# Saving interest/extending Loans



## dewdrop (22 Jan 2013)

How does the country save interest by extending the Loans.  I always thought you would incur more interest but i must be under some allusion.


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## SeamusCoffey (24 Jan 2013)

dewdrop,

Countries don't repay loans, they are simply rolled over.  Have a look at Ireland's historical debt figures from the NTMA website.

[broken link removed]

None of the debt of the 1980s was paid off.  The burden of it was reduced with growth and inflation.  There is no intention of paying off the debt we have built up now so getting a lower interest rate for longer is unambiguously good.

Let's say we borrow 100 at an interest rate of 3% over five years.

This means our repayments on this debt will be 3, 3, 3, 3, 103 over the five years.  A government will try to cover the annual interest from current revenue but will "roll-over" the debt by borrowing the 100 off someone else rather than use revenue to cover the capital.  If they can borrow at 5% the repayments stay at 3, 3, 3, 3, 3 for the initial loan and then 5, 5, 5, 5, 5, ... for as long as the 5% loan lasts until that too is rolled over.

Ireland is borrowing off the EFSM/EFSF at around 3% (or lower) but some of these loans have short maturities.  Again see [broken link removed].  We are due to start paying these loans back in 2015.  This will be done by borrowing elsewhere.  Market rates would probably see Ireland borrowing at 5% (or more).  By extending the maturity Ireland can "lock in" the lower interest rate for longer.  So over ten years the repayments on 100 become

3, 3, 3, 3, 3, 3, 3, 3, 3, 103

Now as you suggest this means paying more interest for the loans 10 x 3 now instead of 5 x 3 in the first instance.  But in the first instance the full interest bill over the ten years is 40 as 5% is paid on the money over the second five years.

So we are paying more interest on the original loans (because they are extended) but less interest overall because they are at a lower rate they we could borrow elsewhere.

Ireland will have about €40 billion of loans from the EFSM/EFSF at the end of this year.  By extending the maturities of half of these at an interest rate 1% lower than the market rate would save €200 million a year.  If the margin on market rates are higher the savings will be even greater.

If for some reason our market rate have dropped below the EFSM/EFSF rate to say 2% by 2015 then we can simply refinance the loans at the lower rate.  We borrow off private markets at 2% and repay the EFSM/EFSF loans early.  With the lower interest rate the interest bill is lower.

Ireland cannot lose if the changes proposed this week are agreed.  Either

1. The extended loans after 2015 are at a rate lower than the market rate and we benefit from a lower interest rate
2.  The extended loans after 2015 are at a rate higher than the market rate and we refinance at the lower market rate so the rate on the extended loans doesn't matter.

A discussion of the ongoing need to keep borrowing money is what is needed.


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## Chris (25 Jan 2013)

But the fact that the loans are not being paid off is precisely the problem. Rolling over this huge amount of debt burden at the short end leaves huge risks in the future when interest rates go up sharply.
There are also some very rosy assumptions in your post. By then end of 2015 the NTMA is projecting that Ireland will have €212bn of debt. Who in their right mind is going to loan the country that kind of money for less than 3%?


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## SeamusCoffey (25 Jan 2013)

Chris,

The NTMA will probably aim for an average maturity on Irish government debt of between 7 and 10 years.  The extension of the EFSF/EFSM loans will help that considerably.  Interest rates might "go up sharply" in the future but it is important to consider the factors that might give rise to that. Inflation maybe?

It was not assumption that Ireland's borrowing costs will be less than 3% by 2015.  It was stated merely as a possibility simply to show that there is no downside from the proposed maturity extensions announced this week.

Ireland will have a debt of around €210 billion by 2015 but we won't have to go and borrow that.  There is currently €25 billion of the Promissory Notes remaining.  Whatever deal is coming down the tracks might see that extended for 25 or 30 years.  It is already agreed in principle that the maturities of the €40 billion of EFSF/EFSM loans will be set at 30 years.  Of Irish government bonds currently in issue €32 billion of them do not mature until 2020 and beyond.  Finally there is around €15 billion in State Savings Schemes such as Prize Bonds, Savings Certs, Savings Bonds and the National Solidarity Bond.  That is more than €110 billion that will not need to be rolled over in the medium term.

The numbers are truly massive but with even moderate growth and inflation over the next decade or so can gradually reduce the real burden of the debt.  What we need to focus on is putting an end to the need to keep adding to the debt.


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## dewdrop (26 Jan 2013)

Thanks Seamus for your detailed reply.


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## Jim2007 (26 Jan 2013)

Chris said:


> Who in their right mind is going to loan the country that kind of money for less than 3%?



The Swiss National Bank for one!  Ireland is seen as having a liquidity problem, while the rest are seen as having insolvency problems - there is a big difference.  As a northern country Ireland is expected to honor its debts and the Swiss have been impressed by how the Irish have got on with sorting thinks out, so they are reasonably happy to buy up Irish debt at around those rates.

In 2012, the SNB bought up €92b in Euro debt, that is about equivalent to the combined deficit of the largest five Euro nations and they are expecting to do at least the same again this year!  So who is really financing Europe then...


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## Chris (28 Jan 2013)

SeamusCoffey said:


> The NTMA will probably aim for an average maturity on Irish government debt of between 7 and 10 years.  The extension of the EFSF/EFSM loans will help that considerably.  Interest rates might "go up sharply" in the future but it is important to consider the factors that might give rise to that. Inflation maybe?
> 
> It was not assumption that Ireland's borrowing costs will be less than 3% by 2015.  It was stated merely as a possibility simply to show that there is no downside from the proposed maturity extensions announced this week.


I must have misread your comment. You are right about extending the term not being a risk in that we will certainly not be seeing interest rates of less than 3%.
But extending the term is simply kicking the can further down the road to make people who are not even born yet, pay for mistakes made well before their time. It solves nothing.



SeamusCoffey said:


> Ireland will have a debt of around €210 billion by 2015 but we won't have to go and borrow that.


Ireland does have to borrow that money. Current debt level is €140bn, that extra €70bn has to come from somewhere. The promissory notes are not real cash. If I give someone a cheque for €100,000 and I don't have the money to back it, I then need to figure out how to turn that cheque into cash. Maybe some person will buy that cheque, but that person has to first be found.



SeamusCoffey said:


> There is currently €25 billion of the Promissory Notes remaining.  Whatever deal is coming down the tracks might see that extended for 25 or 30 years.  It is already agreed in principle that the maturities of the €40 billion of EFSF/EFSM loans will be set at 30 years.  Of Irish government bonds currently in issue €32 billion of them do not mature until 2020 and beyond.  Finally there is around €15 billion in State Savings Schemes such as Prize Bonds, Savings Certs, Savings Bonds and the National Solidarity Bond.  That is more than €110 billion that will not need to be rolled over in the medium term.


Here is the maturity profile of Irish debt. In the medium term this is a huge problem:
2013: €5.1bn 
2014: €7.6bn
2015: €10.5bn
2016: €16.3bn
2017: €7.1bn
2018: €16.3bn
2019: €20.3bn
2020: €20.4bn
That is the money that Ireland needs to roll over in the coming years. 



SeamusCoffey said:


> The numbers are truly massive but with even moderate growth and inflation over the next decade or so can gradually reduce the real burden of the debt.  What we need to focus on is putting an end to the need to keep adding to the debt.


I fully agree with you, Ireland's problem is indeed the debt being piled on every single day. But extending the term on debt does not mean that you solve that problem.

My main point is, that even if Ireland could return to debt markets in full, and even if there were enough people willing to lend to Ireland at let's say even 4%, then the annual interest bill will be over €8bn, before the state even makes the slightest attempt to reduce the debt. That is more than 20% of current tax revenue on debt servicing alone.



Jim2007 said:


> The Swiss National Bank for one!  Ireland is seen as having a liquidity problem, while the rest are seen as having insolvency problems - there is a big difference.  As a northern country Ireland is expected to honor its debts and the Swiss have been impressed by how the Irish have got on with sorting thinks out, so they are reasonably happy to buy up Irish debt at around those rates.
> 
> In 2012, the SNB bought up €92b in Euro debt, that is about equivalent to the combined deficit of the largest five Euro nations and they are expecting to do at least the same again this year!  So who is really financing Europe then...


The SNB is doing everything it's power to lower the value of its currency. They are not buying junk bonds because they think it will give them a great return or increase the value of its currency.
Ireland does not have a liquidity problem, it is bankrupt and has a spending problem. The country's assets, even if they were liquid, are by far not enough to cover the deficit for one year. The EU/IMF are to Ireland what a bankruptcy administrator would be to a private company that was unable to match its outgoings with its income.


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## SeamusCoffey (31 Jan 2013)

Chris said:


> I must have misread your comment. You are right about extending the term not being a risk in that we will certainly not be seeing interest rates of less than 3%.
> But extending the term is simply kicking the can further down the road to make people who are not even born yet, pay for mistakes made well before their time. It solves nothing.



Government debt is never paid off.  Once it is created it almost always exists into perpetuity.  Future generations have always had to carry the debt of previous generations.  Irish governments ran up the equivalent of €40 billion of debt in the 1980s; it was still there in 2006.

By getting agreement that the lower interest rates of 3% will be guaranteed for up to 30 years is not "kicking the can down the road".  It is making sure the burden will be lower in the future.  We are not kicking the can down the road with the debt; we are kicking the can down the road with the continued deficits.  Getting a lower interest rate on existing debt is a good thing.  We need to stop generating more debt [which is a difficult question with no easy answer admittedly].  



Chris said:


> Ireland does have to borrow that money. Current debt level is €140bn, that extra €70bn has to come from somewhere. The promissory notes are not real cash. If I give someone a cheque for €100,000 and I don't have the money to back it, I then need to figure out how to turn that cheque into cash. Maybe some person will buy that cheque, but that person has to first be found.



The debt at the end of 2012 was around €190 billion.  The point was that we have already borrowed most of the money.



Chris said:


> Here is the maturity profile of Irish debt. In the medium term this is a huge problem:
> 2013: €5.1bn
> 2014: €7.6bn
> 2015: €10.5bn
> ...



That includes plenty of EFSF/EFSM loans which as agreed a fortnight ago will be extended by up to 30 years.  That will significantly reduce the medium-term funding needs. The above figures exclude the Promissory Notes though.



Chris said:


> I fully agree with you, Ireland's problem is indeed the debt being piled on every single day. But extending the term on debt does not mean that you solve that problem.



Extending the term at lower interest rates on existing debt is unambiguously good.  Government debt is not paid off.  We are not passing the burden of repaying government debt onto future generations; we are passing on the burden of paying the interest on that debt.  Given that the debt exists a lower interest rate is good.



Chris said:


> My main point is, that even if Ireland could return to debt markets in full, and even if there were enough people willing to lend to Ireland at let's say even 4%, then the annual interest bill will be over €8bn, before the state even makes the slightest attempt to reduce the debt. That is more than 20% of current tax revenue on debt servicing alone.



Yes, €8 billion is a massive amount of money.  That is what happens when you start with €47 billion of debt, borrow €78 billion to run massive deficits, borrow €25 billion for a massive cash buffer and bail-out a delinquent banking system adding another €41 billion to the debt.

But €8 billion is a massive amount of money now.  Over time growth and inflation can reduce the real burden of the debt.  These are absent now but over time their effect will be felt.  We need to stop creating more debt so the growth and inflation can be given a chance to reduce the burden.


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## dewdrop (10 Feb 2013)

In regard to the maturity profile of Irish debt already outlined can the maturity dates be adjusted to reflect loans from EFSM/EFSM which have a longer maturity date. This might make our repayment schedule look better!


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## rayn (10 Feb 2013)

So we can spend more than we earn every year for the foreseeable future?


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## dewdrop (11 Feb 2013)

Just to relieve anxiety for the future


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## Chris (14 Feb 2013)

Seamus, I agree that the number one problem is the deficit, but the level of debt we are talking about will not be serviceable and I wouldn't blame future generation to stick up two fingers and say "we're not going to pay more tax, we'll cut your (pensioner's) entitlements first."

The very fact that debt is not paid off is why so many countries are in trouble. This is something that has been going in for decades but it cannot go on forever. I think that it will all collapse in the next few years, but even if it was to take another few decades I think it is totally irresponsible to burden future generations with these disastrous mistakes.

Leaving it to inflation to take care if things is also a totally irresponsible idea. Central banks around the world are creating unprecedented amounts of new money that so far has not fully made its way I to the economy. But when it does this will be another even bigger disaster to fix, not a solution.


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