tag:blogger.com,1999:blog-2826531655042170344.post645351794271106274..comments2024-03-26T11:29:52.986+00:00Comments on Economic Incentives: “Legacy of Debt”Seamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.comBlogger11125tag:blogger.com,1999:blog-2826531655042170344.post-63361593979029008872013-02-09T17:52:51.278+00:002013-02-09T17:52:51.278+00:00Although of course it is purely academic at this p...Although of course it is purely academic at this point, I still don't see why very long-term bonds could not have been used with the original scheme. I think the schedule for the reduction of the CBI funding and the type of collateral used to support that funding at any point in time are separate - i.e. you can change each aspect independently. If a 2025 bond last year was OK, then I think a 2038 bond would also have been OK. If not-OK it would seem to imply the existence of a threshold year between 2025 and 2038 that marked an upper bound for acceptable maturities, which seems a bit arbitrary. <br /><br />On the "monetary financing" issue, I think Noonan's statements in his Pat Kenny interview are instructive. The original PN scheme was "totally illegal", and the new scheme is more legal/less illegal. So it's still a sin, but less of a sin than before.Bryan Gnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-41222466740859297282013-02-09T02:07:48.264+00:002013-02-09T02:07:48.264+00:00Hi Bryan,
Yes, it could have been proposed to fun...Hi Bryan,<br /><br />Yes, it could have been proposed to fund the original PN payments with long-term bonds (and maybe it was at some stage) but that wouldn't have washed. Last year's payment was met with a bond but the actual cash had to come from BOI (after a bridging loan from NAMA).<br /><br />Paying the CB with bonds definitely would be monetary financing.<br /><br />What we have is a shuffle that smells a lot like monetary financing but has been passed as acceptable. The Euro System of Central Banks (the constituent parts of the ECB) hold over €200 billion of government bonds as a result of the now-defunct Securities Market Programme. This weeks shuffle sees the portfolio of the CBoI increase with €25 billion of Irish bonds. There is lots of moving parts but somehow the CBoI has ended up with €25 billion of bonds issued by the Exchequer. The link to the funding needs of Anglo has been broken but the money still needs to be repaid. This will happen when the CBoI begins the process of selling the bonds, and the Exchequer will eventually pay out on them when they mature.<br /><br />Somehow, this has been approved and essentially all the Promissory Notes/ELA have been repaid with the long-term government bonds. There are lots of moving parts but if this isn't monetary financing, what is? This means there will no longer be fortnightly approval needed for the ELA. In fact the only oversight the ECB has now is an annual review of the CBoI's Investment Portfolio where the ECB can recommend changes to the asset disposal schedule.<br /><br />I don't think the Promissory Note payments could have been made with 2038 to 2053 government bonds. The only way they could have been used was to totally restructure the arrangement as had been accomplished. The funding benefits of the new arrangement would not have been possible under the old structure. Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-66845484208411548872013-02-08T21:16:01.180+00:002013-02-08T21:16:01.180+00:00Seamus,
Great posts.
"The maturity/roll-ove...Seamus,<br /><br />Great posts.<br /><br />"The maturity/roll-over benefits are because the bonds used range from 2038 to 2053 (with larger amounts in the later years)."<br /><br />Couldn't the original PN repayment schedule also have been funded with bonds that matured between 2038 and 2053, so that that element of the equation is a wash?Bryan Gnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-44554558071388385032013-02-08T14:24:34.106+00:002013-02-08T14:24:34.106+00:00Thanks for clearing that up, Seamus. Here's to...Thanks for clearing that up, Seamus. Here's to 40 years of high inflation :)<br /><br />PS: love the blog.delacaravaniohttp://delacaravanio.comnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-39230938319551537222013-02-08T13:10:58.791+00:002013-02-08T13:10:58.791+00:00There is something about this particular bit of de...There is something about this particular bit of debt that gets people's backs up. And the 'making this into sovereign debt' myth only adds to it. We do intergenerational rip offs all the time in this country, as pointed out, there is €58bn of it already!<br />karl deeterhttp://www.mortgagebrokers.ie/blognoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-28403383170045414512013-02-08T12:31:39.683+00:002013-02-08T12:31:39.683+00:00Hi delacaravanio,
There is no "new" deb...Hi delacaravanio,<br /><br />There is no "new" debt from yesterday's changes. It is a restructuring of existing debt.<br /><br />The Fiscal Compact does not require any country to repay debt. If the debt ratio isn't falling in line with the debt brake rule (which is actually a relatively benign constraint) the provisions of the Treaty mean that the country will enter the Excessive Deficit Procedure meaning that the attempts to reduce the debt ratio will be directed on<br /> - a smaller government deficit<br /> - policy changes to improve growth<br />The EDP will not require cash repayments of debt.Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-40973354237736973082013-02-08T12:28:46.905+00:002013-02-08T12:28:46.905+00:00Hi Brendan,
The maturity/roll-over benefits are b...Hi Brendan,<br /><br />The maturity/roll-over benefits are because the bonds used range from 2038 to 2053 (with larger amounts in the later years).<br /><br />The interest rate benefits last as long as the CB holds the new bonds and that is until 2032.Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-32333638462630452822013-02-08T11:25:46.780+00:002013-02-08T11:25:46.780+00:00Just to clarify, by ECB running the show I mean ta...Just to clarify, by ECB running the show I mean targeting inflation at 2%.delacaravaniohttp://delacaravanio.comnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-38545107151776427672013-02-08T11:23:02.578+00:002013-02-08T11:23:02.578+00:00Surely, as per the terms of the fiscal compact, it...Surely, as per the terms of the fiscal compact, it is not the case that we can just pile-on debt?<br /><br />Unless the economy starts growing we're going to have to start paying some debt off in order to reduce our debt/GDP ratio.<br /><br />In the past, maybe governments did just inflate their way out of debts, but with the ECB running the show that no longer seems likely.delacaravaniohttp://delacaravanio.comnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-13239355098918620132013-02-08T10:32:51.808+00:002013-02-08T10:32:51.808+00:00Hi Séamus
A well put together piece.
However, I...Hi Séamus<br /><br />A well put together piece. <br /><br />However, I think we have all been fooled by the long-term maturity dates of the bonds. <br /><br />According to Philip Lane who was at the Press Conference, the Central Bank is expected to hold the bonds for a weighted average of 15 years. <br /><br />So when the Central Bank sells the bonds, what will it do with the proceeds? Presumably it will repay the ECB. <br /><br />So we will be effectively repaying the cheap financing in 15 years with whatever the market rate of interest is then. The Central Bank will sell these 3.5% floating bonds in the market and the price will reflect the price of Irish government bonds at the time. So, in effect, they will be refinanced at the market rate. <br /><br />Brendan Burgess <br />Brendanhttps://www.blogger.com/profile/08759335275353518574noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-61734844084310758302013-02-08T09:14:38.187+00:002013-02-08T09:14:38.187+00:00Excellent piece Seamus.
One point I'd like t...Excellent piece Seamus. <br /><br />One point I'd like to raise, in the first paragraph when you say "First up, governments don’t repay debt, they roll it over". I disagree. <br /><br />Goverments DO repay debt; they don't reduce it(which you point out). A sublte different but significant none the less. I think it is misleading to state "governments don’t repay debt".Robbie Butlernoreply@blogger.com