Angela Merkel: default

The escalating market crisis of Ireland's sovereign bond market was intimately linked with the growing pressure from the European Central Bank (ECB) on the Irish Central Bank about the scale of the funding by both banks to the Irish lenders, sovereign bond market figures show.


As the ECB increased its pressure on the Irish Central Bank, the higher the sovereign bond rates rose. The indicator of the mounting tensions between the ECB and Dame Street was the interest rate that holders of Irish debt paper were demanding to pay to trade in the Irish government's three-year bonds.


Since last May, Greece had been paying an expensive 5% rate for its bailout cash to borrow for three years. The Irish price of three-year money was therefore an early indicator that Ireland was heading to join Greece in a bailout. The closer the three-year rate traded to 5%, the greater the probability that Ireland was approaching the drop zone.


From mid-September, as the Irish banks faced problems in refinancing the so-called 'wall of money', the three-year rate rose sharply from 4%. By 28 September it was trading above the key 5.2%. In early October, the Sunday Tribune reported that during September one of the Irish banks had hit a snag in accessing funding from the European Central Bank. Senior officials played down the fears and claimed that September's funding round had progressed "smoothly".


The following weeks the fears of the holders of Irish sovereign debt eased about the banks. On 15 October, the three-year money rate had fallen back to 3.9%, reassuring Irish officials that September's scare had passed.


Concerns about the austerity budget were also building in the background. The three-year bond rates started rising rapidly again, reaching 4.75% at the start of November, and exploded to 6% by the end of the first week.


On 7 November, the Sunday Tribune reported in a front-page article the views of one of the leading sovereign bond experts that Ireland was on the brink of a bailout because the government would be locked out of the bond markets in 2011, despite its planned €6bn in austerity cuts. This was because German leader Angela Merkel had stated that to protect German taxpayers from Greek, Irish and Portuguese debt she was considering some sort of default on paying back sovereign holders of peripheral Europe's sovereign debts.


In the background, the ECB was also about to take a tougher line on Ireland. Senior sources say that the ECB had decided to call time on its open-ended funding of the Irish banks.


By last week, it had also communicated its mounting concerns about the Irish Central Bank's own funding of at least three lenders – Anglo, Irish Nationwide and EBS – and possibly AIB too through Dame Street's special emergency funding facility.


By the end of October, excluding the approximately €40bn ECB funding sourced by banks in the IFSC, Frankfurt had loaned the main-street Irish banks €90bn. The ECB appeared to want to put a cap on its funding.


Separately, Dame Street had loaned almost €35bn to Irish lenders by the end of October, and the ECB wanted to control the amount the Irish Central Bank could fund too.


Reflecting the pressures, the Irish three-year money rate touched 9% on 11 November. On 14 November, the Sunday Tribune reported that Ireland had reached the point of no return on tapping the bailout cash. By last Friday the Irish authorities were battling to get the best deal possible from the ECB, the EC and the IMF.


Countdown...


June


The Sunday Tribune writes that market crises are all about the interest rates a government must pay to borrow new money from abroad in order for it to plug its deficits. On any day, the rates the market demands will not necessarily be the rate the government or its debt-issuing agency – the National Treasury Management Agency – pays when it next auctions new debt paper. But over many months Ireland has painfully learned each successive market crisis has raised borrowing costs.


Early October


The drama hit the Irish banks over two weeks ago in the middle of negotiations between the government and the EC when Brussels appeared to be slow in agreeing to the extension of the guarantee. Some large corporations, it is believed, moved some funds out of Irish banks.


Sources say that Brussels appeared at first reluctant to agree to a more extensive guarantee but that securing the deal shored up the position of the banks. "As soon as agreement came through from Brussels there was no problem," a senior source claimed. The government then decided to bring forward its announcement of the recapitalisation of AIB and the inevitable effective nationalisation of the bank.


Mid October


Luca Cazzulani, director at UniCredit Bank in Milan, says the difficulties facing the Irish and other peripheral bond markets, including Spain and Portugal, will not lessen in the short term. Ireland is engaged in a fight to stay outside the eurozone's bailout fund – the European Financial Stability Facility.


His warning comes as Moody's, a leading credit rating agency, says it will travel to Dublin in the coming weeks to assess the creditworthiness of Ireland, as finance minister Brian Lenihan prepares to submit his new four-year austerity plan as demanded by Brussels in early November.


Dietmar Hornung at Moody's, which had earlier put Ireland on watch for a possible downgrade, says the revised fiscal plan would be "the key element" in its review. He tells the Sunday Tribune that Moody's would also assess the prospects for economic growth here and examine "to a lesser degree" market "conditions" in reaching its decision.


November


The sovereign debts markets as tracked for many months by the Sunday Tribune have given up on Ireland. The strategy of Berlin and Paris now is to protect Portugal being the next domino to be locked out of the bond debt markets, because they have given up on saving Ireland from a bailout, say senior market players.