I’ve picked up on a comment from a previous thread that stated that the NTMA are going to do a bond issue over the next few days.
To me, this seems like a big deal as it will provide an important indicator over how the bond market smell Ireland in terms of credit risk, and what we as a nation will pay for that risk in the form of higher interest rates.
However, I’m not a financial genius, and I can safely say that I could have been blissfully ignorant of CDS spreads, bond markets, subordined debt and various other financial market terminology and tools were it not for the situation in which we currently find ourselves.
So I’d like to present my own simplified take on the situation, and see if my analysis stands up or whether I’m missing or misunderstanding something important. Hopefully a more financially literate pinster can inform me.
I know that Irelands CDS rating has reached almost 400bps, meaning that it costs €400,000 to insure €10m of Irish soverign debt. While we still have a triple A liquidity rating from the likes of S&P, this to me seems ludicrous in the face of such figures. From the calculations I have seen, and forgive me if I’m wrong, 400bps implies an almost 1 in 3 chance of default as a compounded probability over 5 years. So I think the market will treat this AAA rating with derision at best.
Now, if a bond issue does take place, how exactly does this factor into the bond? Does it increase the interest rate payable by such a bond, if the markets feel that the investment is riskier? It would seem to me that this would inevitably be the case. If so, what would the likely increase be? Would there be a risk that the markets not accept the bond offering at any interest rate, or at usurious interest rates? What could this do to our CDS spreads?
I’m asking this because I have a rather sinking fear that if this bond issue is unsuccessful, it could precipitate a snowball effect whereby the Irish state could be much more likely to default. Is this concern founded?
Sorry for all the questions, but I’m trying to wrap my head around this and figure out what connects the dots.