Wake up and smell the Irish coffee

Note to self: Never lend money to a country where happy hour starts at 9 A.M.

The story so far: Ireland bailed out its over-large banks, curiously choosing to guarantee all of their liabilities. Most of those liabilities were debts to other European banks; without the Irish government’s guarantee, the entire Eurozone financial sector might have collapsed.

Why would Irish taxpayers cough up tens of billions of Euros to foreign banks? As this wonderful article from the Irish Times says:

Given the risk of national bankruptcy it entailed, what led the Government into this abject and unconditional surrender to the bank bondholders? I have been told that the Government’s reasoning runs as follows: “Europe will bail us out, just like they bailed out the Greeks. And does anyone expect the Greeks to repay?”

Hilarious. But that is only half of the story; it gets better.

Since May, the largest purchaser of Irish government bonds has been the ECB. In fact, they are now the single largest holder of Irish debt. But in mid-October, the ECB suddenly stopped buying.

The Economist:

At a European Union summit last month Germany won agreement to rewrite EU treaties to allow for a permanent scheme to deal with stricken euro-zone borrowers—including, it hopes, a mechanism for an orderly sovereign default. At that summit Jean-Claude Trichet, the head of the European Central Bank, warned EU leaders that talk of debt restructuring was likely to unsettle bond markets and drive up the borrowing costs of troubled euro-zone countries. So it proved.

In other words, the (French) head of the ECB warns Germany that their plan will “unsettle bond markets” and “drive up borrowing costs”. Immediately thereafter, the ECB halts all purchases of Irish bonds, causing Irish bond yields to skyrocket. Holy cow, Trichet is a seer! “So it proved.” Ha, ha.

Basically, the country of Ireland is just a toy for Eurozone technocrat games.

Although things seem to be spinning out of control. Irish bond yields are hitting new records daily, and starting this week, the carnage has been across the curve. Not only is the 10-year near 9%, but even the 2-year is approaching 7%.

I am looking for data on even shorter maturities. The natural Bloomberg ticker for the 1-year does not provide any data. The Irish National Treasury Management Agency has a page on bond indices, whose data appear to be updated daily. As of today, it shows a 1-year bond (exactly; it matures on 2011-Nov-11) trading at a yield of 5.68%.

Oh, and Portugal is in trouble, too.

This cannot continue. Expect an announcement this weekend if not sooner.

2 comments to Wake up and smell the Irish coffee

  • jesse

    The Unicorn. Hehe. Kinda puts our (North America’s) bargain basement rates into perspective.

  • snacky

    I disagree with your story about the ECB manipulating Irish bonds. The reason the ECB hasn’t bought Irish government debt lately is because the Irish government hasn’t been issuing any lately.

    Meanwhile, the ECB can, and does, already lend directly to Irish banks. This type of lending has continued to increase.

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