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Government Borrowing during Covid-19 crisis

efanton

I know there are a few economics heads that frequent these forums and I am hoping they might be able to answer a few questions and explain the differences between the different borrowing option available to the government

Bonds
Today the government borrowed 6 billion from the markets by issuing bonds.
They were offered upt to 30 billion but choose just to boor 6 billion.
As I understand it the interest rate on these is just 0.25%

Questions I would ask.
Why borrow only 6 billion when we know the government is burning through over 2 billion per month. Would it not have been wiser to borrow more?
Are there any other terms or condition attached to these bond other than paying back interest?

CoronaBonds.
The government were in talks with other EU leaders over the last few days to see if there could be a way of the EU issuing bond

As I understand it, and please correct me if I am wrong, thee bonds would be a way of sharing the cost of the crisis across the whole of the EU and with the whole weight of the EU economies behind them potentially be a cheaper way of borrowing.

I fails to see the advantage of these corona bonds instead of using the billions that the ECB is issuing. Is there an advantage?
Cheaper, but with strings attached, might not be best.

ESM
Yes that dreaded mechanism that brought austerity to Ireland.

Have the terms and condition for using the ESM changed?
Is this still the option of last resort?

I would truly appreciate anyone helping to explain the real piratical differences between with borrowing mechanisms, what they might mean to us if we use them in the years to come, and why we are not grabbing now more than the 6 billion borrowed, being that we know the crisis is going to cost considerably more than that.

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Eric Cartman

The last thing us and most of Northern Europe want is corona bonds or similar. Germany is heavily resisting them as it would basically make us , Germany , and the other rich countries in Europe liable for that debt. Bailing out the likes of Spain and Italy is absolutely not what Ireland needs or wants and will just exacerbate the problem.

As for the bonds we issued on the market, I think the 6 billion is more intending to use them as a cashflow gap until such time as the ESF / ECB funds come through. I don't think we want to be out to the markets on low yield bonds to finance all of this.

noodler

Eric Cartman wrote: »

The last thing us and most of Northern Europe want is corona bonds or similar. Germany is heavily resisting them as it would basically make us , Germany , and the other rich countries in Europe liable for that debt. Bailing out the likes of Spain and Italy is absolutely not what Ireland needs or wants and will just exacerbate the problem.

As for the bonds we issued on the market, I think the 6 billion is more intending to use them as a cashflow gap until such time as the ESF / ECB funds come through. I don't think we want to be out to the markets on low yield bonds to finance all of this.

1. The NTMA have over 20bn on hand.

They only borrowed a top up to that today (in every sovereign bond auction demand outstrips supply)

2. Nothing to say yet.

3. The point of borrowing from the ESM when we have access to the markets at rates of 0.25% is a bit moot.

efanton

noodler wrote: »

1. The NTMA have over 20bn on hand.

They only borrowed a top up to that today (in every sovereign bond auction demand outstrips supply)

2. Nothing to say yet.

3. The point of borrowing from the ESM when we have access to the markets at rates of 0.25% is a bit moot.

Im not asking as to whether we should or should not borrow.

I am trying to understand what the differences are between the various forms of borrowing available to the government, and the long term impact the different forms of borrowing have.

noodler

efanton wrote: »

Im not asking as to whether we should or should not borrow.

I am trying to understand what the differences are between the various forms of borrowing available to the government, and the long term impact the different forms of borrowing have.

You asked why we didn't borrow all that was on offer at the recent auction.

There is no coronabond.

ESM is for when you are locked out of the sovereign bond market (rates are too high).

This is not the case for us at the moment as you can see by the 0.25%.

Kermit.de.frog

ESM bailout comes with strict conditions.

Italy and Spain should go that route.

No way should we back a common debt vehicle with those countries. That leaves all of us on the hook one way or the other.

efanton

noodler wrote: »

You asked why we didn't borrow all that was on offer at the recent auction.

There is no coronabond.

ESM is for when you are locked out of the sovereign bond market (rates are too high).

This is not the case for us at the moment as you can see by the 0.25%.

I understand the coronabonds do not exist yet. This is why I am confused as to why governments, including Ireland, are seeking to create them when ordinary bonds are at such a low rate.

The only reason I asked as to why we did not borrow more, I assume with will have to before this crisis is over, is that I assumed that one of the other mechanisms might be advantageous. How that might be I do not understand.

Without understanding the differences between government bonds, ECB funds, coronabonds and ESM borrowing how can the ordinary citizen make sense of what is currently going on, and what the likely long term impact of decisions made during the crisis might be.

I know it might be novel on Boards.ie for someone to admit they dont know what they are talking about it, but I genuinely would be interested in learning the differences between the different forms of borrowing and their potential impact.

Kermit.de.frog

efanton wrote: »

Without understanding the differences between government bonds, ECB funds, coronabonds and ESM borrowing how can the ordinary citizen make sense of what is currently going on, and what the likely long term impact of decisions made during the crisis might be.

Eurobonds (or Coronabonds which are suppose to be a more temporary arrangement) would essentially mean Spain and Italy would be able to borrow off Germany's credit card with German interest rates.

All of us would be exposed in the long run to profligacy of countries who should not have such a low cost to borrow, have not earned it and have lived for decades beyond their means.

Their interest rates would fall, ours would go up as the risk is priced in across the Eurozone.

Under no circumstances should we do that. That is not right.

It's not fair.

Italy can earn a low cost of borrowing through reform.

Geuze

Eric Cartman wrote: »

As for the bonds we issued on the market, I think the 6 billion is more intending to use them as a cashflow gap until such time as the ESF / ECB funds come through. I don't think we want to be out to the markets on low yield bonds to finance all of this.

Note that the ECB do not lend to Govts.

noodler

efanton wrote: »

I understand the coronabonds do not exist yet. This is why I am confused as to why governments, including Ireland, are seeking to create them when ordinary bonds are at such a low rate.

The only reason I asked as to why we did not borrow more, I assume with will have to before this crisis is over, is that I assumed that one of the other mechanisms might be advantageous. How that might be I do not understand.

Without understanding the differences between government bonds, ECB funds, coronabonds and ESM borrowing how can the ordinary citizen make sense of what is currently going on, and what the likely long term impact of decisions made during the crisis might be.

I know it might be novel on Boards.ie for someone to admit they dont know what they are talking about it, but I genuinely would be interested in learning the differences between the different forms of borrowing and their potential impact.

Italy's 10 year yield is around 1.6%.

Much higher than ours.

A coronabond, like the ESM, would be backed by all EU/euro area countries so would be deemed more secure and be sold at a much lower yield.

Italy would save money.

Geuze

efanton wrote: »

I know there are a few economics heads that frequent these forums and I am hoping they might be able to answer a few questions and explain the differences between the different borrowing option available to the government

Bonds
Today the government borrowed 6 billion from the markets by issuing bonds.
They were offered upt to 30 billion but choose just to boor 6 billion.
As I understand it the interest rate on these is just 0.25%

Questions I would ask.
Why borrow only 6 billion when we know the government is burning through over 2 billion per month. Would it not have been wiser to borrow more?
Are there any other terms or condition attached to these bond other than paying back interest?

Note that the NTMA started the year with plenty of cash on hand.

Note that the NTMA lay out their plans:

https://www.ntma.ie/news/ntma-to-borrow-less-in-2020-than-in-2019

https://www.ntma.ie/news/ntma-issuance-schedule-for-quarter-2-2020

NTMA Issuance Schedule for Quarter 2, 2020
1 April 2020 – The National Treasury Management Agency (NTMA) announces the following issuance schedule for the current calendar quarter, subject to market conditions.

Syndication

The NTMA plans to launch a new government bond by syndication in April.

Bond Auctions

• Thursday 14 May 2020

• Thursday 11 June 2020

Details of the bond auctions will be announced on the Monday prior to each auction.

Treasury Bill Auctions

• Thursday 16 April 2020

• Thursday 21 May 2020

• Thursday 18 June 2020

Details of the May and June Treasury Bill auctions will be announced on the Monday prior to each auction while the April auction will be announced on the Tuesday prior to the auction.

Geuze

efanton wrote: »

CoronaBonds.
The government were in talks with other EU leaders over the last few days to see if there could be a way of the EU issuing bond

As I understand it, and please correct me if I am wrong, thee bonds would be a way of sharing the cost of the crisis across the whole of the EU and with the whole weight of the EU economies behind them potentially be a cheaper way of borrowing.

I fails to see the advantage of these corona bonds instead of using the billions that the ECB is issuing. Is there an advantage?
Cheaper, but with strings attached, might not be best.

What do you mean by "billions the ECB is issuing"?

Geuze

efanton wrote: »

ESM
Yes that dreaded mechanism that brought austerity to Ireland.

Have the terms and condition for using the ESM changed?
Is this still the option of last resort?

Yes, it has been stated that the conditionality would be reduced/lightened.

Geuze

efanton wrote: »

I understand the coronabonds do not exist yet. This is why I am confused as to why governments, including Ireland, are seeking to create them when ordinary bonds are at such a low rate.

The only reason I asked as to why we did not borrow more, I assume with will have to before this crisis is over, is that I assumed that one of the other mechanisms might be advantageous. How that might be I do not understand.

Without understanding the differences between government bonds, ECB funds, coronabonds and ESM borrowing how can the ordinary citizen make sense of what is currently going on, and what the likely long term impact of decisions made during the crisis might be.

Is Ireland pushing for eurobonds / coronabonds? I don't think so?

The "frugal four" are against them: AT, DE, NL, ??

What do you mean by ECB funds?

Plumbthedepths

Eric Cartman wrote: »

The last thing us and most of Northern Europe want is corona bonds or similar. Germany is heavily resisting them as it would basically make us , Germany , and the other rich countries in Europe liable for that debt. Bailing out the likes of Spain and Italy is absolutely not what Ireland needs or wants and will just exacerbate the problem.

As for the bonds we issued on the market, I think the 6 billion is more intending to use them as a cashflow gap until such time as the ESF / ECB funds come through. I don't think we want to be out to the markets on low yield bonds to finance all of this.

I think you need to inform yourself who Ireland have aligned themselves with. The behaviour of the Dutch and to a lesser extent the Germans has shocked our officials.

efanton

Geuze wrote: »

What do you mean by "billions the ECB is issuing"?

As I understand it the ECB guaranteed to buy up to €750 billion worth of EU government bonds.

I assume that by buying them or guaranteeing them they are locking in the interest rate and the debt will now be owed to the ECB

In effect to me as an ordinary joe soap its the same as a vulture fund buying you mortgage from a bank. You no longer owe the bank money you now owe the vulture fund.

touts

David McWilliams and other economists are calling for 100 year bonds that are specifically for Corona costs. Countries count up how much they have spent in the fight against Covid19 and the ECB gives them the money as a loan that has to be paid back in 100 years. No austerity needed and the gamble is in 100 years the money needed will be relatively small.

Germany and others don't want to do that because they won't profit from it. There is a reason death rates are so low in Germany. They have a world class health system that never suffered any austerity. It was mainly German investment funds that gambled on the empty promises of private banks in Ireland, Spain Italy etc and were the infamous "bond holders" who were paid back with interest by asset stripping Ireland, Spain, Italy etc. So in a way the extra taxes we paid were used to build hospitals in Berlin and Munich. Forcing Italy, Spain Ireland etc to take out massive loans again now will fund the next 20 years of infrastructure in Germany, Holland etc.

That's the battle that is going on now. The Germans and Dutch will spin it as a battle to put manners on the foolish Italians and Irish and Spanish. In reality it is a battle for the future of the EU. Will we be a collection of equal states who help each other in a time of crisis. Or will we be the fourth Reich with all benefits flowing to the center of the empire. Of course that second option won't happen because the EU will fall apart long before we reach that stage. We are at the the decision point right now and what the EU decide to do this month will shape the future of the Continent for the rest of the century.

efanton

Geuze wrote: »

Is Ireland pushing for eurobonds / coronabonds? I don't think so?

The "frugal four" are against them: AT, DE, NL, ??

What do you mean by ECB funds?

Apparently they are

https://www.irishtimes.com/news/world/europe/this-time-the-future-of-the-euro-really-is-at-stake-1.4224394

One dream of what the future of Europe might look like was already over: the idea that it could be shaped by the so-called New Hanseatic League.

Called the Hansa for short, this collection of the Netherlands, Ireland, and Baltic and Scandinavian states was brought together by the departure of Britain from the European Union. As a group, it hoped to replace the UK’s clout on economic matters and defend a trade-friendly, pro-business viewpoint.

Ireland left it by joining the call of nine states including, Italy, Spain and France, for joint debt issuance in the form of eurobonds or coronabonds.

Geuze

efanton wrote: »

As I understand it the ECB guaranteed to buy up to €750 billion worth of EU government bonds.

I assume that by buying them or guaranteeing them they are locking in the interest rate and the debt will now be owed to the ECB

In effect to me as an ordinary joe soap its the same as a vulture fund buying you mortgage from a bank. You no longer owe the bank money you now owe the vulture fund.

Yes, the ECB did launch a new round of QE / asset purchases, for 750bn.

https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

https://www.ecb.europa.eu/mopo/implement/pepp/html/index.en.html

The Irish Govt owes whoever holds the debt.

The interest rate is fixed from day 1, it doesn't matter to the Irish Govt how many times the bonds change hands afterwards.

If €100 is to be repaid, it is repaid, it doesn't matter who the holder of the bond is.

noodler

Someone said the ESM brought austerity to Ireland??

Strange one.

Can the ECB buy government bonds directly? Not sure it can.

Geuze

efanton wrote: »

In effect to me as an ordinary joe soap its the same as a vulture fund buying you mortgage from a bank. You no longer owe the bank money you now owe the vulture fund.

Please note that Govt bonds are bought and sold every day.

I don't know for sure, but a 20yr bond could have dozens of owners during the 20 years.

Geuze

noodler wrote: »

Can the ECB buy government bonds directly? Not sure it can.

I thought the ECB buys only in the secondary markets?

Geuze

noodler wrote: »

Can the ECB buy government bonds directly? Not sure it can.

https://www.ecb.europa.eu/ecb/legal/pdf/celex_32020d0440_en_txt.pdf

"secondary" mentioned.

efanton

Geuze wrote: »

Yes, the ECB did launch a new round of QE / asset purchases, for 750bn.

https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

https://www.ecb.europa.eu/mopo/implement/pepp/html/index.en.html

The Irish Govt owes whoever holds the debt.

The interest rate is fixed from day 1, it doesn't matter to the Irish Govt how many times the bonds change hands afterwards.

If €100 is to be repaid, it is repaid, it doesn't matter who the holder of the bond is.

And this is the part I am trying to get my head around.

What advantage is there of the ECB buying government bonds if those bond have a fixed rate and fixed term already?

Kermit.de.frog

noodler wrote: »

Italy's 10 year yield is around 1.6%.

Much higher than ours.

A coronabond, like the ESM, would be backed by all EU/euro area countries so would be deemed more secure and be sold at a much lower yield.

Italy would save money.

We'd pay more.

And we would be exposed to traditional Italian profligacy, as well as Greek and to a lesser extent Spanish.

That's the problem.

That is why the rich countries will never sign up.

And they are 100% right.

Geuze

efanton wrote: »

And this is the part I am trying to get my head around.

What advantage is there of the ECB buying government bonds if those bond have a fixed rate and fixed term already?

A fair question.

What you are asking is "through what channels does QE work?".

https://www.intereconomics.eu/contents/year/2015/number/4/article/quantitative-easing-in-the-euro-area-transmission-channels-and-risks.html

https://www.europarl.europa.eu/cmsdata/116964/COMPILATION_Nov%202016_TOPIC_3_FINAL_online.pdf

https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2016/qe-the-story-so-far-slides

efanton

Kermit.de.frog wrote: »

We'd pay more.

And we would be exposed to traditional Italian profligacy, as well as Greek and to a lesser extent Spanish.

That's the problem.

That is why the rich countries will never sign up.

And they are 100% right.

So why is Ireland in the Coronabond camp?
Is it a fear that at some point there will be no demand for government bonds?

Geuze

efanton wrote: »

And this is the part I am trying to get my head around.

What advantage is there of the ECB buying government bonds if those bond have a fixed rate and fixed term already?

Bond prices up.

Bond yields down.

Correct, this is no help for existing debt.

But is does help reduce all LT interest rates on new debt.

efanton

Geuze wrote: »

A fair question.

What you are asking is "through what channels does QE work?".

https://www.intereconomics.eu/contents/year/2015/number/4/article/quantitative-easing-in-the-euro-area-transmission-channels-and-risks.html

https://www.europarl.europa.eu/cmsdata/116964/COMPILATION_Nov%202016_TOPIC_3_FINAL_online.pdf

https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2016/qe-the-story-so-far-slides

Thank you so much for those links. A lot to read but exactly what I am looking for from first glance.
I guess I have something to do tomorrow to while away the virus boredom.

I have never had a financial head, its all smoke and mirrors to me, much prefer my science and physics. It might be difficult but there's normally only one correct answer, and a fair amount of certainty.

Kermit.de.frog

efanton wrote: »

So why is Ireland in the Coronabond camp?
Is it a fear that at some point there will be no demand for government bonds?

I have no idea why Ireland is siding with the med.

Makes no sense to me.

Remember also Eurobonds would represent relinqiushing financial sovereignty.

People would want to be very clear about the implications.

I don't think the Irish people want a finance ministry in Brussels giving us a quota of our own money annually.

This is what the tiny minority of EU fanatics do in high places - they try and bring this stuff in under the cloak of crisis.

It's a disgraceful tactic they tried in the financial crisis - it failed then and it will fail now because voters don't want it. In particular the rich countries will never support it.

They never get the message.

It annoys me that every time there is a crisis we are asked to surrender ever more sovereignty.

otnomart

Geuze wrote: »

Is Ireland pushing for eurobonds / coronabonds? I don't think so?

The "frugal four" are against them: AT, DE, NL, ??

What do you mean by ECB funds?

On 25 March, the Irish Gov co-signed letter to European Council calling for "coronabonds"
https://www.ft.com/content/258308f6-...f-41bea055720b
https://www.rte.ie/news/europe/2020/...e-coronabonds/
Five more Countries then joined Ireland, France, Belgium, Luxembourg and others: the three Baltics, Slovakia and Cyprus.
It is a total of 14 Countries including Ireland now pushing for this.
On the other side: Netherlands, Austria, Finland and Germany.