Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Eiro-group Review –The power of trading education - 4th Dec 20
Early Investors set to win big as FDA fast-tracks this ancient medicine - 3rd Dec 20
New PC System Switch On, Where's Windows 10 Licence Key? Overclockers UK OEM Review (5) - 3rd Dec 20
Poundland Budget Christmas Decorations Shopping 2020 to Beat the Corona Economic Depression - 3rd Dec 20
What is the right type of insurance for you, and how do you find it? - 3rd Dec 20
What Are the 3 Stocks That Will Benefit from Covid-19? - 3rd Dec 20
Gold & the USDX: Correlations - 2nd Dec 20
How An Ancient Medicine Is Taking On The $16 Trillion Pharmaceutical Industry - 2nd Dec 20
Amazon Black Friday vs Prime Day vs Cyber Monday, Which are Real or Fake Sales - 1st Dec 20
The No.1 Biotech Stock for 2021 - 1st Dec 20
Stocks Bears Last Chance Before Market Rally To SPX 4200 In 2021 - 1st Dec 20
Globalists Poised for a “Great Reset” – Any Role for Gold? - 1st Dec 20
How to Get FREE REAL Christmas Tree 2020! Easy DIY Money Saving - 1st Dec 20
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Is The Irish Debt Attractive?

Interest-Rates / Global Debt Crisis Jul 08, 2011 - 02:45 AM GMT

By: Jan_Kaska

Interest-Rates

Best Financial Markets Analysis ArticleAccording to a Bloomberg article, Sandor Steverink, the Europe’s best-performing sovereign debt fund manager over the last decade, asserted that when the Irish debt gets downgraded to junk, it is time to become a buyer. Steverink said he prefers Irish bonds to Portuguese ones as the country’s debt burden was caused by the banks and the country doesn’t have the structural problems of southern Europe’s economies. Above all, Ireland also has more potential to export its way out of trouble. We very much agree with such assessment and believe that once Ireland gets downgraded to junk, forced sellers will create a wonderful opportunity to buy.


Let us provide you for some facts and explanation, why we think Irish bonds at today’s prices are already a good deal. And in case debt gets downgraded further, the deal will be so much sweeter. As of today, Irish 10Y government bonds are yielding in excess of 12% p.a. and trade at 60% of par value. Let us look at what is actually priced in?

Going back into history as far as 1997, before Ireland's accession to EMU, Irish public debt traded with roughly 100bps premium to German Bunds. So if Ireland goes through a default of sufficient size so that its debt trajectory is on sound foundation, we believe spreads should compress back to 100bps or possibly even lower. Remember that Germany is currently bearing public debt worth of 89% of GDP and faces a possibility of having to bail out certain Landesbanken in the not so distant future.

In 2012, Irish debt will rise to 120% of GDP on the back of further banking sector recapitalization and a budget deficit reflecting the huge output gap. According to Goldman Sachs report from the end of last year, additional capital required for Irish banks may reach as much as €35bn over next 5 years, which is roughly 23% of GDP.

If we assume some modest GDP growth of roughly 2-3% in current prices, gradual improvement in the budget deficit (Ireland is actually on schedule with the IMF budget deficit reduction plan) and NAMA turning into modest profit, than Irish public debt should end up no higher than 130% of GDP in the 2013/2014 period. Afterwards, it should start gradually declining on the back of GDP growth led by exports as Ireland has already regained a lot of lost competitiveness thanks to brutal deflation in wages.

Therefore if Ireland were to default in 2013/2014, which marks a confluence of periods when Ireland reaches a primary surplus (a precondition for successful default as the country will not have to tap debt markets) and runs out of money, we see roughly two possible outcomes:

a) haircut of 40% while reaching public debt of 80% of GDP – 100 bps spread to German Bunds
b) haircut of 55% while reaching public debt of 60% of GDP – 0 bps spread to German Bunds

We have built a map where Irish debt should be trading given the assumption of haircut and number of years to default.

Current pricing is more favorable than our assumption of 40% haircut in 2013/2014 and 100 bps spread to Bunds (currently priced @ 223bps over Bunds). If Irelend got more stringent with is creditors and decided for a 55% haircut, than current loss-adjusted implied spread over Bunds stands at negative 135 bps, which is still positive yield in absolute terms, but not truly attractive, as it is 135 bps below our prediction where clean Irish bond should trade. In order to get our predicted attractive yield, we would wait for the price of Irish 4.5% coupon 2020 bond to fall to levels around 54-55, or yields equal to 13.50% p.a.


We also feel that Irish bond has an embedded option in the form of Ireland actually not defaulting on its sovereign bond, but letting the bank senior bondholders feel the pain and thus avoiding any further bank recapitalization. On contrary, and unfortunately as is the case with every other trade, there are some risks associated as well. We would keep us awake at night is the downside risk that European authorities decide to somehow subordinate private investors in the future.

By Jan Kaska

www.atwel.com

Analyst with ATWEL International Hedge fund

© 2011 Copyright  Jan Kaska, - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules