It seems that Chancellor Merkel has clarified her previous suggestions that bond holders must not rely on an EU bailout for Irish and other sovereign debt by saying her proposal only commences from 2013. All existing debt will therefore be free of all but EU sovereign risk to debt holders

That’s what it seems to me. There is no way to avoid the conclusion that all of our existing debt, guaranteed by the State, will rest on an implicit–and almost explicit- EU backstop guarantee. Brilliant ! The risk spread over German Bunds should therefore disppear, or almost so, in relation to presently outstanding debt and debt to be issued in the near future

Most of the currently issued Irish debt– that is “promises to pay” guaranteed by the Irish State – relates to NAMA. This year, something like €30-40 bn. of NAMA bonds are being issued. Up to now, the money market chaps didn’t really expect that our State could redeem these bonds fully.. and neither did I. (Especially as their Term Sheets do not contain a firm redemption commitment, other than to offer more bonds in exchange). But now, Angela Merkel has added her promise to them…Is that right?

This seems marvellous !..It means that the Irish government is borrowing up to €40 bn. of encashable property from the banks, at an incredible interest rate of c. 1.5%, to be used when it needs to use it – i.e. sell for cash when ready- and without a firm repayment date to the banks. Meanwhile, the banks get their funds to be going on with–in the form of borrowings– from the European Central Bank. What a deal! for the State….(And Shane Ross wanted us to join the sterling area, not the Euro !) (Of course, expect the ECB to say something about that..They may pressure the goverment here to pay the banks- i.e. redeem the bonds- immediately upon selling the property, and meantime to pay a proper interest rate on the bonds)

This can only be good for bank shares, too, to the (considerable) extent that the government guarantee which was (recently unsuccessfully) backstopping the banks normal market funding operations, a guarantee of diminishing credibility, had a major depressing influence on bank share values and should now become a real positive for the banks.

I don’t know that Angela really realises what she has done. A year ago there was no EU guarantee backstopping Irish obligations, short of an expensive and humiliating EU-IMF bailout. Then she suggested that it was unfair to German taxpayers that investors in Irish bonds should get away scott free in the event of a collapse. That really depressed the bond prices, and bank shares. But now, in saying that her ideas about loss-sharing won’t come into force for 3 more years, she has effectively stated that there will be an EU guarantee for Irish bonds before then.

Tausend Dank, Frau Merkel !