Morning Ireland

Agencies The three main credit rating agencies are Standard & Poor's (S&P), Moody's and Fitch. They examine the financial positions of companies and countries and decide their creditworthiness (how safe it is to lend to them). The top rating is triple A (AAA). Ireland had an AAA rating for many years, which meant lending to the Irish Government was seen as relatively risk-free. As a result, Ireland could sell bonds with a relatively low rate of interest. But when a country loses its AAA rating, it usually must offer lenders a higher rate of interest, meaning it will cost more to pay the money back.

The lowest rating is known as speculative grade, or junk bond, status. This is a polite way of saying 'don't touch with a 20-foot bargepole'.

Credit rating agencies have been criticised for awarding AAA ratings to assets which turned out to be backed by risky (sub-prime) mortgages.

Bank guarantee Before the financial crisis hit, the phrase 'bank guarantee' usually referred to money held by savers in a bank. This was guaranteed, up to a limit of €100,000, in the event that the bank failed. In other words, your money - up to the level of the guarantee - was safe.

When the financial crisis hit in 2007/2008, investors became wary of lending to banks because they saw a risk that they might not be re-paid. This led the Irish Government to introduce its wider bank guarantee scheme, which guaranteed liabilities as well as deposits. To put it simply, the measure was aimed at reassuring lenders and savers that, should the bank fall into difficulty, they would still get their money back. The Government scheme, introduced in September 2008, is scheduled to run for two years.

Bonds A fancy name for IOUs. Governments and companies raise money all the time by selling bonds. The buyers receive interest in return. Investors who buy company or Government bonds can then also sell them on to other investors in the bond market. For more information on bonds, see Senior/Subordinated bonds and Eurobonds below.

CFDs Contracts for Difference are bets on the future price of a share. They represent a contract between a buyer and a seller where the seller agrees to pay the buyer the difference between today's share price and the share price at some date in the future. If the share price goes up, the buyer receives the difference but if it falls the buyer must pay the shortfall to the seller. There is no stamp duty payable on CFDs, compared to a stamp duty of 1% on ordinary shares. Also, buyers do not have to disclosure their shareholding (as happened when Seán Quinn scooped up his Anglo Irish bank shares)

Credit crunch This happens when banks severely tighten up on lending money to businesses and consumers. This has a knock-on effect on the wider economy as businesses find it harder to borrow money for things such as new equipment, or expansion. It usually begins when banks tighten up on lending to each other.

Creditwatch The rating agencies sometimes announce that they are placing a country or company on 'creditwatch', with a negative outlook. This means they are thinking of downgrading that country's credit rating.

Debt/GDP ratio Under euro zone rules, a country's deficit in any year should not exceed 3% of its GDP, or economic output. The EU calculates the deficit slightly differently from the way in which the monthly Exchequer figures are compiled. For more information on debt, see Senior/Subordinated Bonds/Debt below.

Eurobonds At present, each country in the eurozone borrows money as an independent nation eg: Germany issues German bonds which are bought by investors. As a result of the sovereign debt crisis, Ireland, Greece and Portugal have been unable to sell their bonds to investors primarily because their debts are too high. The proposal for eurobonds stems from the idea that all eurozone countries would issue a common bond. For heavily borrowed countries this would greatly reduce the interest rate demanded from investors. They could return to the markets without the need for aid from the IMF and EU. The disadvantage for countries such as Germany is that it would push up their cost of borrowing. Another hurdle is that if all the countries in the eurozone enter this arrangement it would necessitate a fiscal union. That could mean a eurozone finance ministry with individual member states losing some control of their own financial affairs.

Exchequer surplus/deficit The difference between what the Government spends and what it receives in taxes and other revenue. Almost €20 billion deficit this year, in our case.

GDP/GNP Gross domestic product and gross national product. These can also be described as 'economic output', or the value of all the goods and services produced in an economy. In most countries, GDP and GNP are almost identical, but in Ireland, GDP is often higher because of the large number of multinationals based here. Their profits are excluded from GNP, which is why many economists think GNP is a better measure for the Irish economy.

Impaired loans Banks define loans as impaired when they believe they are unlikely to receive part or all of the money back. Banks have to account for these in their financial results, when they make an estimate, or provision of how much they have lost on these loans. This is also referred to as a bad debt charge.

Junior debt See Subordinated debt below.

Liquidity Access to cash or other assets which can be used to meet the short-term financial needs of a country or company. At the moment, the term is being mainly used in a banking context. Some banks have problems with a lack of liquidity - in other words, they are finding it difficult to borrow money on financial markets.

Monetise This means converting an asset into cash - usually by selling it . It can also refer to converting a debt into cash - governments could do this by printing money (see Quantitative Easing below).

Naked short-selling See Short-selling below.

Ordinary/Preference shares Ordinary shares are the shares traded on the stock market. Preference shares are a special class of shares, which give the holder an influence, but do not affect the percentage held by ordinary shareholders. Holders of preference shares are often given a guaranteed dividend payment from the bank.

When a company is wound up, ordinary shares entitle the holder to an equity investment in the company. Should the investment fail, the investor stands to lose the amount pledged.

Price/earnings ratio (P/E ratio) The P/E ratio is a measure of how cheap or expensive a company's shares are. It divides the current share price by the company's earnings per share or EPS - a figure which is usually broken down in its financial results. So if a company is trading at €1, and it delivered EPS of 20 cent, the P/E ratio is 5. Sometimes you can see tables giving different ratios, with the E based either on the company's results last year, or estimates for its results in the current or following year. For US companies, the historic average P/E ratio has been around 15, while the FTSE 100 companies it has been around 13.

Pro-cyclical Pro-cyclical usually refers to something which moves in the same direction as the overall economy. In recent economic debate, there have been many references to pro-cyclical (as opposed to counter-cyclical) policies. For instance, increasing government spending or lowering taxes during a boom is seen as pro-cyclical, as it tends to add even more to economic growth. Some economists argue that policy should be counter-cyclical - reduce spending or raise taxes during a boom to provide a cushion so that spending can be increased when the economy is shrinking.

Quantitative easing You could call this a licence to print money. This is where central banks try to boost economic activity by putting more money into the economic system. The most common way of doing this is by buying up bonds from banks or companies.

Recapitalisation Injecting money into the banks, usually in exchange for shares. In the current crisis, the aim of recapitalisation is to ensure that banks have enough money in reserve to cope with the expected bad debts resulting from the property market collapse.

Recession This is technically defined as two successive quarters (three-month periods) in which economic output fell compared with the previous quarter. In the US, however, there is a special economic board which examines all the figures and decides whether the country has entered a recession - almost the economic equivalent of English football's pools panel.

Securitised debt These are debts which have been packaged up and sold on in return for an upfront payment. Banks had been doing this with mortgages. What the buyer gets in return is a stream of future income from the mortgage repayments. Of course, when home-owners can't meet their repayments, the buyer is in trouble.

Senior/Subordinated Bonds/Debt You read earlier what a 'bond' is and sometimes you'll also hear it referred to as 'debt'. You might have also heard about senior and subordinated bonds or senior and subordinated debt. When investors own senior bonds, it means they're on top of the list when it comes to being repaid and are most likely to get their money back. It is a safer investment than a subordinated bond and is therefore potentially less lucrative because risk is rewarded with higher payouts when things go right in the financial world. A subordinated bond is often referred to as a 'junior' bond because it is lower down the list of repayment priorities. If a government/company does not have enough money to repay all its debts, the subordinated/junior bondholders are most likely to lose out in the event of a default. It is a riskier and therefore potentially more lucrative investment. There are many people who argue that subordinated bondholders in bailed-out institutions such as Anglo Irish Bank should not be repaid because they were aware of the risks when they made their investments and decided to risk more to enjoy a bigger potential payout. That said, subordinated bondholders still outrank ordinary shareholders when it comes to getting money back in the event of a company being liquidated.

Short-selling Short-selling is when investors borrow shares - or other assets - which they then sell in the hope of buying them back later at a lower price. They then pocket the difference as profit. Naked short-selling - on which the German regulator recently imposed restrictions - occurs when investors sell shares or other assets they do not own and have not even borrowed, again in the hope of buying them back later at a lower price. Listen to a more detailed explanation here: http://www.rte.ie/business/2010/0519/businesstonight.html

Subordinated Bonds/Debt See Senior/Subordinated Bonds/Debt above

Tier 1 capital ratio Banks are allowed to lend more money than they actually have on deposit by borrowing from other banks, but they are required to hold a certain amount of money in reserve, in various forms. The most commonly known measure of this is Tier 1 capital ratio, usually expressed as a percentage. If this ratio falls below a certain level, investors worry that the bank is lending too much and may not have enough money in reserve if the debts turn bad.

Yield The interest rate, or coupon, on a bond stays the same, but if the price falls, the yield goes up. If I sell a €100 bond with an interest rate of 4%, and the price of that bond later falls to €80, the buyer still receives €4 a year. But the yield for the person who bought at €80 is now 5% (€4 interest on €80).