The 'euro-bond' and has much to recommend it. It reduces the risk of defaulting because a country can't service its debt and increases the chances of it getting its house in order.
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.
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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11 Responses to “Lib Dem ‘euro-bond’ idea makes sense but won’t please Tories”
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.