A new ruling by the International Swaps and Derivatives Association, the trade body that oversees the credit default swaps market, ruled that a failure to pay credit event – a financial markets term for a default on a payment or breach of a bond covenant – had occurred at AIB.The Irish Independent reports that this was done with full knowledge of the European Central Bank who did nothing:
The ruling means that bondholders will be able to recover some of their losses as a result of insuring against a default by the bank.
Which means there's more trouble ahead:
As a consequence yesterday, faced with a default by AIB, the ECB did nothing. Following Mr Noonan's threat to burn the senior bondholders, did the ECB cut off the Irish banks from the repo market? No it didn't. Did the market sell off Irish government bonds in the wake of Mr Noonan's musings? No it didn't. Why?
Because the market already knows that the Irish banks are bust. The market knows that they have become re-cycling vehicles for the Irish Government, which is simply upholding the ECB's will that an Irish bank doesn't declare itself bust, because that would look bad for the euro. So the ECB is now allowing the Irish banks to go bust by stealth rather than by diktat.
The Irish banks will now begin to default bit by bit and Irish depositors will wake up to this and react by doing what the ECB doesn't have the courage to do -- they might just continue to take their money out. Now that would be a real crisis.hattip: Richard at EUReferendum