How would a rise in interest rates affect our national finances?

Brendan Burgess

Brendan Burgess

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(Extracted from another thread as Mandlebrot raises an interesting question.)

The difference now is that we have €200 billion of borrowing which we have to pay interest on.



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· When interest rates rise, the true cost of our €200 billion and growing national debt will hit home
 
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Brendan Burgess said:
· When interest rates rise, the true cost of our €200 billion and growing national debt will hit home
Click to expand...

Maybe I'm ignorant as to how these things work, but surely increasing interest rates only affect us as we roll over the borrowings, issuing new paper in order to repay the bonds falling due for repayment? Is there detail somewhere as to the breakdown of the 200bn by time remaining to maturity - I though that some of the debt is very long dated?
 
torblednam said:
surely increasing interest rates only affect us as we roll over the borrowings, issuing new paper in order to repay the bonds falling due for repayment?
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Hi mandlebrot

You are dead right.

It's not a simple question that we are paying 0% of €200 billion today and if rates rise to 4% next year, we will be paying €8 billion.

We have the equivalent of a series of fixed rate mortgages with different maturity dates.

Those that expire now we can refinance at close enough to zero %.

But when interest rates rise, we will be refinancing the new ones at higher rates.

Brendan
 
I have sent this question to the NTMA

"The NTMA website is very useful.

But one thing I can't find out, although I suspect it's there. How much is debt servicing expected to cost us into the future?

If debt servicing in 2017 is €6.29 billion, should we expect it to fall as more expensive debt matures and we can refinance it with cheaper debt?

When interest rates rise, how will it affect the cost of our national debt?

Has the NTMA issued anything on it in public?"
 
Hi mandlebrot

Here is the schedule of outstanding bonds

http://www.ntma.ie/download/dail_bonds_outstanding_reports/OutstandingBondsReport2017-10-10.pdf

There is about €45 billion of bonds at rates of between 4% to 5.9% maturing between now and 2020. These will be replaced by much cheaper bonds.

So the interest bill will fall in the near future.

However, if we need to borrow in the medium term and rates have risen by then, there would be a significant increase in the amount spent on interest. Of course, if the economy and government revenues have risen by then, the interest may be affordable.

There are two rough scenarios:

Everything goes well. The economy will grow. We won't need to borrow more. Interest rates remain fairly low. Economic growth and growth in government revenue will make the debt servicing affordable.

Everything goes wrong. Brexit or Trump causes an economic decline. Interest rates rise. We need to borrow more and it will be at much higher rates.



Brendan
 
Hi Brendan,

I am not an expert on bond refinancing, but since we can theoretically borrow at 1.7% for 20 years, would it not be an idea to repay all outstanding bonds > 1.7% with refinanced, new bonds at 1.7%?

It is difficult to envisage 20 year interest rates falling much below 1.7% I would have thought.

This could reduce our annual payment from 6.29bn (from your figure above) to around 3.5bn..

Firefly.
 
Brendan Burgess said:
When interest rates rise, the true cost of our €200 billion and growing national debt will hit home
Click to expand...
it's not just a matter of what borrowing costs. Ireland is required by the EU's stability and growth pact to have a medium term budgetary objective of a structural deficit (i.e. a persistent budgetary deficit) of 0.5% of GDP. It's currently 0.7%. Under the SGP Ireland's debt to GDP ratio should be 60% by 2019. It was 87.6 % in 2016. According to the EU https://ec.europa.eu/info/sites/info/files/2017-european-semester-country-report-ireland-en.pdf) IE's debt to GDP reduction is due to increased economic activity rather than debt reduction. Also, the Irish Fiscal Council has commented negatively on IE's high debt levels.http://www.fiscalcouncil.ie/pre-budget-statements/pre-budget-2018-statement/.

That's the reason for the stability pact, the fact you can finance a deficit regardless of the business cycle is just a cover up for poor management of the public finances. So even though we could probably refinance debt and probably could take on more, we really should be reducing it. And not just because we are required to do so under EU rules, but because it is good and prudent ffinancial management.
 
Hi PMU

Agree fully that we should manage our finances properly because it's the right thing to do and not just because the EU tells us to do so.

The IFAC summarises it well in the link you provide:

"Debt levels still remain very high, which leaves Ireland vulnerable to adverse shocks such as those from a harder-than-expected Brexit impact. On the basis that GNI* is a more appropriate measure of national income for Ireland than GDP, this suggests that Ireland’s net debt burden ranks as the fourth highest in the OECD."
 
We have been repaying more expensive debt, as much as possible, and issuing cheaper debt to replace it.
 
Protocol said:
We have been repaying more expensive debt, as much as possible, and issuing cheaper debt to replace it.
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Yes, but as BB said in post # 10 often the interest rates and terms of historic debt are fixed. According to this [broken link removed] Ireland's implicit interest rate is about 3.4%, a figure confirmed by the NTMA at a PAC meeting last year.
 
Whereas if I'm holding Irish debt that's paying 4%, I'm hardly going to let them redeem it early at par. The interest bill should go down.

One wonders whether it would be prudent to borrow "too much" now to redeem down the line?
 
Global debt has increased massively over the last 10 years.
The latest figures I can find are here, showing an increase of $57 trillion or 40% between 2008 and 2015. That can only have increased in the last 2 years so, with such an increase, are we still fundamentally in the same place as we were in 2008 with a sea of cash quantitative easing disguising the fact that nothing's really changed? If so what are the implications for a country like ours with such a massive debt and such an open economy which is so reliant on a narrow and unreliable stream of tax revenues?
 
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