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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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Comments

Bishop of hope

Harry Palmr wrote: »

So then the word has been sent out - Ireland would sooner return to austerity than borrow on a game changing level because to approximately quote Leo Varadkar this morning "we don't know what the world will look like in 6 months never mind several years".

A classic example of fighting the last war.

How so?
Can you predict how the world will come through this or when?
We were put in dire trouble by a Govt that thought there would never be an end of boom and that pay up day would never come not that long ago, can't for the life of me figure out why any Govt or person should want us to go down that road again.

noodler

Harry Palmr wrote: »

So then the word has been sent out - Ireland would sooner return to austerity than borrow on a game changing level because to approximately quote Leo Varadkar this morning "we don't know what the world will look like in 6 months never mind several years".

A classic example of fighting the last war.

Were gonna increase our bet borrowing by 30bn this year at least?

That's the largest underlying deficit in the States history.

Sam Russell

Bishop of hope wrote: »

How so?
Can you predict how the world will come through this or when?
We were put in dire trouble by a Govt that thought there would never be an end of boom and that pay up day would never come not that long ago, can't for the life of me figure out why any Govt or person should want us to go down that road again.

Depends what the money pays for.

If it is for much needed infrastructure like Metrolink or the M20, then that is good. If it to pay for Social Welfare increases, then that is daft.

efanton

Bishop of hope wrote: »

How so?
Can you predict how the world will come through this or when?
We were put in dire trouble by a Govt that thought there would never be an end of boom and that pay up day would never come not that long ago, can't for the life of me figure out why any Govt or person should want us to go down that road again.

But surely that is exactly what Leo intends to do.

the Greens demands will cost billions, and the commitments that Leo and Michael Martin made when announcing the the framework document billions more. That's not even counting the costs relating the the covid crisis which is already running into the multi-billions.

The simple fact is that as a country we are going to have to borrow billions to kick start it back to life, and deal with the issues that can no longer be put on the long finger such as housing and health.

Surely the issue is not whether we borrow, but how we borrow.
At the moment the government can borrow what ever it needs on its own terms. If we leave it too late and those sources of funding may no longer look kindly on government bonds and virtually 0% interest, then we are reduced to seeking aid from the ECB or EU again and there has been no mention whatsoever regarding what terms might apply with regards the new funding agreed by Germany last week. If the Germans have agreed to these EU grants it would be reasonable to assume that conditions are attached that might not be in Ireland's best interest.

If we need to borrow then in my opinion as soon as a government is formed, we should borrow what we need as soon as possible on our own term, lest we fall into the trap of having to go back the the EU and ECB again.

Sheep Shagger

Any reason why we don't just borrow borrow and borrow, (for infrastructure not day to day spending), just rack it up and never actually pay it off...a bit like Italy.

Preferably boris from the ECB and not the markets this time around.

efanton

Sheep Shagger wrote: »

Any reason why we don't just borrow borrow and borrow, (for infrastructure not day to day spending), just rack it up and never actually pay it off...a bit like Italy.

Preferably boris from the ECB and not the markets this time around.

Why would you choose to borrow from the ECB and not through the markets via government bonds?

At least with government bonds Ireland gets to decide the terms, maturity date and conditions.
Once the EU and ECB are involved we have little control over the terms, maturity date, and conditions that might apply.

The EU and the ECB have once already royally shafted Ireland, why give the an opportunity to do it again if we do not have to?

AlmightyCushion

efanton wrote: »

Why would you choose to borrow from the ECB and not through the markets via government bonds?

At least with government bonds Ireland gets to decide the terms, maturity date and conditions.
Once the EU and ECB are involved we have little control over the terms, maturity date, and conditions that might apply.

The EU and the ECB have once already royally shafted Ireland, why give the an opportunity to do it again if we do not have to?

You go with whichever offers the best terms. During the bailout it was the EU and IMF offering us better terms and rates than the markets so it made no sense to borrow from the markets at 15% instead of the EU/IMF at around 5%. If the EU will lend to us at lower rates than the markets then we would be mad not to take it.

efanton

AlmightyCushion wrote: »

You go with whichever offers the best terms. During the bailout it was the EU and IMF offering us better terms and rates than the markets so it made no sense to borrow from the markets at 15% instead of the EU/IMF at around 5%. If the EU will lend to us at lower rates than the markets then we would be mad not to take it.

I would totally agree, in principal.

My concern however would be what if Ireland needed to borrow billions in a year or mores time? What might be on offer today (basically close to zero interest with no addition terms and conditions) might not be available then. Also we are not the only country in the EU that will have to borrow substantial sums of money.

I would imagine there is going to be an ever increasing demand for additional funding from the EU. Germany, Holland and a few other countries killed the corona bonds because there were no additional terms and conditions attached to that proposal. With that increased demand for loans from the ECB there likely to be additional pressure for conditions to be applied. Those conditions might hamper any plans a new government might wish to implement.
In a years time Ireland, or indeed an other country, might find it hard to find financial institutions willing to invest considerable sums of money at near zero rates. There's only so many institutions with a limited amount of money to invest and if they have invested elsewhere in the meantime then they might not be able or willing to invest in Irish bonds in a year or two's time at the low rates available now.

Borrowing sufficient amount of money to cover any costs due to the covid virus epidemic for the next three or for years once a new government is in place at near zero interest seems to me to be a prudent consideration. That near zero rate is unlikely to remain static, and any surplus that might arise can easily be used to buy back those bonds probably at lower cost than borrowing when rates increase or borrowing from the ECB where strings might be attached in a year or two's time.

Geuze

Sheep Shagger wrote: »

Any reason why we don't just borrow borrow and borrow, (for infrastructure not day to day spending), just rack it up and never actually pay it off...a bit like Italy.

Preferably boris from the ECB and not the markets this time around.

The ECB do not lend to Govts.

They never have, and they don't.

Geuze

efanton wrote: »

The EU and the ECB have once already royally shafted Ireland, why give the an opportunity to do it again if we do not have to?

Note that the reason we borrowed from the IMF and the EFSM was because bond rates were too high.

Also note that the loans from the EFSM were later re-negotiated, so the interest rate was cut a lot, and the maturities extended.

We repaid the IMF early, as those loans were expensive.

We have not repaid the EFSM early.