Bank of Ireland in March is now too small and it’s only July!
If we move to the market impact of this we see that the Irish ten-year government bond yield is 13.6% this morning. I feel that some sense of perspective on this can be gained from the fact that some many worries were circling Italy at an equivalent yield of less than half this. I also feel that it cannot be reinforced enough that Ireland has deteriorated substantially under this “rescue” as when it started this yield was some 4.7% lower at 8.9%. I think that we can genuinely wonder if it would have been much worse if she had tried to go it alone. I have argued that of the countries in trouble Ireland is the one for whom default seems to me a more and more obvious way out. On that subject let me introduce you to a country which did take that route and we can stay in the same letter of the alphabet as it is Iceland. Remember the pariah which did take that route just over two years ago?
Iceland has today issued a USD 1 billion Reg S / 144A bond offering due in 2016. This is a fixed rate issue with a 4.993% semi-annual yield, which reflects 3.20% premium over mid-swaps. The transaction was well received by global investors and the book was two times oversubscribed.
and for more food for thought her is an accompanying comment from Iceland’s Finance Minister.
I am extremely pleased that Iceland has regained access to the capital markets only two and a half years after the onset of the financial crisis
So for those who do not feel that default is becoming more and more of an option I would draw their attention to two things. The length of time one is a “pariah nation” seems to be just over two years. And secondly I would like you to compare the interest-rate with the current Irish one. Actually strictly speaking we should compare it with Ireland’s five-year yield which is 16% which only reinforces my point.
The UK’s relationship with Ireland: bilateral aid
When Ireland hit trouble I argued that whilst we are a component of one of the Euro zone rescue funds and are a shareholder in the IMF we should restrain from bilateral lending as we were unlikely to get the money back. I had a letter published in the Evening Standard to this effect and here is an excerpt from what I sent them last November.
I wish to make it clear that I wish Ireland the best in difficult times but in my opinion the Euro zone should solve its own problems. Back in 1992 when the UK was in trouble nobody helped us. Also as time goes forwards I suspect there will be other calls for money/aid from Euro zone countries with Portugal and possibly Spain leading the list and if we start now with Ireland we have to realise there will be other calls too.Accordingly I believe that our government should be very circumspect before offering help as it is unlikely to be the last call and may not even be the last call from Ireland and there is a danger of us getting on a treadmill we cannot get off. As an example I believe the “temporary” help provided to Greece has now become effectively permanent.
I also contacted the Chancellor of the Exchequer with this analysis but did not even receive the courtesy of a reply. As we stand nearly 8 months later it is clear to me that my analysis/forecast was correct and the waffle presented at the time that we would get all the money back was simply derisory hyperbole. Should Ireland take the Icelandic route it may be that we see very little of it back at all and in my opinion if you are a logical Irishman/woman the Icelandic route must be looking more and more attractive.
The Bank Of Japan and concerted intervention
Last night the Yen surged against other currencies hitting 78.47 against the US dollar which means it rushed through the level at which we saw concerted central bank intervention on March the 18th. Although the situation has improved to 79.25 if the Bank of Japan was the star ship Enterprise it would as a minimum be on yellow alert right now night and for a while last night it would have been red alert.
My view on the matter back then was illustrated by the title of my article from the 18th of March.
Can even concerted currency intervention by the G-7 work?
An apology on behalf of the Metropolitan Police
In the past writers such as Sir Arthur Conan Doyle with characters such as Sherlock Holmes have led to a mystique about “inspectors” from Scotland Yard being efficient skilful and effective in persuing criminals. The very fact that such men might be on the case might hopefully terrify criminals.
Sadly the representatives of the Metropolitian Police on display in the News International scandal seem to more represent Inspector Clouseau than Sherlock Holmes. I doubt Sherlock would have been deterred by someone refusing to co-operate and would have instead redoubled his efforts.Many criminals must now be sadly rueing the fact that it would appear that by refusing to cooperate they presumably would have had a good chance of getting off scot free….
To receive our free email newsletter sign up here.