Getting back into the Bond Markets

Imhof Tank

Dan O’Brien and Lucinda Creighton on Vincent Browne last night claimed leaving the euro voluntarily would be unadulterated madness and would assure the total and absolute destruction of Irish society.

Their reasoning is if we leave, the ECB money tap gets turned off, the banks lose all liquidity and ATMs stop working.

As far as I understand it, the counter argument is that if we leave the euro and establish the punt nua then we would default on our existing sovereign or a huge percentage of it, and then hope the bond markets are prepared to lend to us again with our lower gearing, and in the meantime print our own money to keep the ATMs humming, and we also become super competitive in terms of our exports as an additional benefit.

OK, it would be a massive gamble, but if the money taps are going to be turned off anyway because of what is going on elsewhere – why not? Is it not the case that the bond markets forgave and forgot and started lending to Iceland as soon as they reduced their sovereign debt by devaluation?

ardmacha

OK, it would be a massive gamble, but if the money taps are going to be turned off anyway because of what is going on elsewhere

Why should the ECB tap be turned off? More likely similar measures will be needed for banks in other parts of Euroland.

Imhof Tank

ardmacha wrote: »

Why should the ECB tap be turned off? More likely similar measures will be needed for banks in other parts of Euroland.

Because of the increasing scale of the crisis.

There are not enought euros to go around - unless the ECB start printing money which they dont seem prepared to do.

Scofflaw

It's probably more relevant that Iceland has reduced its deficit to 1.4% of GDP, and that the size of their return to the bond markets was only $1bn. We're on track (apparently) to reduce our deficit to 8.6% of GDP by next year, and our borrowing needs are multiples of Iceland's - on the other hand, our bonds are at 8.6%, theirs are at 5%.

As for the banking recapitalisations needed round Europe - €300bn was the figure cited by the IMF, and it's worth noting that ours has cost €70bn, so you're looking at a bit over four times the recapitalisation across an economy many times larger.

Standard disclaimer: none of this should be taken to mean that everything's just peachy.

cordially,
Scofflaw

Imhof Tank

Scofflaw wrote: »

It's probably more relevant that Iceland has reduced its deficit to 1.4% of GDP, and that the size of their return to the bond markets was only $1bn. We're on track (apparently) to reduce our deficit to 8.6% of GDP by next year, and our borrowing needs are multiples of Iceland's - on the other hand, our bonds are at 8.6%, theirs are at 5%.

As for the banking recapitalisations needed round Europe - €300bn was the figure cited by the IMF, and it's worth noting that ours has cost €70bn, so you're looking at a bit over four times the recapitalisation across an economy many times larger.

Standard disclaimer: none of this should be taken to mean that everything's just peachy.

cordially,
Scofflaw

Yes but if we could raise new money at 8.6% on the bond market wouldnt that be sustainable - especialy if we haircut the existing debt and convince the market we are working on the deficit.

On the undercapitalisation -correct me if Im wrong but I thought either the planned eurobond offering or the efsf would have a max €450bn available and saving Greece would eat up €300 bn - so thats not going to happen obviously, in which case why would the Germans keep the money tap on for us? (and therefore should we get out now and be the first mover?)

Good loser

Imhof Tank wrote: »

Yes but if we could raise new money at 8.6% on the bond market wouldnt that be sustainable - especialy if we haircut the existing debt and convince the market we are working on the deficit.

On the undercapitalisation -correct me if Im wrong but I thought either the planned eurobond offering or the efsf would have a max €450bn available and saving Greece would eat up €300 bn - so thats not going to happen obviously, in which case why would the Germans keep the money tap on for us? (and therefore should we get out now and be the first mover?)

The bond rates were over 14% some months ago; they would likely return to these levels, and higher, if we left the euro - especially if we defaulted as well.

At the very least we are prisoners of our current situation (in euro) until we have balanced budgets. 2020?

This country imo got excellent advice from Peter Sutherland two days ago.
We would be very wise to follow it to the letter.

Debtocracy

Good loser wrote: »

This country imo got excellent advice from Peter Sutherland two days ago.
We would be very wise to follow it to the letter.

Taking advice from Peter Sutherland is like taking advice from a wolf on how to protect a hen house. The bank this guy works for is one of the leading contributors to the current global financial crisis. Does anyone understand the idea of a conflict of interest?

Imhof Tank

Imhof Tank wrote: »

Dan O’Brien and Lucinda Creighton on Vincent Browne last night claimed leaving the euro voluntarily would be unadulterated madness and would assure the total and absolute destruction of Irish society.

Their reasoning is if we leave, the ECB money tap gets turned off, the banks lose all liquidity and ATMs stop working.

As far as I understand it, the counter argument is that if we leave the euro and establish the punt nua then we would default on our existing sovereign or a huge percentage of it, and then hope the bond markets are prepared to lend to us again with our lower gearing, and in the meantime print our own money to keep the ATMs humming, and we also become super competitive in terms of our exports as an additional benefit.

OK, it would be a massive gamble, but if the money taps are going to be turned off anyway because of what is going on elsewhere – why not? Is it not the case that the bond markets forgave and forgot and started lending to Iceland as soon as they reduced their sovereign debt by devaluation?

Argentina defaulted in 2001, it is now 2011 and they still have not returned to the bond market and have been bankrolled since 2001 by hugo Chavez buying their bonds.

Why would Ireland be any different, except we dont have any country to personally buy our bonds.

lasnoufle

Imhof Tank wrote: »

Yes but if we could raise new money at 8.6% on the bond market wouldnt that be sustainable - especialy if we haircut the existing debt and convince the market we are working on the deficit

Well if you haircut the existing debt, it's a clear message that there's a chance that you do it again in the future,so I don't really understand how you'd expect the bonds to stay at 8.6%... They'd be back to 14% or more overnight.

Good loser

Debtocracy wrote: »

Taking advice from Peter Sutherland is like taking advice from a wolf on how to protect a hen house. The bank this guy works for is one of the leading contributors to the current global financial crisis. Does anyone understand the idea of a conflict of interest?

Sutherland has a brilliant mind. He knows the international business scene inside out. Shrewd and wise, he has always been a patriot.

Pay heed to him while we have him.