Government Borrowing during Covid-19 crisis

BorneTobyWilde · 10-04-2020 5:37pm

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 · 10-04-2020 5:38pm

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

Nody · 10-04-2020 5:57pm

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 · 10-04-2020 8:04pm

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 · 10-04-2020 8:06pm

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 · 10-04-2020 8:07pm

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 · 10-04-2020 9:33pm

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 · 11-04-2020 9:57am

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 · 11-04-2020 10:34am

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 · 12-04-2020 5:37pm

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.

Larbre34 · 12-04-2020 6:25pm

As described above, we are in a deflationary scenario. How do you think unmanageable inflation is going to arise?

makeorbrake · 12-04-2020 6:48pm

Larbre34 wrote: »

As described above, we are in a deflationary scenario. How do you think unmanageable inflation is going to arise?

At this very moment, we are in a deflationary scenario. Oncemoney printer goes brrr, one of the potential outcomes is a wave of inflation. Of course, it will depend on how this money is dispersed. However, its naive to assume that this can be managed without damage along the way.

This experiment started in 2008 - and whilst inflation was kept down post financial crisis, we're talking about a shed tonne more magic money now. If it was this easy and there are no consequences, how come we've been paying taxes all these years? Why can't that money be printed off for us? I think we all know the answer.

IF (and its a big IF) they manage to keep inflation under control, the can is just being kicked down the road - and this nettle is going to have to be grasped and dealt with ultimately.

Geuze · 12-04-2020 11:52pm

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.

What about the savers in Ireland who own Govt debt?

Are their savings to be wiped out?

Geuze · 12-04-2020 11:54pm

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
..

You seem to suggest that the ECB should start QE, yet it already started QE in 2014?

It announced a major new program of QE last month.

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

Pandemic emergency purchase programme (PEPP)

The ECB’s pandemic emergency purchase programme (PEPP) is a non-standard monetary policy measure initiated in March 2020 to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the coronavirus (COVID-19) outbreak.

The PEPP is a temporary asset purchase programme of private and public sector securities, which has an overall envelope of €750 billion. All asset categories eligible under the existing asset purchase programme (APP) are also eligible under the new programme. Under the PEPP, a waiver of the eligibility requirements will be granted for securities issued by the Greek Government. In addition, non-financial commercial paper is now eligible for purchases both under the PEPP and the corporate sector purchase programme (CSPP). The residual maturity of public sector securities eligible for purchase under the PEPP ranges from 70 days up to 30 years and 364 days.

For the purchases of public sector securities under the PEPP, the benchmark allocation across jurisdictions will be the capital key of the national central banks. At the same time, purchases will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

The Governing Council will terminate net asset purchases under the PEPP once it judges that the COVID-19 crisis phase is over, but in any case not before the end of 2020.

Amirani · 13-04-2020 12:01am

GT89 wrote: »

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

Any money you have lodged in a bank is debt. Happy for that to just be wiped?

Akrasia · 13-04-2020 12:36am

Geuze wrote: »

What about the savers in Ireland who own Govt debt?

Are their savings to be wiped out?

How many citizens of Ireland own government bonds?

We could put in an exception to refund those few non institutional investors

Geuze · 13-04-2020 12:54am

Akrasia wrote: »

How many citizens of Ireland own government bonds?

We could put in an exception to refund those few non institutional investors

All credit union savers?

I suspect nearly all CU own Govt bonds?

Then there are all the workers with pension funds?

Then there are all the people with managed funds that own bonds in the funds.

I'd make an estimate that 2m people have some indirect ownership of Govt bonds???

Then you have all the savers in An Post savings instruments.

These are part of the Govt debt.

They would have to wiped also.

Prize Bonds, Savings Bonds, Savings Certs

Nijmegen · 13-04-2020 11:42am

Akrasia wrote: »

How many citizens of Ireland own government bonds?

We could put in an exception to refund those few non institutional investors

Do you or does anyone you know have a pension?

efanton · 14-04-2020 1:05am

Just to be clear on this, is it right to say that the interest charged on a Government bond can never be changed or altered no matter how many times that bond is bought and sold?

I assume the answer is the interest remains fixed.
If that is the case why are government bonds bought and sold??
Is the interest paid on an annual or monthly basis or is it only payable on maturity date of the bond?

Geuze · 14-04-2020 10:36am

efanton wrote: »

Just to be clear on this, is it right to say that the interest charged on a Government bond can never be changed or altered no matter how many times that bond is bought and sold?

I assume the answer is the interest remains fixed.
If that is the case why are government bonds bought and sold??
Is the interest paid on an annual or monthly basis or is it only payable on maturity date of the bond?

Most Govt bonds are fixed-rate bonds.

By that it is meant that the coupon is fixed.

So the Govt issues a 100 euro bond at 0.20%, and it will pay 0.20 interest each year, that is fixed.

See this bond:

https://www.ntma.ie/news/ntma-raises-6-billion-from-sale-of-new-7-year-benchmark-bond

https://www.ntma.ie/uploads/general/Ireland-7yr-EUR-Final-TS_070420.pdf

Note that the coupon is a fixed 0.20% - it is in the title of the bond.

Now, the bond actual sold at 99.706, so the initial yield is 0.242%.

So the Govt effectively borrowed at a cost of 0.242%.

It borrowed 99.706, will repay 100, and will pay 0.20 interest each year.

Geuze · 14-04-2020 10:38am

Then, after that, the bond trades in the secondary market.

Imagine general interest rates fall.

The bond pays a fixed 0.20%, so becomes more attractive.

Its price rises, say to 103 / 104 / 105.

Its yield falls, as now the owner will face a capital loss.

So the yield-to-maturity changes every day as the bond price changes every day.

Do not confuse the initial fixed coupon rate with the YTM.

Salary Negotiator · 14-04-2020 10:38am

Geuze wrote: »

Most Govt bonds are fixed-rate bonds.

By that it is meant that the coupon is fixed.

So the Govt issues a 100 euro bond at 0.20%, and it will pay 0.20 interest each year, that is fixed.

See this bond:

https://www.ntma.ie/news/ntma-raises-6-billion-from-sale-of-new-7-year-benchmark-bond

https://www.ntma.ie/uploads/general/Ireland-7yr-EUR-Final-TS_070420.pdf

Note that the coupon is a fixed 0.20% - it is in the title of the bond.

Now, the bond actual sold at 99.706, so the initial yield is 0.242%.

So the Govt effectively borrowed at a cost of 0.242%.

It borrowed 99.706, will repay 100, and will pay 0.20 interest each year.

Who (or how?) decides what price the bond sells at?

Geuze · 14-04-2020 10:41am

efanton wrote: »

Just to be clear on this, is it right to say that the interest charged on a Government bond can never be changed or altered no matter how many times that bond is bought and sold?

I assume the answer is the interest remains fixed.
If that is the case why are government bonds bought and sold??
Is the interest paid on an annual or monthly basis or is it only payable on maturity date of the bond?

https://www.ntma.ie/business-areas/funding-and-debt-management/government-securities

There is a list of all existing bonds here, in a PDF.

https://www.ntma.ie/uploads/general/Outstanding-Bonds-Report-2020-04-09.pdf

You can see the coupon rates.

Geuze · 14-04-2020 10:42am

efanton wrote: »

Just to be clear on this, is it right to say that the interest charged on a Government bond can never be changed or altered no matter how many times that bond is bought and sold?

I assume the answer is the interest remains fixed.
If that is the case why are government bonds bought and sold??
Is the interest paid on an annual or monthly basis or is it only payable on maturity date of the bond?

The interest cost to the original borrower is fixed, yes.

The return, or yield, to the buyer in the secondary market is not fixed.

Geuze · 14-04-2020 10:43am

Salary Negotiator wrote: »

Who (or how?) decides what price the bond sells at?

Demand.

There is sometimes an auction.

Read this:

https://www.ntma.ie/uploads/general/Final-press-release.pdf

Geuze · 14-04-2020 10:46am

Salary Negotiator wrote: »

Who (or how?) decides what price the bond sells at?

PRESS RELEASE
Ireland
€6 billion 7-year benchmark bond, due 15th of May 2027

Today, Ireland acting through the National Treasury Management Agency (NTMA), with ratings of 'A2' (stable outlook) from Moody’s, 'AA-' (stable outlook) from Standard & Poor’s and 'A+' (stable
outlook) from Fitch Ratings, launched a new 7-year syndicated transaction.

The new €6 billion benchmark bond, due 15th of May 2027, has a 0.2% coupon and was priced at a spread of mid swaps +32 basis points (bp) to give a re-offer yield of 0.242%. BNP Paribas, BofA
Securities, Cantor Fitzgerald Ireland, Danske Bank, Goldman Sachs International Bank and J.P. Morgan acted as joint book-runners on the transaction.

This transaction is Ireland’s second syndicated benchmark this year, following the €4 billion 15-year benchmark in January. The transaction provides Ireland with a new EUR 7-year on-the-run benchmark bond. Ireland last issued a new 7-year bond in 2015.

Highlights of the Issue

 On Monday 6th of April at 11:30 Dublin time, the NTMA announced its intention to launch a new 7-year benchmark bond via syndication in the near future, subject to market conditions. This
followed the NTMA’s announcement of a new debt syndication in their quarterly update earlier this month.

 On Tuesday 7 th of April, with supportive market conditions and Indications of Interest (IoIs) in excess of €9.75 billion (excluding JLM interest), Ireland together with the Joint Lead Managers
(JLM) decided to release to the market at 8:20 Dublin time initial guidance of mid swaps +35bps area.

 Fair value for the new bond was seen in the context of mid swaps + 26.5bps at the London morning open, implying an initial NIP of 8.5bps.

 At 9:40 Dublin time, guidance was revised to mid swaps + 33bps area as the deal was met with strong demand, with the orderbook exceeding €25 billion (excluding JLM interest) at this point.

 With the orderbook exceeding €31.5 billion (excluding JLM interest) at 10:45 Dublin time, the final spread was set at mid swaps + 32bps.

 The orderbook was officially closed at 11:15 Dublin time with final books above €33 billion (excluding JLM interest) stemming from over 260 individual orders. The transaction was launched at 11:45 Dublin time with the issue size set at €6 billion and final spread set earlier at mid swaps + 32bps.

 The new €6 billion IRISH May-2027 benchmark was successfully priced at 15:06 Dublin time at a re-offer price of 99.706% and re-offer yield of 0.242%.

Salary Negotiator · 14-04-2020 10:53am

Geuze wrote: »

PRESS RELEASE
Ireland
€6 billion 7-year benchmark bond, due 15th of May 2027

Today, Ireland acting through the National Treasury Management Agency (NTMA), with ratings of 'A2' (stable outlook) from Moody’s, 'AA-' (stable outlook) from Standard & Poor’s and 'A+' (stable
outlook) from Fitch Ratings, launched a new 7-year syndicated transaction.

The new €6 billion benchmark bond, due 15th of May 2027, has a 0.2% coupon and was priced at a spread of mid swaps +32 basis points (bp) to give a re-offer yield of 0.242%. BNP Paribas, BofA
Securities, Cantor Fitzgerald Ireland, Danske Bank, Goldman Sachs International Bank and J.P. Morgan acted as joint book-runners on the transaction.

This transaction is Ireland’s second syndicated benchmark this year, following the €4 billion 15-year benchmark in January. The transaction provides Ireland with a new EUR 7-year on-the-run benchmark bond. Ireland last issued a new 7-year bond in 2015.

Highlights of the Issue

 On Monday 6th of April at 11:30 Dublin time, the NTMA announced its intention to launch a new 7-year benchmark bond via syndication in the near future, subject to market conditions. This
followed the NTMA’s announcement of a new debt syndication in their quarterly update earlier this month.

 On Tuesday 7 th of April, with supportive market conditions and Indications of Interest (IoIs) in excess of €9.75 billion (excluding JLM interest), Ireland together with the Joint Lead Managers
(JLM) decided to release to the market at 8:20 Dublin time initial guidance of mid swaps +35bps area.

 Fair value for the new bond was seen in the context of mid swaps + 26.5bps at the London morning open, implying an initial NIP of 8.5bps.

 At 9:40 Dublin time, guidance was revised to mid swaps + 33bps area as the deal was met with strong demand, with the orderbook exceeding €25 billion (excluding JLM interest) at this point.

 With the orderbook exceeding €31.5 billion (excluding JLM interest) at 10:45 Dublin time, the final spread was set at mid swaps + 32bps.

 The orderbook was officially closed at 11:15 Dublin time with final books above €33 billion (excluding JLM interest) stemming from over 260 individual orders. The transaction was launched at 11:45 Dublin time with the issue size set at €6 billion and final spread set earlier at mid swaps + 32bps.

 The new €6 billion IRISH May-2027 benchmark was successfully priced at 15:06 Dublin time at a re-offer price of 99.706% and re-offer yield of 0.242%.

Thanks.

So, if I'm understanding this correctly it's a bidding process that was well over prescribed?

Does that mean the NTMA could have raised more at the same price if they'd wanted to?

AlmightyCushion · 14-04-2020 12:03pm

Salary Negotiator wrote: »

Thanks.

So, if I'm understanding this correctly it's a bidding process that was well over prescribed?

Does that mean the NTMA could have raised more at the same price if they'd wanted to?

Possibly. We have no real idea without seeing the bids. It's possible the other bids were a lot higher and the NTMA weren't interested at the rates they offered. I imagine at least some of the bids were at a similar level that would have interested the NTMA but they didn't want to auction too many bonds at the one time.

Even if the whole €33 billion was offered at 0.24% you don't want to take all 33 billion. Simply because if you do then in April of 2027 you have to roll over that debt and borrow another €33 billion and you could struggle to get it. Best to have multiple auctions throughout the year and over multiple years instead of doing it in one go so that the debt profile is easier to manage.

Salary Negotiator · 14-04-2020 12:10pm

AlmightyCushion wrote: »

Possibly. We have no real idea without seeing the bids. It's possible the other bids were a lot higher and the NTMA weren't interested at the rates they offered. I imagine at least some of the bids were at a similar level that would have interested the NTMA but they didn't want to auction too many bonds at the one time.

Even if the whole €33 billion was offered at 0.24% you don't want to take all 33 billion. Simply because if you do then in April of 2027 you have to roll over that debt and borrow another €33 billion and you could struggle to get it. Best to have multiple auctions throughout the year and over multiple years instead of doing it in one go so that the debt profile is easier to manage.

Ah yeah, I understand the idea behind the rolling process of raising funds. I was just curious about the process, I had assumed the NTMA would have just stated they were looking to raise €6bn and then wait for the bids to come in.

hmmm · 14-04-2020 12:18pm

Salary Negotiator wrote: »

Ah yeah, I understand the idea behind the rolling process of raising funds. I was just curious about the process, I had assumed the NTMA would have just stated they were looking to raise €6bn and then wait for the bids to come in.

The most recent deal was a syndicated deal i.e. a group of banks are asked to find people interested in purchasing Irish government debt - e.g. pension funds.

The other type you'll see is an auction, where the government says it wants to buy x, and takes the lowest price offered.

Both types of offers are used, depending on the circumstances and where the dealers think they can get the best price. An auction might seem a no-brainer, but often you can get a lower price if you have third parties out trying to drum-up interest with their clients who might otherwise never have even taken a look at buying Irish debt. I'm just speculating in this case, but with everything happening and the reputational risks of any failures to raise money, the NTMA may have felt it was safer to go down the non-auction route.

KyussB · 14-04-2020 1:02pm

A missing part of this discussion, is the economic reason why countries are pushing for mutualized debts in the first place. It is due to having a centralized currency (the Euro), without having a centralized government - and that this creates unfixable economic imbalances between countries.

These imbalances are unsustainable, which inherently makes them both ilogical and immoral - and will eventually cause economic ruptures which will break up the Eurozone.

The core of this imbalance, is to consider the size of each countries economy, the relative value of having a local currency vs having the Euro, and how this affects trade for each country. For the biggest economies - Germany principally - the Euro is like having a depreciated currency (relative to the Deutschmark) - and that for nearly all other Eurozone countries, the Euro is like having an appreciated currency.

This means that Germany, the biggest economy, has an inherent trade advantage compared to all other Eurozone countries - and is the biggest economy - and has the cheapest debt. All other Eurozone countries have a trade disadvantage relative to Germany, have less export capacity, and have more expensive debt.

This means Germany is guaranteed to grow significantly faster than all other Eurozone countries, than they would without the Euro - and that all other countries will have increasing debt over time if they try to keep up with Germany, and will become less and less capable of financing that debt - because the relative value of the Euro will keep appreciating for all those countries as Germany grows stronger, and each countries relative trade competitiveness keeps shrinking.

So, mutualized debt (eurobonds/coronabonds) fix the debt portion of this problem, and are the next step. They don't fix the overall imbalance, though - but they will buy us decades of time. Eventually, fiscal transfers between countries will be needed (like the way Dublin funds weaker regions locally) - and eventually, a single government.

So yea. This is why a centralized currency, without a centralized government, is a bad idea - and why it unstoppably leads to either abandonment of the centralized currency, or a centralized government.

efanton · 14-04-2020 3:55pm

Geuze wrote: »

Most Govt bonds are fixed-rate bonds.

By that it is meant that the coupon is fixed.

So the Govt issues a 100 euro bond at 0.20%, and it will pay 0.20 interest each year, that is fixed.

See this bond:

https://www.ntma.ie/news/ntma-raises-6-billion-from-sale-of-new-7-year-benchmark-bond

https://www.ntma.ie/uploads/general/Ireland-7yr-EUR-Final-TS_070420.pdf

Note that the coupon is a fixed 0.20% - it is in the title of the bond.

Now, the bond actual sold at 99.706, so the initial yield is 0.242%.

So the Govt effectively borrowed at a cost of 0.242%.

It borrowed 99.706, will repay 100, and will pay 0.20 interest each year.

THanks Geuze

Your two posts explained everything I needed to know in a nutshell. Thanks for being so clear and concise and taking the effort to explain it.

I wasn't aware that the bonds were auctioned, that is why I could not see any advantage to them being sold. With an initial yield that now makes sense as to why they might be.

noodler · 14-04-2020 4:02pm

Following on Geuzes explanation, in 2011 Irish 10 year bond yields were 14/15%.

Now, we never sold bonds at this rate, but that rate was in fact what the buyer would be getting because their value had dropped sonlow.

Sell bond 100euro at 5%. (NTMA will pay 5% on this until maturity).

**** hits the fan. Someone willing to flog the bond for 50 euro. Now the person who buys it (on this secondary market) gets a de facto rate return of 10% (cos they bought it for 50euro bit still get the 5%).

I wish I'd bought a few Irish ones in 2011!

Geuze · 14-04-2020 5:42pm

efanton wrote: »

THanks Geuze

Your two posts explained everything I needed to know in a nutshell. Thanks for being so clear and concise and taking the effort to explain it.

I wasn't aware that the bonds were auctioned, that is why I could not see any advantage to them being sold. With an initial yield that now makes sense as to why they might be.

Thanks.

There are actually three interest rates to consider.

(1) the coupon rate, so called as you used to cut it out and send it off to collect the interest. This is typically fixed.

(2) the running yield, for example buy a 5% bond, pay 120, you will earn 5/120 = 4.17%

(3) the Yield-to-Maturity, this is what you see in the media

Example: buy 5% bond at 120, earn 4.17% interest, but also make 20 capital loss, so the overall YTM is maybe 3%

Geuze · 14-04-2020 5:45pm

efanton wrote: »

I wasn't aware that the bonds were auctioned, that is why I could not see any advantage to them being sold. With an initial yield that now makes sense as to why they might be.

Yes, and thanks to Hmmmm, as I myself would not be very clear on auctions vs. syndicated sales.

Also, note that a new bond introduced today, can be auctioned again in a few months, i.e. more of the same bond issued.

At least I think that can happen.

Geuze · 15-04-2020 12:39pm

Here a case is made for public debt restructuring.

Convert a share of existing public debt that is already owned by the ECB into perpetual zero coupon debt, i.e. no maturity date and no interest payments.

The article admits that this is monetary financing of Govt deficits, but says it is similar to the ECB buying, and forever rolling over, normal Govt bonds.

https://voxeu.org/article/make-room-fiscal-action-through-debt-conversion

All members would benefit, so there is no reward for "bad behaviour", moral hazard.

blanch152 · 15-04-2020 4:39pm

KyussB wrote: »

A missing part of this discussion, is the economic reason why countries are pushing for mutualized debts in the first place. It is due to having a centralized currency (the Euro), without having a centralized government - and that this creates unfixable economic imbalances between countries.

These imbalances are unsustainable, which inherently makes them both ilogical and immoral - and will eventually cause economic ruptures which will break up the Eurozone.

The core of this imbalance, is to consider the size of each countries economy, the relative value of having a local currency vs having the Euro, and how this affects trade for each country. For the biggest economies - Germany principally - the Euro is like having a depreciated currency (relative to the Deutschmark) - and that for nearly all other Eurozone countries, the Euro is like having an appreciated currency.

This means that Germany, the biggest economy, has an inherent trade advantage compared to all other Eurozone countries - and is the biggest economy - and has the cheapest debt. All other Eurozone countries have a trade disadvantage relative to Germany, have less export capacity, and have more expensive debt.

This means Germany is guaranteed to grow significantly faster than all other Eurozone countries, than they would without the Euro - and that all other countries will have increasing debt over time if they try to keep up with Germany, and will become less and less capable of financing that debt - because the relative value of the Euro will keep appreciating for all those countries as Germany grows stronger, and each countries relative trade competitiveness keeps shrinking.

So, mutualized debt (eurobonds/coronabonds) fix the debt portion of this problem, and are the next step. They don't fix the overall imbalance, though - but they will buy us decades of time. Eventually, fiscal transfers between countries will be needed (like the way Dublin funds weaker regions locally) - and eventually, a single government.

So yea. This is why a centralized currency, without a centralized government, is a bad idea - and why it unstoppably leads to either abandonment of the centralized currency, or a centralized government.

I don't buy that.

Firstly, while you may be correct that it is unsustainable, that may be in the very long run - out to 100 years. Who knows what sort of place we will live in in a hundred years.

However, the logical leap to the imbalances being both illogical and immoral is not credible. Those are judgement calls which you haven't justified at all.

blanch152 · 15-04-2020 4:40pm

Geuze wrote: »

Here a case is made for public debt restructuring.

Convert a share of existing public debt that is already owned by the ECB into perpetual zero coupon debt, i.e. no maturity date and no interest payments.

The article admits that this is monetary financing of Govt deficits, but says it is similar to the ECB buying, and forever rolling over, normal Govt bonds.

https://voxeu.org/article/make-room-fiscal-action-through-debt-conversion

All members would benefit, so there is no reward for "bad behaviour", moral hazard.

A good idea in the current situation. Time-limited to prevent long-term damage to the currency, but as a way out of the current situation, a good idea.

Only alternative is inflating the debt away within the Eurozone, which could cause significant damage to the economy.

KyussB · 15-04-2020 5:45pm

The imbalances proved to be unsustainable within as little as 8 years, not 100 - the EU still hadn't recovered from the last crisis, before this one hit.

Harry Palmr · 21-05-2020 1:05pm

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.

Bishop of hope · 21-05-2020 10:14pm

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 · 21-05-2020 10:28pm

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 · 21-05-2020 10:30pm

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 · 21-05-2020 10:32pm

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 · 21-05-2020 10:40pm

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 · 21-05-2020 11:03pm

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 · 22-05-2020 12:01am

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 · 22-05-2020 12:40am

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 · 22-05-2020 10:56am

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 · 22-05-2020 10:59am

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.

Government Borrowing during Covid-19 crisis

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