Friday, June 17, 2011

“It’s all Greek to me”

Students of economics are often faced with a plethora of Greek symbols leading many to despair “it’s all Greek to me”.  For the past while all things Greek have jumped from econometrics textbooks to the economics headlines.  And the turbulence is being felt over here.  This graph from Bloomberg shows an average 10-year yield for Irish government bonds.

Bond Yields 6M to 17-06-11

You can see that actual yields at yesterday’s close for the outstanding Irish government bonds in this daily report from the NTMA.

Since the start of the year Irish bond yields have been rising almost incessantly.  The only notable decline took place in the 10 days following the March 31st stress tests of our ailing banks, which did garner some international credibility.  That fall was quickly reversed and the yields quickly rose back above 10% and have recently settled above 11%.

Today has already been a volatile day and after opening at 11.55% an hour ago the yields are up to a record 11.69%.  The Department of Finance, IMF, European Commission might be saying that the rescue package is working but we are getting further and further from a return to these markets to raise money rather than closer. 

When the IMF rolled into town the 10-year yield was 8% and it was felt that was sufficient to warrant calling on external help.  Six months into that rescue package and the yields are racing to 12%.  The torpor in the Irish economy continues but there has not been negative news in the past two months that can explain our surging bond yields. 

It is been political rather than economic developments that have driven the changes and it is clear that political institutions at national, European and international level do not have a credible strategy for dealing with this debt crisis.  This is now coming to a head in Greece and it is expected that a similarly disjointed approach will be taken when the circus returns its focus on Ireland. 

Ireland may not be Greece but with the same people providing the “solutions” it is not hard to see why our yields are moving so closely together.

From an Irish perspective this can be readily summarised using Michael Noonan attempt at kite-flying from Washington during the week when he suggested that burden-sharing with the €3.5 billion of senior unguaranteed unsecured debt in Anglo and INBS was back on the table.  What has been the reaction of the ‘troika’?

  • According to Noonan the IMF support this idea but no one in the IMF has actually come out and said this.
  • The European Commission have said they “always ready to consider any proposal” but hadn’t heard anything about this latest move.
  • And the ECB? Well, the ECB is so opposed to burden-sharing that they still think that Greece can pay back all its debt.

And we wonder why the markets are reacting as they are.  Seems perfectly rational to me.

UPDATE: Today’s volatility has continued and the breakfast time rise to 11.7% percent has been followed by a lunchtime drop to below 11.4%.  Check out the 1Day graph here though movements like this at these levels are largely academic.

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