Lib Dem ‘euro-bond’ idea makes sense but won’t please Tories


Last December Britain promised to provide a direct loan of up to £7 billion as part of the €85bn provided to bail out Ireland by the eurozone financial stability system, the IMF and other EU countries. The interest rate charged by the Treasury is 5.9 per cent. Not generous terms in normal times, but more generous than the 6.1% interest levied by other EU donors.

These high interest rates raise a serious point. The chances of Ireland defaulting on its debt are extremely slim so Britain can expect to make a profit of around £400m on a pretty safe loan. So effectively, Britain and the other contributors to the Irish bailout are behaving like the investment banks and financial institutions that they have spent the past two years criticising.

EU-dominos-Irish-bailout
A proposal that has been outlined by respected economists Willem Buiter, Wölfgang Munchau and has now been taken up by Sharon Bowles MEP in the European Parliament is much more sensible and fair. The lending countries, EU facility and the IMF would still get their money and costs back and get the upfront interest that is paid at the start of loan, but the pool of extra interest that is covering the risk of the loan would be held centrally and then paid back to the indebted country.

Of course, if the borrowing country did default then the cash would be used to cover the losses of the lenders, but otherwise it would go to the indebted country. This would be a great incentive for the borrowing country to clear their debts and maintain their repayments.

Although Mrs Bowles is guilty of being a touch immodest and disingenuous in describing the idea as “Bowles’ bonds”, when the likes of Munchau and Buiter had already made similar proposals, she and they have hit upon a good idea. Providing countries that are up to their eyeballs in debt with loans at high interest rates will inevitably increase the risk of the indebted countries being unable to make their repayments, or will have to make unnecessary austerity programmes that damage their future growth and economic recovery. It is economically brainless.

The idea is essentially a form of ‘euro-bond’ and has much to recommend it. It reduces the risk of a country defaulting because it can’t service its debt and it would increase the chances of a country getting its finances in order and returning to growth so it could win back the interest premium back.

However, with the Tory-led government now presiding over a deficit that has not reduced at all since it came to office, it’s not hard to imagine that the Treasury will be delighted at the prospect of giving up these interest payments. Meanwhile, Tory europhobes like MEPs Dan Hannan and Roger Helmer must be frothing at the mouth when they hear one of their coalition colleagues talking about the need for EU member states to be “acting out of European solidarity” instead of investment banks.

As chairwoman of the European Parliament’s economic committee, Bowles is no fool and arguably in the most senior position of all the coalition MEPs in Brussels. But it’s probably unlikely that she contacted her Conservative-government colleagues or Treasury chief secretary Danny Alexander before she said that the Treasury should surrender £400m worth of interest payments.

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  • http://www.order-order.com Guido Fawkes

    “The chances of Ireland defaulting on its debt are extremely slim” – that is not what the market thinks and a number of politicians are calling for exactly that. Not likely is not the same as slim.

    Familiarise yourself with the concept of risk adjusted reward.

  • Ash C

    Are you also proposing that banks lending to high-risk customers should refund a portion of the interest once the loan is paid off?

    Should credit card companies also refund interest to customers who pay their balances off?

    If not, why should national governments behave differerently to commercial lenders, putting themselves at a disadvantage?

  • Ash C

    Also, if commercial lenders know that Ireland is heading for a large cash rebate, what is to stop THEM from upping their rates to get a slice of the pie?

  • Ash C

    P.S. your comment formatting is a let down to the rest of your blog design!

  • Thomas F

    THAT IS THE OPPOSITE OF HOW DOMINOES WORK

    Truly, news graphics are an amazing thing.

  • Support for national Parliamentary democracy is not “europhobia”

    “Meanwhile, Tory europhobes like MEPs Dan Hannan and Roger Helmer must be frothing at the mouth when they hear one of their coalition colleagues talking about the need for EU member states to be “acting out of European solidarity” instead of investment banks.”

    What about Labour’s Euro Sceptics in the Labour Euro Safeguards Campaign, are they “europhobes” too ?

    http://www.lesc.org.uk/

    “The case against Stage III and the single currency is not a question of arid economic theory. It is a struggle for the soul of the Labour Party. Join us in the fight.

    A Betrayal of Democracy

    The draft EU constitution, signed by European leaders, does nothing to make European institutions more accountable to their peoples. Its implementation would lead to a significant shift of power away from its citizens and democratically accountable national governments.”

  • Support for national Parliamentary democracy is not “europhobia”

    More of Labour’s so called “europhobes”

    “Tony Benn speaks in favour of an EU referendum”

    http://www.youtube.com/watch?v=o0I-ZdvQz1o

    “The Euro-Realism of the left with Austin Mitchell MP”

    http://www.youtube.com/watch?v=VQgFNtpSU34

  • Ben Fox

    re Guido,

    Well that’s not what representatives from two of the main credit rating agencies told me last week. Why don’t you familiarise yourself with some proper economists.

  • Mark Stevo

    The same agencies that told us mortgage loans were AAA?

    Anyway, if you think Irish bonds won’t default you should be taking your savings out of the bank and buying Irish govt bonds, but I rather doubt you’re doing that.

  • Chris Clothier

    Hi Ben,
    Not sure I agree with your figures. I believe that the loan was priced at 2.29% over the prevailing UK seven-and-a-half-year swap rate (which would give a total cost to Ireland, when the loan was announced, of 5.9%). So the “profit” is around £160 m annually. But I don’t really see that as profit since the loan is priced at a huge discount to what Ireland can borrow in the market – Ireland’s 10 year yields are around the 9% mark at the moment. Which comes onto your other point, is this loan expensive. I would argue strongly no, on the basis of the same discount. I am not saying for a second that the UK government is acting out of the kindness of its heart, but I don’t think it ripping off our friends across the Irish Sea.

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