There is no more powerful a financial force in the world than the bond market. Valued at $44.9trn, it dwarfs the equity and commodity markets and is growing faster than either of them thanks to record fundraisings by virtually every government in the world this year.
Former Clinton administration adviser James Carvill is famous for talking about the bond market's ability to intimidate sovereign governments, but with deficit spending on the rise in every corner of the economic world, its intimidatory powers have grown exponentially.
The most hardened shock troops of the bond world are the so-called "bond vigilantes", a loose group of hedge funds and mutual funds which bully governments by demanding higher yields on government bonds and in this way discipline these governments to reign in their deficits and keep a lid on inflation.
Ireland has yet to encounter such organised pressure, but the US, where the largest bond market in the world resides, is currently getting stretched by the vigilantes as they bid up US Treasury bond yields. The retreat from the financial panic of earlier this year has meant that these bond purchasers are even more aggressive in their stance. Other alternative assets are now providing an enhanced return, so buyers no longer have to seek out safe havens like US Treasuries.
Ireland's relationship with the bond market has been fruitful so far this year with the NTMA managing to raise €22.1bn for the exchequer, albeit in very expensive money. But in March and April it looked like the bond market could crush Ireland entirely as risk-aversion gripped the markets and Ireland's credit worthiness plummeted.
For example, the bid to cover ratio on Irish bonds on 21 April was 1.1, even though Ireland was offering a yield of 5.1% at that time. A bid to cover ratio this low effectively means there was just about enough demand to get that auction away successfully. A failure of that auction, at that time, could have been fatal and in a worse-case scenario could have triggered a sovereign debt crisis. The man who helped Ireland navigate those choppy waters at that time was Michael Somers, director of the NTMA.
However, the Department of Finance, which was hurt by his comments on Nama a few months ago, was not prepared to cut him too much slack in private last week. "It's easy enough to raise money when you're paying out so much interest to get it," remarked one official.
Nevertheless, Irish bond yields in March were over 6%, so the scale of the crisis at that time cannot be underplayed. Throughout this period, the government's approach has been to do nothing in the banking area that could make the position any more precarious.
As a result, all banks were allowed to keep their guarantee, Bank of Ireland received €3.5bn, AIB received €3.5bn and Anglo Irish met all its bond obligations, while also picking up a promise of fresh funding to the tune of up to €4bn.
Anglo had to meet these bond obligations at that point because the government saw sovereign risk and banking risk as intertwined. Any failure to pay out on banking bonds, even the junior debt, was seen as dangerous, possibly having a knock-on impact on Ireland's ability to raise finance via European and US bond houses.
The opposition railed at the government's timidity in the face of the bond market, but the government in private was happy to remain something of a supplicant. When this newspaper revealed on 24 May that the government had finally accepted it was possible not to pay coupons (interest payments) on certain Anglo Irish bonds, spokespeople were reluctant to even comment publicly for fear of highlighting their thinking.
When last week Anglo Irish finally announced no payments would be made on €2bn of Tier 1 bonds, which are mostly perpetual in nature, there was barely a stir, although some brokers warned the government not to start "annoying liquidity providers", ie the bond market.
Of course, the government and Anglo Irish were able to hide behind the European Commission for making the decision to halt interest payments. A short release by Anglo said the European Commission was insisting that in order to get state funding it was only proper that junior-debt holders, who have no automatic security over the bank's assets, should not get paid.
Privately, the government was delighted the European Commission was going out front to ditch the junior bond holders, rather than them. What the government and Anglo did not say is that under the terms of perpetual bonds, Anglo is entitled to defer payments where it would cause the bank to breach capital rules layed down by Irish regulators.
But once again, in a clear illustration of how the government fears the bond traders, this perfectly legitimate get-out clause was not the one used. Instead, the government waited until the European Commission forced it to drop the holders of the junior bonds.
For the Irish taxpayer, this is good news. Every bond payment scrapped is less capital Anglo needs from the taxpayer. This will inevitably trigger calls for the entire bond edifice at Anglo to be torn down and even for the bank to finally be put into "run off", or delayed closure.
But that's where the real complications and sensitivities rest. Senior debt is a wholly different proposition. According to the last set of Anglo Irish results, the bank had €4.9bn of subordinated bonds. But the bank is not even welching on all of this, never mind the €14.2bn of senior bonds.
The bonds which the bank last week halted payments on are perpetual bonds with no final maturity date. The bank has another group of bonds which it appears prepared to honour. In total, last week's announcement involved seven separate bond issues, but Anglo has 12 subordinated bond issues. Some of these are going to bought back, but there appears no appetite to even suggest changing any arrangements with the senior bonds.
That means closure is all but impossible for now and run down options very unlikely.
However, last week the government did start down the long road of winding down Anglo Irish, but it can't tell anyone this (under state-aid rules) and also the road it is taking is a very, very long one.
Near debt experience
How close we came to a failed bond auction
2009 Ireland bond auctions – Bid-Cover Ratios**
24 March 3.8
24 March 2.7
21 April 1.6
21 April 1.1
19 May 4.8
19 May 1.8
16 June 2.2
16 June 2.5
*On certain of these dates different bonds were auctioned off. **Bid to cover signifies the level of demand. The higher the ratio the bigger the demand Source: National Treasury Management Agency