How to solve the Bond market "problem" for Ireland

[adrem]

The underlying bond market "problem" for Ireland is that no-one wants our bonds. This pushes the price down (good ol supply and demand) which pushes up the yield. The less people want our bonds, the lower the price, the higher the yield.

So - to solve the problem, we need to encourage people to buy our bonds.

At the moment the yield is extremely attractive on Irish Bonds. A return of over 7.5% p.a. for 10 years is a bloody great return. Of course the concern is that the Government will default and therefore won't actually give the 7.5% return at all.

So - to the point - how do we "create" a demand for Irish Bonds? Remember the demand has to be fairly significant - maybe 7-10bn now with a future ongoing demand and it can't be the State, the ECB or the IMF (for obvious reasons).

There is actually an answer that would deliver an immediate demand for up to 20bn in Irish bonds - that is to get the Irish pension funds to replace their German bonds with Irish Bonds.

Currently Irish DB pensions are under massive pressure because German bond yields are very low and they are effectively required to use German bonds to back their pensions in payment and future pensions liability. A simple piece of legislation could be passed which allows pension schemes to use Irish bonds to fund their pensions in payments and allows them to use Irish bonds to price their future liabilities would actually serve a number of immediate beneficial purposes.

It would immediately create domestic demand for Irish bonds. The legislation could require pensions in payment from pension schemes to be purchased via an annuity - thus ensuring immediate bond purchase requirements. The fact that the Irish yields are high would mean that the repricing of pension liabilities would be lower, meaning less DB schemes would be insolvent, meaning a greater liklihood of employers keeping the schemes running for staff. Finally - the big one - it would drive down the price of Irish debt which would make our future interest bill lower, reduce some of the pressure on future public finances and make it easier for the NTMA to issue debt next year.

Downside - yes one downside - IF the Irish government did default then those pensions that were linked to the Irish bonds would be impacted - HOWEVER that simply isnt reason enough (imho of course) not to do this. This is somewhat self fulfilling - if we don't get the bond market moving then the risk of default increases but in fact if we take this step, it will get the market moving, thus removing the liklihood of default. In any event the broader positive impact of this move far outweighs any small possible risks to DB scheme pensioners.

How to do it? Pass a simple piece of legislation - could be done as emergency legislation over the weekend if they wanted to.

 

[Watcher2]

But WE dont want to be paying that level of interest. From my limited knowledge, the 7+% rate is what the bonds are traded at between the bond traders themselves, not what the Irish government is selling them at.

What should really matter is what WE sell them at. Of course the current rate on the market is indicative of what we would have to pay should the NTMA go to the market, but they (the NTMA) are not auctioning at the moment.

What I find strange is that there is the ECB/IMF fund which is available to bail us out should we choose/need to tap into that and that fund surely is a form of guarantee on our bond repayments.

So why does the market feel so jittery about Irish bonds, or any EU bonds for that matter?

 

[orbit]

I think it makes a lot of sense (in principle). Clearly though if default did happen, and private sector pensions take an (even bigger) hammering as a result, then I'd like to see public sector pensions being cut by the same amount. There's no way that the private sector should take all the risk here.

Also, someone would have to crunch the numbers and show that it would actually make a difference, ie. there is enough money to be invested so that it would genuinely help the situation.

 

[Cassandra Syndrome]

There is a problem? I thought going by your posts the entire nation was living it up like hogs in muck.

Household savings should be earning decent interest from deposit savings providing funds for entrepreneurs to invest in real wealth creation.

Stinking Irish statist bonds go to feeding wealth destroying bureaucrats and insolvent ponzi schemed financial institutions.

Let them eat paper.

 

[adrem]

I think it makes a lot of sense (in principle). Clearly though if default did happen, and private sector pensions take an (even bigger) hammering as a result, then I'd like to see public sector pensions being cut by the same amount. There's no way that the private sector should take all the risk here.

Also, someone would have to crunch the numbers and show that it would actually make a difference, ie. there is enough money to be invested so that it would genuinely help the situation.

If default did happen . . . . well the IMF will be in before default happens, as a result the public sector will be hammered so by definition there will be no default that just hits the private sector

The numbers definitely add up - some estimates as high as 20bn currently held in German/French bonds which could be transferred - certainly more than 10bn. A significant amount of new requirement each year (aging population in DB schemes etc) Given that our annual funding requirement is c20 bn at the moment and set to drop (austerity budgets et al) doing this would immediately move the bond yields substantially

 

[adrem]

But WE dont want to be paying that level of interest. From my limited knowledge, the 7+% rate is what the bonds are traded at between the bond traders themselves, not what the Irish government is selling them at.

What should really matter is what WE sell them at. Of course the current rate on the market is indicative of what we would have to pay should the NTMA go to the market, but they (the NTMA) are not auctioning at the moment.

What I find strange is that there is the ECB/IMF fund which is available to bail us out should we choose/need to tap into that and that fund surely is a form of guarantee on our bond repayments.

So why does the market feel so jittery about Irish bonds, or any EU bonds for that matter?

We DON'T pay the 7.5%+ rate. The coupon on the bonds is fixed (around 4-5%) - the higher yield is simply a function of a fixed coupon being purchased at a reducing price. Eg if the bond at par is 100 and the coupon is 4% then the yield is 4% (I'm keeping it simple). If the price of that bond falls to 50 and the coupon is fixed at 4% of 100 then I am getting a yield of 4 on my investment of 50 - i.e. 8%. However the issuer (the govt) is still just paying 4 every year. Make sense?? Problem is if we want to issue a new bond - we will only get them away at yields of 8% in that market.

The idea with this scheme is that the Irish pension issuers would buy the Irish bonds currently trading at 50 (in the example above) which would over time push that price back up closer to 100. So our new bond would be issued at rates closer to the 4%.

btw - this idea (or a derivative of it) has been with the Govt for over a year now.

 

[adrem]

There is a problem? I thought going by your posts the entire nation was living it up like hogs in muck.

Household savings should be earning decent interest from deposit savings providing funds for entrepreneurs to invest in real wealth creation.

Stinking Irish statist bonds go to feeding wealth destroying bureaucrats and insolvent ponzi schemed financial institutions.

Let them eat paper.

WTF??? Are you posting from the front of a plane at the moment having consumed copious amounts of nurofen and alcohol??!!

 

[HarshBuzz]

so, not content with bankrupting the sovereign, the banks and the populace - you'd now like to go for the clean sweep with the pension funds?

outstanding FF

outstanding

 

[Baddaddy]

WTF??? Are you posting from the front of a plane at the moment having consumed copious amounts of nurofen and alcohol??!!

:lol:

 

[Watcher2]

We DON'T pay the 7.5%+ rate. The coupon on the bonds is fixed (around 4-5%) - the higher yield is simply a function of a fixed coupon being purchased at a reducing price. Eg if the bond at par is 100 and the coupon is 4% then the yield is 4% (I'm keeping it simple). If the price of that bond falls to 50 and the coupon is fixed at 4% of 100 then I am getting a yield of 4 on my investment of 50 - i.e. 8%. However the issuer (the govt) is still just paying 4 every year. Make sense?? Problem is if we want to issue a new bond - we will only get them away at yields of 8% in that market.
The idea with this scheme is that the Irish pension issuers would buy the Irish bonds currently trading at 50 (in the example above) which would over time push that price back up closer to 100. So our new bond would be issued at rates closer to the 4%.

btw - this idea (or a derivative of it) has been with the Govt for over a year now.

Yes, I get all of that bit. You kinda lost me on the second bit because there is already a government backed savings bond scheme administered through An Post - the Solidarity Bonds. Isn't that what you are advocating as a "new" idea?

 

[HarshBuzz]

Yes, I get all of that bit. You kinda lost me on the second bit because there is already a government backed savings bond scheme administered through An Post - the Solidarity Bonds. Isn't that what you are advocating as a "new" idea?

he's talking about swapping AAA securities for junk in our pension funds

 

[orbit]

so, not content with bankrupting the sovereign, the banks and the populace - you'd now like to go for the clean sweep with the pension funds?

outstanding FF

outstanding

I don't think he's suggesting that anyone be forced to buy Irish bonds.

Though the current 7.5% yield would have to come down significantly, because presumably it's the yield when we sell the damn things that matters, not the coupon. The yield is the effective interest rate, not the coupon.

 

[HarshBuzz]

I don't think he's suggesting that anyone be forced to buy Irish bonds.

who in their right mind would buy them if not forced to?
So if you're not forcing them - it won't work as nobody will buy.
If you are forcing them, you're pretty much guaranteeing old people with no money. Hardly win\win now, is it?

this is among the dumber of the dumb ideas espoused on here recently and that's saying something

it's a very small step from Anglo sub debt to Irish sovereign bonds right now

<awaits next daft idea; probably something along the lines of forced conversion of deposits into solidarity bonds>

 

[McEavelli]

Sadly I think this is going to happen.

2 pieces of legislation are being mooted. The OP mentions just one piece. He didn't mention the second which will introduce legislation that, in the event of a default, the burden falls on the pensioner/contributor and not the pension or employer.

Normally governments drowning in debt simply seize the pensions but we have an Irish solution whereby we have the pensions asking to be seized.

 

[Future]

Would such a proposal be permissable under EU law?

 

[Libero]

Downside - yes one downside - IF the Irish government did default then those pensions that were linked to the Irish bonds would be impacted - HOWEVER that simply isnt reason enough (imho of course) not to do this. This is somewhat self fulfilling - if we don't get the bond market moving then the risk of default increases but in fact if we take this step, it will get the market moving, thus removing the liklihood of default. In any event the broader positive impact of this move far outweighs any small possible risks to DB scheme pensioners.

Now boys and girls, there's a first-rate cost/benefit analysis on a matter of critical importance to the country and its citizenry.

Remember to bring it along to your tutorial in policy studies as an example of best practice.

 

[Cassandra Syndrome]

WTF??? Are you posting from the front of a plane at the moment having consumed copious amounts of nurofen and alcohol??!!

Rather that then the Valium and opiates that this insane government is on.

Do a money trail of the existing €95 Billion worth of Bonds and €30 Billion worth of notes, bills and commercial papers that the government borrowed.

Was it value for money? How well did wealth multiply from this investment?

Or did it just plug a derivatives vortex hole temporarily?

People deserve a rate of interest on deposit savings. They shouldn't be forced into making donations to feed the fat cats. Feudalism was meant to die in medieval days. Its back with a vengeance.

 

[Tombo]

The underlying bond market "problem" for Ireland is that no-one wants our bonds. This pushes the price down (good ol supply and demand) which pushes up the yield. The less people want our bonds, the lower the price, the higher the yield.

So - to solve the problem, we need to encourage people to buy our bonds.

At the moment the yield is extremely attractive on Irish Bonds. A return of over 7.5% p.a. for 10 years is a bloody great return. Of course the concern is that the Government will default and therefore won't actually give the 7.5% return at all.

So - to the point - how do we "create" a demand for Irish Bonds? Remember the demand has to be fairly significant - maybe 7-10bn now with a future ongoing demand and it can't be the State, the ECB or the IMF (for obvious reasons).

There is actually an answer that would deliver an immediate demand for up to 20bn in Irish bonds - that is to get the Irish pension funds to replace their German bonds with Irish Bonds.

Currently Irish DB pensions are under massive pressure because German bond yields are very low and they are effectively required to use German bonds to back their pensions in payment and future pensions liability. A simple piece of legislation could be passed which allows pension schemes to use Irish bonds to fund their pensions in payments and allows them to use Irish bonds to price their future liabilities would actually serve a number of immediate beneficial purposes.

It would immediately create domestic demand for Irish bonds. The legislation could require pensions in payment from pension schemes to be purchased via an annuity - thus ensuring immediate bond purchase requirements. The fact that the Irish yields are high would mean that the repricing of pension liabilities would be lower, meaning less DB schemes would be insolvent, meaning a greater liklihood of employers keeping the schemes running for staff. Finally - the big one - it would drive down the price of Irish debt which would make our future interest bill lower, reduce some of the pressure on future public finances and make it easier for the NTMA to issue debt next year.

Downside - yes one downside - IF the Irish government did default then those pensions that were linked to the Irish bonds would be impacted - HOWEVER that simply isnt reason enough (imho of course) not to do this. This is somewhat self fulfilling - if we don't get the bond market moving then the risk of default increases but in fact if we take this step, it will get the market moving, thus removing the liklihood of default. In any event the broader positive impact of this move far outweighs any small possible risks to DB scheme pensioners.

How to do it? Pass a simple piece of legislation - could be done as emergency legislation over the weekend if they wanted to.

I hate to disturb you while you are saving the country, but a couple of important facts:

1. There is no proscription against Irish DB pension schemes buying Irish government bonds at the moment. They choose not to pile into these financial instruments in the same way they choose not to pile into other sub investment grade bonds.
   
2. There are European regulations that talk to "technical reserves" to be held by pension schemes. I doubt a valuation of such technical reserves based on Irish government bond yields would pass muster.

And somethnig that isn't a fact, but is probably true. Any board of trustees who choose to concentrate their investment risk in large holdings of Irish government bonds could find themselves on the nasty end of a scary prosecution (not to mention the object of hatred of scheme members) if there is a default event.

You see, you have in fact made an argument for Irish pension schemes to pile into Greek and Portuguese bonds as much as Irish ones. Unless it is you contention that you know that Irish government bonds aren't as risky as those dirty filthy Greek or Portuguese ones.

 

[Tombo]

BTW, this statement:

IF the Irish government did default then those pensions that were linked to the Irish bonds would be impacted - HOWEVER that simply isnt reason enough (imho of course) not to do this

leads me to believe you work in the public sector, or you don't have a defined benefit pension.

 

[Congalltee]

If default did happen . . . . well the IMF will be in before default happens, as a result the public sector will be hammered so by definition there will be no default that just hits the private sector

Excuse my ignorance, but is the interest holiday contained in the Promissary Note and the (justified) shafting of Junior Bond Holders from Anglo, not two examples of Sovereign default (even if not technically so) which had already occurred?

With such a record, would it not be reckless for the Pension Fund to throw good money after very very bad?

There is also the Public Sector Pension time bomb, NAMA property release, end cost of Anglo, INBS, ESB and AIB, Croke Park Agreement preventing the end of the structural deficit, and a budget that is certain to hit growth.