SocGen bond guru backs economists against NAMA... … rmination/


My understanding was that Ciaran produces research for clients
of soc gen. i.e. he is very close to the trading desks but he does not run a book.

Generally dealers don’t talk to the media for obvious reasons.

Yep. I was just looking that up. How’s the new title? … 45360.aspx

Expect calls to teh head of SG from the embassy in Paris, the Dof, NTMA, etc etc.

Mr O’Hagan is talking about Irish sovereign debt holders when he talks about bondholders…

Why would SocGen come out and say this? Trying to get the bonds for cheaper? they aren’t doing a public service.

gee, maybe Ciaran is, you know, analysing it? And doesnt agree with it? Just a mad thought…
He has consistently, since January this year, spoken out about the folly of the policies being pursued by the two brians. This is consistent with that.

He is paid to Analyse for SocGen, why publish it? I’m as suspicious of people paid by the bond markets commenting on the bond markets as I am of Estate Agent’s Economists commenting on the property market.

A lot of investment banks try to publish as much of their analysis as possible, effectively as marketing or to try to increase their profile. Equity/fixed income analysis depts. are generally run as cost centres rather than profit centres.
I presume the reason Sc Gen sees this as negative is that as overall sovriegn debt increases (as with NAMA) the riskiness of that debt goes up and the value falls. Since Soc Gens clients are probably a lot more interested in Irish Sov. debt which is traded, rather than NAMA debt, which won’t be, they want information about the likely (downward) future price trends in sovriegn debt.


Fair point weathervane. I’m always interested in trying to figure out the motives of any public pronouncement like this. Marketing is one view alright, and they can’t have too different a story in their public pronouncements as in their premium paid for analysis.

Huh? Can you back up your assertion that NAMA bonds won’t be tradable?

All the indications are that will be tradable in some form, probably at insistance of ecb.

O’Hagan is an excellent guy who knows what he is talking about.

The current proposal is to issue bonds which pay a floating coupon initially set at 150 basis points. This is significantly below the current yield on Irish Sovreign debt (approx 4% on short dated bonds at the moment.) A bond paying a coupon which is below the markets required yield will not be bought unless the yield rises to match the markets requirement. Since the coupon rate is fixed to a reference rate (I presume either an Euribor or ECB ref rate) the only way these bonds can trade is is they trade at a very large discount so that yield is higher.

Very straightforward example. Lets say I want to borrow money but I’m a very high credit risk. Rather than going to a bank I decide to issue bonds. Lenders determine that because of my credit risk I should yield 20%. I propose issuing 1 year bonds paying a coupon of 1%. I.e. if I am solvent at years end I will pay €101 to holder of my bonds. Question is how much will these bonds trade at? Answer not €100 but approx €67 because that is the present value of the €101 I intend to repay, discounted at a yield that reflects my credit risk. (I have increased the discrepency between offered and required yield in this example for illustrative purposes)

Returning to NAMA bonds, if the govt issues bonds paying 1.5% but the market demands 4% (and probably more becuase of the sudden increase in Irelands indebtedness) the bonds will trade at a discount. So AIB may have to for example sell €25bn (nominal value) NAMA bonds for say €20bn, why would they do this when the ECB has apparently agreed to repo them at face value.

These bonds will never trade on a secondary market - they are purely a vehicle to tap the ECBs repo operation.


Just scanned the O’Hagan piece, where does he say NAMA bonds will traded, apologies if I missed it somewhere.


Wrong, wrong, wrong.

Bonds with an off-market coupon trade all the time.

Two gov bonds with the same maturity and different coupons adjust prices to have the same bond yield.

alan ahearne stated that NAMA bonds would be eligible for interbank repos i.e. they will trade.

Wrong, wrong wrong :angry:

I know govt bonds with differing coupons trade all the time, my point is that holding maturity, seniority etc. constant they will trade at the same Yield to Maturity. The only way this can happen is if they trade at different prices (i.e. where the coupon exceeds the YTM they will trade at a premium, where the YTM exceeds the coupon they will trade at a discount). In the case of NAMA bonds would you accept that the YTM will exceed the coupon, if you do you would accept that these bonds will trade at a discount to par and therefore either :

  • the Govt will have to issue more than the required amount to ensure the banks have adaquate capital;
  • the banks will not have adaquate capital (because they will sell say €60bn of NAMA for €50bn)
    or - the banks will repo the bonds at par with the ECB and hold them to maturity, i.e never mark them to market, and get exactly how much the govt intends

I’m not saying these bonds couldn’t trade I’m saying they definately won’t trade (as currently structured).


Jeez,weathervane, when you are in a hole stop digging.

The ECB will not repo a bond at par when it’s fair value is at a discount to par. That would ignore the time value of money. The ECB is not about to damage their credibility doing this.

I believe there are a few dumbfucks in irish financial mafia who actually think that is going to happen. :laughing:

I also believed the ECB wouldn’t repo at par (rather than mkt value) because of the credit risk that entailed (if AIB goes bust the ECB would be left holding bonds worth say 25bn and a repo loan of 30bn outstanding) and posted that a while back, however on reflection I’ve changed my mind on that. The ECB must have agreed to repo at par otherwise NAMA can’t work if they issue bonds at 1.5%.

Could you explain what you believe is going to be done with the NAMA bonds given to the banks.


Using rough figures (and an assumption that maximum haircut banks can sustain is €30bn), heres how I see your scenario working.
Govt values, nominally €90bn, loan books at €50bn. Decides to pay a “LTEV” of €60 bn (because thats they believe minimum banks need)
NAMA issues €60bn in 10yr bonds paying coupon of 1.5%. Assume a YTM of 4.5% on these bonds (approx YTM on Irish sov 10y debt)
Banks repo these bonds on interbank mkt (or to ECB) at market value, which is a discount of just over 40% to par given the spread between coupon and YTM).
Banks now have €36bn instead of €60bn.

Am I missing something?


Just looking at an old thread I started on exactly this issue - whether repo would be at par or market - as you can see I’ve changed my mind on what the ECB is likely to do!