MacroScope

We had thought the end-of-week EU summit was going to be a lacklustre affair but things are starting to bubble up.

Ireland announced last night it would issue its first new 10-year bond since it was bailed out in 2010. It sounds like the books on the syndicated issue will open today with dealers predicting strong demand. This is a crucial step in Dublin becoming the success story the euro zone desperately craves. Some European Central Bank policymakers have said the bank’s bond-buying programme could be deployed to help Ireland once it has demonstrated its ability to issue debt in a variety of maturities. Others, notably Bundesbank chief Jens Weidmann, appear less keen on the idea.

With yields below four percent (they peaked above 15 percent in 2011) and needing to raise only a few billion in debt this year, it’s not clear that Ireland even needs ECB help to put the bailout behind it, but bond-buying support would certainly seal its exit and also show the ECB’s intent to markets. Further down the line, it will be worth pondering whether Ireland’s journey demonstrates that austerity was the right medicine. Plenty of euro zone policymakers will say so. The interesting question to address would be whether Dublin could have got there faster with more leeway to boost growth and therefore tax revenues.

We know euro zone leaders will meet along with ECB president Mario Draghi as an adjunct to the Thursday/Friday summit. Draghi will doubtless press for a continuation of austerity and structural reforms. It would be no surprise if he was quizzed on his plans for Ireland too, not to mention Italy which holds a three- and 15-year bond auction today. Borrowing costs are likely to rise again although the paper will be sold. Yesterday, yields climbed at a one-year debt sale while a short-term bill auction in Spain saw borrowing costs fall. It is unclear whether the ECB backstop will encompass Italy, given its political turmoil, but it would almost certainly be there for the rest of the euro zone if needed so the threat of contagion is much diminished.

As one heads out, another heads in. Discussion around a Cyprus bailout is reaching a denouement. Nicosia may have to accept the imperative to raise taxes and slap a temporary levy on bank deposits. As a result the amount of money it needs from the EU, and maybe Russia, would be more like 10-13 billion euros rather than the initial estimate of 17 billion. This is not a done deal but with the new Cypriot president making his debut at the Brussels summit it’s going to be a live issue.

Investors who bought Greek default insurance discover how much they will be paid today. Memories of the chaos that flowed from CDS payouts after the collapse of Lehmans mean there is a degree of nervousness but the signs are this will be nothing like as serious.

A  payout of around $2.5 billion to holders of the insurance contracts on Greek bonds will not cause the calamity once feared by euro zone politicians and the ECB as it represents a drop in the ocean of losses investors have already taken on money lent to Greece. That doesn’t mean, however,  that a few banks have not been foolish enough to write vast amounts of contracts on Greek debt which will now fall due.

There is a complex auction process to go through where bonds are bought and sold in order to determine a final price, or ‘recovery rate’. That will also give a more accurate guide to the market outlook for Greece since the new bonds issued as part of the bond swap are barely being traded so far. That view ain’t likely to be pretty.