We have been shaken, and the markets are stirred. Why not have fun in our final days? When asked what I’d do if I was on a plane that was going to crash, my simple answer is ask somebody for a shag and drink champagne until it all goes bang, what a pity that during the bond market equivalent of this all we can do is shake in our boots, I say crack open the bubbly.
O.k. So we can’t afford to drink champagne, and with any flight/sex innuendo I’ll become the blog version of Prenderville so we’ll leave that alone too.
What could we do with our bond market to sort out this mess? The issue we currently have is that there is capital depreciation on our bonds leading to higher yields, when you hear that our yields hit 8% it doesn’t mean that we are paying more, it means people are selling at a loss and new buyers get a higher yield on the indexed mix of bonds (explained this here).
So why not take advantage of those discounts to buy back debt? Our next bond issuance will likely be primarily to roll over debt, so the plan would be as follows:
1. Snap our fiscal fingers and bring out a new bond, it is sovereign issued but called a Tax Anticipation Bond and it is underwritten by whatever new taxes come out in December, so while the sovereign owes whatever it owes, this is a sovereign bond but it only relates to (recourse restricted to) certain aspects of our taxes, so if they bring in water charges then whoever buys the bond gets that, a carbon tax, more income tax, whatever comes along, write off the future incomes and crystallize it today in a new bond.
2. Offer these to existing bond holders but only if they are willing to sell at today’s capital price and in exchange they get a far more guaranteed (1st lien on new taxes) issuance, so you are paying €96ish for €100 and keeping the €4 difference. This reduces our deficit straight away by c.4% on whatever we can get out the door under this new bond.
Doing this is playing with fire, but is it any worse than what we’ll get anyway? We are going to increase the tax burden so why put that into the common pot – given that holders of that debt are not trusting us, and say ‘we’ll sell the increased tax take to you for your old bonds’ and in that fashion offer only specific recourse while reducing our need to roll debt.
It may be only a marginal solution, and it could cause a bigger sell off as existing debt holders figure that there will be no money left for them, but if it was allocated on a specific tax anticipation then all you are doing is ring-fencing those taxes for this purpose and therefore it shouldn’t cause too big an issue. At this stage we advocate trying anything. What’s the worst that could happen?