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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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otnomart

"France is not ruling out the idea of issuing debt with other European countries and could set up a coalition of motivated countries in the event of a German veto, an Elysian source told Reuters agency. The idea of a coalition initially floated by Pascal Lamy could yet make its way."
Source: https://www.euractiv.com/section/all/short_news/france-hints-at-eu-coalition-of-willing-to-issue-joint-debt/

Nody

Corona bonds only works if the EU also had the right to set a countries budget which all supporters of the idea are strongly against; what they want is exactly how Republicans run USA. Individual (country) freedom & profit when things go well and shared (preferably handed over to the state) responsibility when things go bad. It's the worst of two worlds; either you have a common bond and the budgets are controlled by the EU or you have country responsibility for the budget and funding. You can't cheery pick to have country freedom and then shared responsibility to pay it back because that will only further encourage vote buying practices in countries and that's exactly why Italy et al are so against any requirements on any money they get. They don't want an actual corona or euro bond; they want more money without any responsibility to come with it and then shove the cost over to other countries to pay it back for them. That's not about EU unity; if anything that's about country greed.

Kermit.de.frog

Nody wrote: »

Corona bonds only works if the EU also had the right to set a countries budget which all supporters of the idea are strongly against; what they want is exactly how Republicans run USA. Individual (country) freedom & profit when things go well and shared (preferably handed over to the state) responsibility when things go bad. It's the worst of two worlds; either you have a common bond and the budgets are controlled by the EU or you have country responsibility for the budget and funding. You can't cheery pick to have country freedom and then shared responsibility to pay it back because that will only further encourage vote buying practices in countries and that's exactly why Italy et al are so against any requirements on any money they get. They don't want an actual corona or euro bond; they want more money without any responsibility to come with it and then shove the cost over to other countries to pay it back for them. That's not about EU unity; if anything that's about country greed.

Precisely.

They tried in 2010 (despite the fact the problems stemmed from decades of gross economic mismanagement) to push this.

They want Germany's credit card essentially and burden sharing.

Why would any German or other contributing government do that?

We are net contributors now and we also should have our eyes wide open to this. It's our money now too.

otnomart

Kermit.de.frog wrote: »

Precisely.

They tried in 2010 (despite the fact the problems stemmed from decades of gross economic mismanagement) to push this.

They want Germany's credit card essentially and burden sharing.

Why would any German or other contributing government do that?

We are net contributors now and we also should have our eyes wide open to this. It's our money now too.

Ireland, France, Belgium, Luxembourg, Italy are all net contributors into the EU and they have all signed the letter requesting coronabonds.

Nody

otnomart wrote: »

Ireland, France, Belgium, Luxembourg, Italy are all net contributors into the EU and they have all signed the letter requesting coronabonds.

It's not about contributing to the EU budget that we're talking about; it's the contributing to loan to country budgets which is a whole different topic. Italy wants to borrow money for their country budget (and by extension payments to EU) and then have Germany pay for their loans when they can't handle the payments anymore. Italy's net contribution is about 2 billion EUR to the budget while Germany net contributes 18 billion already; why in any world would Germany then go on and subsidize Italy further on their borrowing to buy votes for the local party without having any fiscal control over the matter? But do you know what does larger countries you listed do have in common? Higher interest rates than Germany because they have not managed their economies (esp. Italy with a economical plan that has zero feasibility but buy votes and the market offers interest accordingly) ; that's why they all think a "corona bond" is a "EU Solidarity" because they want others to pay for their spending when in reality Germany is already subsidizing them in the first place via the euro. If Italy was not part of the euro they would have way higher interest rates on their bonds than today.

efanton

Nody wrote: »

It's not about contributing to the EU budget that we're talking about; it's the contributing to loan to country budgets which is a whole different topic. Italy wants to borrow money for their country budget (and by extension payments to EU) and then have Germany pay for their loans when they can't handle the payments anymore. Italy's net contribution is about 2 billion EUR to the budget while Germany net contributes 18 billion already; why in any world would Germany then go on and subsidize Italy further on their borrowing to buy votes for the local party without having any fiscal control over the matter? But do you know what does larger countries you listed do have in common? Higher interest rates than Germany because they have not managed their economies (esp. Italy with a economical plan that has zero feasibility but buy votes and the market offers interest accordingly) ; that's why they all think a "corona bond" is a "EU Solidarity" because they want others to pay for their spending when in reality Germany is already subsidizing them in the first place via the euro. If Italy was not part of the euro they would have way higher interest rates on their bonds than today.

Surely what Italy and Spain are looking for is to be able to borrow at the same rate as Germany.

A coronabond, because it represents ALL EU countries would have the lowest interest rate possible far lower than say a Italian government bond. It would be perfectly understandable for Italy and Spain to want this being that the virus epidemic was not of their own making surely a reasonable thing of other countries to agree to as long as what is borrowed by Italy and Spain is payed by Italy and Spain.

I see nothing that suggests that if coronabonds were put in place that those using these bonds would not be paying that debt or expect other to pay that debt for them.

Also the maturity date on coronabonds could be far far further in the future. If Italy issued a 50 year bond would there be a demand for it? possibly not, but their probably would if it was a coronabond backed by the entire EU.

I guess its all down to the terms and conditions agreed by the EU countries for these coronabonds, but I suspect some of the reluctance is not that countries end up paying other countries debts but more likely that some countries such as Germany, Holland etc, might lose economic advantage or have less control in the EU parliament and financial bodies.

Nody

efanton wrote: »

Surely what Italy and Spain are looking for is to be able to borrow at the same rate as Germany.

Which will never happen until they manage their economy properly (blended interest rates etc.).

A coronabond, because it represents ALL EU countries would have the lowest interest rate possible far lower than say a Italian government bond. It would be perfectly understandable for Italy and Spain to want this being that the virus epidemic was not of their own making surely a reasonable thing of other countries to agree to as long as what is borrowed by Italy and Spain is payed by Italy and Spain.

Nope; a corona bond is suppose to be a blended bond backed up by ALL EU countries which means if Italy defaults or can't pay then the other EU countries have to pick up the bill.

I see nothing that suggests that if coronabonds were put in place that those using these bonds would not be paying that debt or expect other to pay that debt for them.

"Corona bonds" are joint debt issued to member states of the EU. The funds would be common and would come from the European Investment Bank.

This would be mutualised debt, taken collectively by all member states of the European Union.

Definition from here.

Also the maturity date on coronabonds could be far far further in the future. If Italy issued a 50 year bond would there be a demand for it? possibly not, but their probably would if it was a coronabond backed by the entire EU.

And now you are contradicting your own claims above that Italy alone would be responsible to pay it back. If a 50 year Italian bond is not of interest why would a Italian "Corona bond" be suddenly of interest? The answer is because the second one is not backed by Italy alone but the rest of EU.

I guess its all down to the terms and conditions agreed by the EU countries for these coronabonds, but I suspect some of the reluctance is not that countries end up paying other countries debts but more likely that some countries such as Germany, Holland etc, might lose economic advantage or have less control in the EU parliament and financial bodies.

Yea; it could not have anything to do with these countries trying to shove their borrowing over to other countries; of course not...

We need to work on a common debt instrument issued by a European institution to raise funds on the market," the nine countries wrote in a letter to European Council President Charles Michel, ahead of Thursday's video call summit of EU leaders.

These nine countries are prone to calling for the mutualisation of European national debts, while others — richer countries in the north of Europe — usually oppose such measures.

Let's be clear here; what's is proposed is that Italy, Spain etc. are to be allowed to borrow money and then put Germany etc. on the hook to repay the debt if they can't manage it. How in the seven hells does that sound like a good plan when Germany will be given ZERO input in how the money they are on the hook for will be used? It's like me going to you and saying hey I've co signed this loan for a million euros, I'll promise to pay it back don't worry about it as I got a sure fire business plan and you got zero input in if you wish to sign up or not. Either the countries agree that EU manages their finances (that means setting their budget limitations, sorting out borrowing etc.) OR the countries keep the control and sort out their own finances; anything else is a recipe for disaster as you're encouraging frivolous spending (you're not on the hook to pay it back) and punishing those who're managing their economies instead.

Kermit.de.frog

efanton wrote: »

Surely what Italy and Spain are looking for is to be able to borrow at the same rate as Germany.

They have not earned the right to.

They can borrow at rates the market deems suitable for how they run their economies.

They are not entitled to borrow at German, Irish or Dutch rates.

beggars_bush

The EU will need a Marshall Plan type stimulus after this crisis to get economies back up and running

noodler

Cheaper borrowing agreed.

Pretty much just the ESM in principle tho.

GT89

All debt should be wiped after this at the end of the day it is only figures on a computer screen

Danzy

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.

Not bailing out countries got hard will see the end if the Euro, never mind the EU.

The resistance to the bonds shows that talk of EU solidarity, shared currency, shared economy is horse shi5.

That the Dutch and Germany have been gratuitously insulting to countries hit hard only makes it personal.

Danzy

Kermit.de.frog wrote: »

They have not earned the right to.

They can borrow at rates the market deems suitable for how they run their economies.

They are not entitled to borrow at German, Irish or Dutch rates.

The EU better be careful that hard market realism doesn't bite it on its ass.

The prevailing view given so far is that Euro solidarity is for good times only and that they won't do what it takes to protect the economy and currency.

Nijmegen

Irish policy is to advocate for Eurobonds because the Irish civil servants advising politicians were around when markets turned on us like a light switch and we got ridden into the ground as a country by events, some of which were the result of our bad decisions and some of which were bad luck in global affairs.

The prudent policy of the Irish government is to assume that we will not be able to borrow at 0.2% forever.

noodler

Danzy wrote: »

Not bailing out countries got hard will see the end if the Euro, never mind the EU.

The resistance to the bonds shows that talk of EU solidarity, shared currency, shared economy is horse shi5.

That the Dutch and Germany have been gratuitously insulting to countries hit hard only makes it personal.

Ridiculous.

Despite all the profligacy of some countries, ultimately the continent keeps bailing out other countries.

That's ignoring the billions upon billions redistributed on an annual basis through the cap and structural funds.

Nody

Danzy wrote: »

Not bailing out countries got hard will see the end if the Euro, never mind the EU.

The resistance to the bonds shows that talk of EU solidarity, shared currency, shared economy is horse shi5.

That the Dutch and Germany have been gratuitously insulting to countries hit hard only makes it personal.

Italy, Spain etc. are the once refusing to have a shared economy; they refuse that there are ANY requirements on any money they get to loan. If they really wanted a shared economy they would welcome such oversight but instead Italy keeps whining about how EU should have nothing to do with how they spend their money. As I said earlier; you either have EU controlling both the borrowing and the countries budgets or you have the countries doing the borrowing and controlling the countries budgets but you'll never have EU doing the borrowing and the countries controlling the budgets.

Geuze

GT89 wrote: »

All debt should be wiped after this at the end of the day it is only figures on a computer screen

Debt is matched by savings.

If countries repudiate their public debt, then all the savers who lent to the Govt lose out.

That includes 1m+ savers in Irish credit unions.

theguzman

The EU will not survive this nor will the Euro.

BorneTobyWilde

Eh why isn't China made pay???? IN life those who are responsible pay for their mistakes? Why should we pick up the bill ?

coolshannagh28

theguzman wrote: »

The EU will not survive this nor will the Euro.

The lack of solidarity at peak crisis should ensure this .

BorneTobyWilde

The trade deficit with China is an absolute joke also, the amount of shoddy products that enter the EU is a disgrace, we've seen that also with PPE Gear, so much of it not fit to wipe the floor with.
People order stuff from China, it arrives. nothing like the picture, and then it is just absorbed financially by that person as a bad purchase, no one is sending a item back to China. Billions of euros of this crap enter the EU every year, and it all ends up in the waste, and who knows where some of that waste ends up.

BorneTobyWilde

Products from EU into China on the other hand are of top quality.

Nody

theguzman wrote: »

The EU will not survive this nor will the Euro.

/Yawn; EU was not going to survive the 2008 crash; the PIGS loan issues, Brexit and a whole slew of other items as well and yet it's still here. The part you and many others who keep claiming EU "will never survive this" keeps forgetting that Italy's PM etc. are playing for the home audience. Italy could have left at any time; it's still here. Greece could have left as well; they are still here. Why? Because being a member of EU is not perfect it sure as heck beats trying to go at it alone. EU will still be here in 20 years time simply because while it's not perfect, nor will it ever be, it sure beats being outside it. There's a reason for example why Italians don't want to leave the euro while their politicians love to think they can come up with their own home brewed currency because the Italians do remember what happened in the past. Devaluation sounds like a lovely solution to a problem until you realize it also means all Italians salaries and savings decrease accordingly and it only works as a solution if it is backed up by proper economical policies (and it basically never is). Nothing stops countries such as Spain or Italy to perform proper business reforms to get more competitive except their own politicians who don't want to do it because that would upset people; heck you only need to look at France or Greece in regards to pension reforms to see that.

PopePalpatine

BorneTobyWilde wrote: »

Eh why isn't China made pay???? IN life those who are responsible pay for their mistakes? Why should we pick up the bill ?

How do you plan to enforce that? In life you those who are responsible for calamities usually don't have an apocalyptic arsenal of atomic arms.

BorneTobyWilde

PopePalpatine wrote: »

How do you plan to enforce that? In life you those who are responsible for calamities usually don't have an apocalyptic arsenal of atomic arms.

Use the trade deficit as a tool to bend their will. Pay up or expect tariffs on all that tack they call product.

noodler

BorneTobyWilde wrote: »

Use the trade deficit as a tool to bend their will. Pay up or expect tariffs on all that tack they call product.

Come back to us Toby.

beggars_bush

European countries will very quickly identity key products that must be produced in that country to ensure quality and continuity of supply, though for a higher price

Surely there are companies in Ireland who could supply equipment?

Wanderer78

correct horse battery staple wrote:

I would have agreed with many posters here who are getting all high and mighty 10 years ago, but this time those people in Europe who these pretentious posters on this thread consider themselves superior to are suffering a natural disaster and we all need help.

The last crash had little or nothing to do with balanced budgets, surpluses and deficits, it was a fundamental global banking problem, of which we haven't fixed

Akrasia

Wanderer78 wrote: »

The last crash had little or nothing to do with balanced budgets, surpluses and deficits, it was a fundamental global banking problem, of which we haven't fixed

Yep, the global banking system has been getting more and more messed up with debt piling up and financial instruments being created and implemented with wildly inconsistent regulatory oversight such that there might as well not be any oversight at all

The global pandemic is going to cost the world tens of trillions of dollars in lost economic output and further trillions in income supports and bailouts to individuals and corporations

Issuing government bonds won’t work because nobody has enough money to buy those bonds without simply creating it out of thin air through yet another financial instrument

The only solution is for central banks to print money ( quantitative easing) to cover the costs of the bailouts and income supports, and when this is over, a global debt jubilee should be announced. This should clear the national debt of every country in the world back to zero. If done carefully the QE should not have a big impact on inflation because the crisis is inherently deflationary, the money supply is shrinking due to the shock to both producers and consumers at the same time

It would totally screw over a few billionaires and trillionaires,and financial institutions and hedge funds who trade n government debt and the banking system would need to be reconstructed but ultimately there is and has been an awful lot of corruption in the financial system for a very long time now and it’s crippling for a lot of the world’s poorest nations, who will also be devastated by the current medical crisis as well as other natural disasters related to environmental degradation and climate change

Our global priorities will need to change.

I’m talking about erasing most sovereign debt, not private debt, but there would need to be a very serious conversation had about wiping out unsecured debt for private individuals also.

This could become a massive transfer of wealth into the laps of land and property owners as their assets would increase in value while their liabilities would dissolve away, so there would need to be a way to balance so that secured debt is not just all inflated away

Things like student loans, credit cards, personal loans etc. should also all just go away. You say you’re prudent and have no personal debt so why should spendthrift Magee down the road get rewarded?? Sh1t happens,

I personally have zero unsecured debt, So I’m not suggesting this because I want to be bailed out personally

There would of course be loads and loads of fine print and exceptions and hard cases to work out, and the elites would try to manipulate everything into their own best interests but If we don’t do something like this, there is the very real potential for a very bleak decade to come with mass starvation and mass migration triggering social unrest, wars, the further rise of right wing populism, or left wing totalitarian regimes, at home and abroad.....

makeorbrake

Akrasia wrote: »

The only solution is for central banks to print money ( quantitative easing) to cover the costs of the bailouts and income supports, and when this is over, a global debt jubilee should be announced. This should clear the national debt of every country in the world back to zero. If done carefully the QE should not have a big impact on inflation because the crisis is inherently deflationary, the money supply is shrinking due to the shock to both producers and consumers at the same time

Quantative Easing is an ongoing experiment from the last financial crisis onwards. Sure, they managed to keep inflation down up until now but now they're going to reach a new level. We've never been here before - nobody knows how this will go. It's quite possible that they won't be able to keep inflation under control.

This is a time for hard money - Gold, Silver and Bitcoin.