European Clearing House Warns Irish Bond Traders

Fears over the health of the euro zone bond market intensified after one of Europe’s biggest clearing houses warned investors they could be compelled to stump up substantially more money to trade in Ireland’s debt.

Dublin, Ireland
Firecrest Picture | Robert Harding | Getty Images
Dublin, Ireland

LCH.Clearnet told members they might be required to deposit more cash to trade in Irish sovereign bonds, a move that is being widely interpreted as a signal that the organization will act next week.

Such a curb would be a blow to the Irish debt market and comes amid growing concerns over the fragility of the euro zone's peripheral economies.

Ireland and Spain were on Thursday removed from a list of countries in which Russia’s $130.9 billion sovereign wealth funds is permitted to invest, according to the Russian finance ministry’s website.

Norway’s $520 billion fund said the past few weeks had seen Spanish debt grow significantly less attractive.

“The warnings by sovereign wealth funds creates even more uncertainty in the euro zone,” said Nigel Rendell, senior strategist at RBC Capital Markets. “These funds are big players in the markets and can influence sentiment.”

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LCH.Clearnet has contacted members in the past few days to say that, under newly introduced rules, it has the power to impose a 15 percent “haircut”, a cash deposit to help indemnify against default risk, against Irish bonds if it determines that the risk of the Irish government defaulting has increased.

A spokesperson for the clearing house said: “We have the ability to do so should we decide to do so.”

Any move by LCH.Clearnet to increase Irish debt margin requirements could undermine the Irish banking system.

Irish 10-year yields rose for the eighth day on Thursday, jumping 19 basis points to a fresh record of 7.49 percent since the launch of the euro.

Steven Major, global head of fixed income research at HSBC said LCH was sending a warning to financial markets: “It is another blow for Ireland and the euro zone and underlines the nervousness among investors over the health of the peripheral economies.”

Spreads on peripheral Eurozone debt have continued to widen in spite of buying from European Central Bank, said traders. Greek 10-year bond yields jumped 0.3 percentage points to 11.05 percent on Thursday. Portuguese 10-year yields also rose 0.3 percentage points to 6.47 percent. Spanish yields were marginally higher.