Ireland buying back debt on secondary market?

Bits_n_Bobs

Can someone explain why this is not happening? I assume there are some reasonable objections to it?

beeftotheheels

Bits_n_Bobs wrote: »

Can someone explain why this is not happening? I assume there are some reasonable objections to it?

2 main reasons stand out.

1. A buy-back of debt at a discount by the issuer of that debt is generally frowned upon (and probably illegal unless we want to trigger a default). Say all Irish debt was owned equally between two investors, Irish pension fund and Hedge fund. Now Irish pension fund expects to be repaid in full in five years time when the debt falls due. But, Ireland realises that Hedge fund would be prepared to sell the debt back to us at 50c in the euro, Pension fund would not. If Ireland were to buy all the debt off Hedge fund then that leaves less cash in the kitty to repay Pension Fund in five years time, so Pension Fund will take us to court.

2. Where would the cash come from? The cash we have, and which we borrowed, is already earmarked for certain purposes, so we would need to find new cash to effect a buy-back even if it were possible without being sued.

Now the EFSF can, subject to the approval of the ECB, buy our bonds in the secondary market and presumably allow us to retire them as they fall due for the amount it paid (i.e. allow us to benefit from the discount that they can get). Which brings up the final issue.

3. No one is really buying or selling Irish bonds at the moment so the numbers mean very little. Irish banks and pension funds are sitting on the bonds believing that they will be worth €1 in the €1 because they believe Ireland will repay them, a lot of other investors are doing the same.

So while yields seem very very high, it is a bit like trying to determine the price of cattle in Ireland based on the price three particularly weak samples got when Johnny Murphy bought them off his elderly neighbor Joe McHugh who had to sell as he was going into a nursing home.

The fact that most holders of Irish bonds are not selling means that, in their view, and in mine, the risk premium on Irish bonds is way over done at the moment.

ardmacha

Just have the banks buy debt, bring it to the government and cash it in for full value?

beeftotheheels

ardmacha wrote: »

Just have the banks buy it?

1. Since we own the majority of them that would still be us buying it which would cause the same default issues, and
2. Where would the banks get the cash from to fund the purchases?

Taxi Drivers

Bits_n_Bobs wrote: »

Can someone explain why this is not happening? I assume there are some reasonable objections to it?

The trading volume in Irish bonds is tiny. If we decided to buy them we'd find close to nothing out there to buy.

http://economic-incentives.blogspot.com/2011/07/trade-volume-in-irish-bonds.html

Scofflaw

Taxi Drivers wrote: »

The trading volume in Irish bonds is tiny. If we decided to buy them we'd find close to nothing out there to buy.

http://economic-incentives.blogspot.com/2011/07/trade-volume-in-irish-bonds.html

Which leads one to try to work out whether there are no sellers, or no buyers. If nobody wanted to buy Irish debt at the current discount, because it's simply too awful for anyone to want it, then presumably those holding it wouldn't want it either, and would offer a greater discount to attract buyers.

So the present tiny trading volume would seem to suggest that those who hold Irish debt regard it as worth more than the current market discount would yield. But in that case, why would those who don't hold it not want it, and offer a better price for it?

Either way, there's cash on the table, and there shouldn't be in an efficient market. That would suggest, in turn, that the market in Irish debt is currently dysfunctional...which suggests, in turn, that there is an information problem, most likely that neither buyers nor sellers can properly price the risk in Irish debt. Which, finally, suggests that the market pricing of Irish debt is meaningless - a conclusion that we could also reach on purely statistical grounds, but which on those grounds tells us nothing in particular.

cordially,
Scofflaw

beeftotheheels

Scofflaw wrote: »

Which leads one to try to work out whether there are no sellers, or no buyers. If nobody wanted to buy Irish debt at the current discount, because it's simply too awful for anyone to want it, then presumably those holding it wouldn't want it either, and would offer a greater discount to attract buyers.

So the present tiny trading volume would seem to suggest that those who hold Irish debt regard it as worth more than the current market discount would yield. But in that case, why would those who don't hold it not want it, and offer a better price for it?

Either way, there's cash on the table, and there shouldn't be in an efficient market. That would suggest, in turn, that the market in Irish debt is currently dysfunctional...which suggests, in turn, that there is an information problem, most likely that neither buyers nor sellers can properly price the risk in Irish debt. Which, finally, suggests that the market pricing of Irish debt is meaningless - a conclusion that we could also reach on purely statistical grounds, but which on those grounds tells us nothing in particular.

cordially,
Scofflaw

Despite the fact that reading the above gave me a headache this also comes back to an interesting point on the stress tests.

It was reported (I cannot find the link) that RBS cut their exposure to Irish sovereign by several billion from the 2010 numbers when in fact the stress tests don't tell us that. Had RBS moved Irish sovereign from the trading book to held to maturity it would have disappeared from the trading book and stress tests while not disappearing from the bank.

It would also be the logical course of action for any investor who holds Irish sovereign and believes that the market is under-pricing it, you wouldn't want to mark such debt to market, you'd want to carry it at par and perhaps make some impairment provision against it.

So we have imperfect information which could point to either of two diametrically opposed conclusions.

Bits_n_Bobs

Very interesting and I share your headache! Brain is not meant to actually do anything on a saturday morning and it is protesting mightily!