My thoughts on what is going on in the Irish Bond Market

Irish Bond yields rose to over 9% at one stage in the past week. But what does this mean? Basically when the Irish Government need money they issue what is called a bond. This is an IOU. They will issue it a cost of €1 per unit and they will guarantee to repay that €1 in a set period i.e. 2016. In the meantime they will give you a set return traditionally up to about 5% per annum. This is the interest you get. So in other words you give them your money, they agree to repay it in a set period of time and in the meantime they pay you interest on it annually.

However when you buy it there is what is called a secondary market. What this means is that you can sell it on to someone else. The person you sell it to however may say it is no longer worth €1 per unit, they may feel there is a chance that the government won’t be able to repay the €1 at maturity so they may only agree to pay you let’s say €0.90 per unit.

The person who buys it off you now has something that in 2016 will be worth 10% more than it is today (the difference between the 90c they paid and the €1 they will get back from the government).This 10% divided by let’s say 5 years is a simple 2% per annum in addition to the 5% per annum they have coming from the state gives them a state guaranteed return of 7% per annum, in simple terms.   

But if the markets are pushing the price lower because they believe the state will not pay the money back, in other words they will default; there must be something to it, right?  Possibly is my answer. The government are claiming today that they will not have to go to Europe/IMF to borrow any money but in fairness to the market that is exactly what Greece said just before they borrowed the money.

So let us assume they do go to the European Financial Stability Fund/IMF what would it mean for the bond holders. Well at the moment the fund states that there would be no loses or “haircuts” incurred by bondholders. The fund however will only exist until 2013, so if your bond matures after that date are you covered? You possibly are, but it is yet to be decided. Europe is due to come up with the post EFSF (European Financial Stability Fund ) plan sometime in mid December this year. But this will only be the plan it will take at least months for this plan to pass. The only thing is that 5 EU finance ministers came out at the weekend and said that there will be no haircut for bondholders’ post 2013. This was in direct support of the Irish Government but some people believe the statement was too weak.

In my opinion I think that it is a good sign of what some of the big hitters in the room will be looking for when they sit down to design the new plan for post 2013.

If we look at what has happened elsewhere most recently in Greece, they approached Europe officially 6 months ago. They have not defaulted on their sovereign debt. They have had a hiccup recently where they have revised their budget deficit estimate from 7.9% to 9.4% of GDP. This provides a perfect example to us as to what happens next. Basically Europe/IMF are now lenders to the Greeks. Greece must report back to them on a regular basis on how things are going. As a result of this revision it puts in jeopardy Greece’s chance of its “lender” giving them the 3rd traunche of the money they are due to get.

It’s likely when the EU/IMF  come to visit Greece next week they will want to see sure plans as to how Greece intend to wipe the increase out in 2011 and it is likely, and this is the important bit, that they will also start to look at the process of restructuring their debt.

It is my opinion, that ultimately Greece will restructure their debt. It is no different than the numerous clients I currently have in financially difficulty. I am going to the banks on their behalf asking for a reduction in payment by extending the term. (Greece and Ireland are already on interest only!)

But I also believe that Greece is different to Ireland. In their favour they have an overall majority so anything the government needs passed will be passed. In Ireland we have a paper thin majority which I have no doubt is increasing our yields.

But Ireland is very open with Europe in terms of the state of the economy. There should be few surprises for Mr Ollie Rehn when he looks at our books. Having said that I do believe we are in a seriously difficult position and I am not claiming it is “different this time”.

If Europe/IMF does come in I believe they will want to provide stability for as short a period as possible and then they will want to leave the economy/country in a better position than we are currently in. Defaulting on the sovereign debt I think would permanently damage a countries reputation.  To default on a countries banks debt is a completely different story however.

Note: If you fancy your chances I can orgainse access to the government 2014 & 2016 bonds, minimum investment €5,000.

About the Author

Eoin McGee is the owner of Prosperous Financial Services, an independent firm regulated by the financial regulator as a multi agency intermediary and mortgage intermediary. He has over 10 years experience giving advice to both individuals and companies in relation to their finances, he can be contacted on,  045 841 738 or 087 6 44 55 33.