Another sovereign bankruptcy, another stick save by the ECB. The FT has confirmed Friday's rumors that it was just the ECB's intervention that prevented domino number two - Ireland - from toppling, and taking with it all of Europe. "The European Central Bank intervened to stabilise the Irish bond markets on Friday after a report by a leading UK bank triggered investor fears that the country might turn to the international community for a multibillion-euro bail-out." As readers will recall, the half a percent spike in Irish bond yields was precipitated by a Barclays report that the IMF would be needed to rescue the Emerald Isle, coupled with confirmation that the Irish government was negotiating with AIB bondholders about an imminent bankruptcy. At least now it is doubtless that domino #2 is now on a ventilator, in the critical condition ward, and should Doctor ECB's attention be diverted elsewhere, say to quell riotous mutiny in Greece, that the house of cards will finally fall.
More from the FT:
Although investors said Dublin would only need financial help in the event of more unexpected banking losses and a deterioration of its economy, the Irish sell-off highlighted the continued fragility of eurozone bond markets.
Traders said the intervention by the ECB was small – in the tens of millions of euros but the report by Barclays Capital still prompted the International Monetary Fund to state it did not envision that Ireland would need financial assistance.
The Irish government will test investor sentiment on Tuesday with an auction of four-year and eight-year bonds that bankers warn could see the country having to pay high yields to attract demand.
Domenico Crapanzano, head of euro rates trading at Jefferies, said: “There are just no buyers out there for Ireland because of worries over its banks and economy. Ireland and also Portugal are very much the worry for investors.”
The Barclays report said: “If the macroeconomic conditions deviate from our baseline recovery scenario and unexpected losses crop up in the financial sector, then the government’s best option at stabilising adverse market dynamics would indeed be by drawing on financial assistance from the EU-IMF.”
Michael Noonan, finance spokesman for the conservative Fine Gael party, said: “There is no doubt that the political developments of recent days have also added to the concerns of the international markets.”
The country’s underlying deficit – stripping out the cost of the bank recapitalisations – is poised to be one of the highest in the EU at 11.6 per cent of gross domestic product in the current year. Its bank rescue has already added close to €25bn to national debt, projected to peak at 100 per cent of GDP in 2012.
The Barclays Capital report also said: “We believe that the Irish government has to a large extent deployed the right economic and financial policies thus far. The problem is that, despite these policy efforts, the government has very few options left of its own.”
So now that we know that Central Banks are performing daily interventions in both FX and bond markets, it is "certain" that equities are completely safe from JCT and Bernanke's tender loving care. Of course, when the missing confirmation finally appears, hopefully everyone will finally leave every asset class, all of which have now become merely a venue for global central banks to conduct domestic policy, and have lost all traditional capital formation and forward looking properties.