Wednesday, 9 November 2011

Not rocket science pt 2: Losing interest

Having spent the last wee while going thru another one of they “your job will not exist from this date onwards, but there’s these other lovely jobs you can apply for” reorganisation thingies, I've been too distracted to write anything vaguely coherent. Now I know the mortgage payments will be met for however long it is until the next reorganisation, I reckon its time to do another not rocket science thing, this time on bond yields and the Eurozone crisis.

First off the big thing here is the sheer volume of disinformation that’s going on. Like up until well the other morning really when Evan Davies on the Today show finally admitted he was confusing things, nearly all the mainstream media headlines about Italy and its cost of borrowing were a simplification of reality as distorting as they were out of context. Like seriously.

Not being a corporate financier I’ll also explain why in simplistic hypothetical terms, but hopefully ones less bollocks than those most people are using. Here goes;

Italy wants to borrow £100. It does so by issuing a five year bond for £100 that will pay whoever buys it i.e. whoever lends Italy £100, £5 or 5% a year for 5 years at the end of which the original £100 is fully repaid.

Oh oh, the original buyer of the bond sells it to someone else after a year because there’s a sovereign debt crisis going on and all of a sudden it’s not looking as likely as it once was that Italy will repay the original £100. Plus there’s only 4 more years worth of 5% payments to get as well.

So now I buy the £100 bond for less, a big chunk less, say £50. But hang on a mo this £50 has bought me an asset that yields an annual payment £5 i.e. the implied yield is 10%. Bonza! Just try getting that off a cash ISA these days.

In the meantime what do Italy care – it got the original £100 it was after, still has it for another 4 years and is still only paying 5% per annum. It was the original buyer who sold the bond for less that took the loss and felt the pain. And it’s the implied yields NOT Italy’s actual borrowing costs, that've just reached “crisis” levels.

The implied implication is that if Italy was to try and borrow more today, then it would have to pay current yield rates i.e. the 10%, except that cheeky wee word “if” highlights what’s actually going on here – the yield on existing debt doesn’t reflect Italy’s ACTUAL borrowing costs. What follows on from this is a number of things:

- The tenor of Italy’s debt is the crucial thing to be concerned about i.e. how much is maturing over the next 12 to 18 months and will need to be replaced with fresh bonds.

- The reporting of this has for the most part concentrated on generating distorted headlines, op-eds and articles that favour current English government economic policy (cut spending to save Britain’s AAA rating and so on) and the interests of bondholders.

- A fuck of a lot can happen in a week let alone 12 to 18 months.

One other wee sneaky bit that also warrants much, much more attention is the interest being taken in PIIGS government debt by speculators, hedge funds, vulture funds etc., This lot are already buying up cheap government debt because they’re taking a punt on being able to get high yields now and the thing completely repaid later (i.e. for more than they paid for it). Double whammy!

A couple of things follow on from this given the Greek example wherein billions of Eurozone taxpayer funds from other countries are already being handed over to Greece so it can repay holders of Greek government debt (i.e. its bondholders). One is that the speculators doing so are immoral cunts. The other is a nice neat straightforward demand – can a publically available record please be maintained that details:

1) Who buys any piece of government debt
2) How much they paid for it
3) When they bought it

Doing so would perform a VERY important risk management function cos it would enable anyone at any time to know who exactly was on the hook and for how much to whatever economy is in potential crisis.

Making that kind of info available would also do other sorts of mad stuff like make perfectly clear how rational (or not) markets were behaving and consequently whether crazy things like some government buying up its debt on the cheap to effectively cancel it out is an option e.g. the European Central Bank lends Italy £100 at 5%, Italy then uses this to buy 2 tranches of £100 5 year bonds currently trading at £50 each and hey presto its debt is halved.

It would also let us all know who the cunts were that were taking punts on national economies so we could pitch our tents up outside there head office. They will, in their defence refer to the “liquidity” they provide i.e. those wanting to offload Italian bonds can do so. Except so fucking what, like seriously, so fucking what. Head teachers here are about to go on strike for the first time ever because of the sacrifices they are being expected to make and some multi-millionaire cunt considers the ”liquidity” him taking a punt in the hope of making millions provides to be sufficient justification for taxpayer rape? Fuck off.

P.S. My understanding is Italian debt levels aren't really the issue here, rather its that the country is bent from the top down, which is scarey bsicuits because institutionalised bent-ness is awfy hard to remove due to all the vested interests it involves.

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