Bond fears – Ireland lights the fire

The cost of insuring debt in Anglo Irish jumped today to new record levels. The reason is that back in June the Bank of Ireland Governor, Mr Patrick Honohan said he didn’t know if Junior Bond holders (those who hold Junior and subordinated debt) would get back all their money. At the time this didn’t sound encouraging but no on panicked because there was a government guarantee in place promising to pay ALL types of bond holders back their full whack.

This guarantee, however, expires next week. Of course when the guarantee and its expiry were decided upon, the recession was supposed to be over. But its not. Instead, the latest figures out today show that the Irish economy, far from growing out of recession, is falling deeper into it. Last quarter when ‘experts’ were expecting growth as per the plan, instead, much to their surprise but to no ones else’s, GDP shrank by 1.2%. This on the day figures showed the entire euro area is slowing has damped some of the idiot ‘everything is fine, nonsense we have been putting up with all summer.

With the Irish economy shrinking the Irish government simply cannot afford to keep all the bond holders in the style and comfort they expect. So with the guarantee expiring next week the bond holders are in a flap at the thought that they might lose some money. The latest suggestion is that the bank may buy back its own subordinated debt but for a lot less than face value.

And there is a broader pan European bond market fear which is effecting all debtor nations in Europe. Which is the fear, among bond holders, that if the sky does not fall on the first government which does not pay back some of its bond holders, then other debtor governments may lose their fear of offending the mighty bond market.

I think we can expect to see after the shocks from this spread to CDS costs and debt costs for Portugal, Greece, Italy and Spain. They already did go up today on the Irish news. They will keep going up.