The biggest CDO of all time

You remember what CDOs were?

Collaterialised Debt Obligations?

Take some dodgy debt, stick a nice guarantee on top of it, bit of financial alchemy and then call it an AAA bond?

The Commission’s €60bn bail-out fund (EFSM) raised its first €5bn to cover the Irish loan package, paying 2.59pc on five-year bonds. The cost is notably higher than equivalent French debt at 2.12pc, suggesting that investors are sceptical about the fund’s AAA rating.

Ireland will be charged 5.1pc for loans from the EFSM.

Oh look, if Governments do it it must OK, right?

For this is essentially what they are doing here. Raising money on the combined debt rating of the eurozone countries in order to lend it to the fiscal basket case which is Ireland.

7 thoughts on “The biggest CDO of all time”

  1. Not much in the way of collateral, is there? Irish bonds aren’t being accepted as collateral by the Swiss central bank.

  2. Tim,

    I thought that we were guaranteeing the loan to Ireland?

    Tim adds: We are guarnteeing *a* loan to Ireland….not sure if it is this one or not. But it’s still the same principle, isn’t it? Slap an AAA rating on a loan that really isn’t AAA….

  3. Well it is a AAA fund if the debt is underwritten by AAA-rated governments. Of course, there’s political risk (with all this talk of haircuts) tyat transcends formal ratings and clearly the market thinks this debt is riskier than the underlying governments.

  4. I have a problem with the word ‘collateralised’.

    What collateral is there?

    Banks doing CDOs were not putting any collateral into the deals AFAIK. The properties the mortgages were for were not securities that could be claimed by the institutional lender if the bank issuing the CDO got into difficulty. This is becoming evident with US banks attempting to repossess properties they have no claim on and in the UK our mortgages not having the names of the bank changed on the deeds – the claim on the properties never left the originating bank.

    CDOs as the banks got into practising them were simply massive unsecured loans relying on banks being inclined to protect their reputations, easy access to international money markets and a bizarre notion that house prices always go up.

    So what collateral has the EU offered? None it would seem. They, like the banks they have demonised before them, are trading on the understanding that they will always be good for the money up until the moment they aren’t. Except it’s the other way round isn’t it – banks began aping Governments who have traded on their reputations for centuries and can easily get money to meet the repayments from us mugs.

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  6. The rating is for the lender, not borrower, Ireland’s credit rating matters only for the proportion of the fund it is contributing. The fund isn’t actually Ireland’s debt, you realise?

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