Inside the world of business
Anglo, the nightmare that keeps on giving
IT SEEMS the knock-on effect of Anglo Irish Bank’s woes continues.
Yesterday, the International Swaps and Derivatives Association – the association that represents banks and other major investors in the over-the-counter derivative markets – announced that auctions will be held to settle some outstanding credit default swaps (CDS) linked to Anglo bonds.
The association has already ruled that a “restructuring credit event” had occurred on the Anglo contracts and that the subordinated bondholders should be compensated in the event of such a restructuring taking place.
Last month Anglo investors, who engaged in the bank’s debt-exchange exercise, were told that they would be offered one cent for every € 1,000 of bonds they hold at face value.
The “settling” of the contracts will mean that some holders will demand payment from the issuers, although some, as with previous cases related to Anglo CDS, may hold out in the hope that they will recover more favourable rates.
The prospect that the writers of Anglo Irish Bank credit default swaps may actually have to cough up will elicit little sympathy from taxpayers who have had to stump up billions to the crippled bank.
Although CDS are technically an insurance product which protect against default, they are also themselves speculative investment vehicles which allow the market to profit and bet on the financial woes of a country or company.
To this extent, CDS holders are perceived by many to be even lower down the food chain than the much maligned bondholders.
Nonetheless, as with bondholders, the CDS market is a formidable and pervasive part of the global financial infrastructure, and one that cannot blithely be dismissed.
The CDS market is worth tens of trillions of dollars. In relation to Anglo Irish Bank alone, there are some 674 credit-default swap contracts insuring a net $390 million of Anglo Irish’s senior and subordinated debt, according to Depository Trust and Clearing Corp data.
Anglo is not the first company to trigger credit default payouts. Following the nationalisation of Bradford & Bingley in 2008, credit-swaps protecting all the Bingley, England-based bank’s bonds were eventually triggered.
It may be a step too far to suggest that Anglo could trigger the demise of such a sophisticated system as the global credit default swap market.
But the fact that Anglo Irish Bank has caused serious headaches for the CDS system, raising fundamental questions about its credibility, illustrates the global implications of the Irish bank’s demise.
Deadlines and other targets
THE FIRST of January has come and gone and with it some of the first deadlines set under the EU-IMF Programme of Financial Support for Ireland.
By this point – according to the agreement – the Government in consultation with the European Central Bank, the European Commission and the IMF was to have have set “ambitious” target loan-to-deposit ratios for each of the banks.
These ratios – which are to be achieved by 2013 – are one of the first steps towards ensuring that the Irish banks meet new international capital targets.
As of yesterday, there was no sign that any such targets had been set.
Likewise the draft terms of reference for the due diligence of bank assets by internationally recognised consulting firms which were to be agreed with the ECB, the EC and IMF by the end of December 2010.
Not meeting either of these two commitments should not be considered a deal-breaker but it is to be hoped that these boxes have, in fact, been quietly ticked because to fall behind so early in the process bodes ill for the future.
In this regard the Government would be advised to consider what strategy best suits its needs when it comes to keeping the public and the markets apprised of progress under the programme agreed with the EU-IMF. Whilst a strategy of telling nobody anything unless you have to may chime with the culture of the Department of Finance, it is unlikely to be conducive to rebuilding trust with the international markets.
Common sense would dictate that when you have signed up to a timetable and made it public, you had best keep to it or explain the delay. Leaving a vacuum can only be dangerous.
And lest there be any doubt as to the size of the mountain Ireland must climb in order to regain the confidence of the febrile markets, it is sobering to realise that, as of yesterday, the cost of insuring against a default by Ireland now exceeds that of insuring against a default by Argentina.
This is despite Ireland’s credit rating being some eight levels above Argentina’s and the Latin American country’s default on $95 billion of debt in 2001.
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