Monday, September 20, 2010

The cost of money

Ireland is massively in debt - I think we can all agree on that. The state currently spends somewhere around 50% more than it brings in through taxation. That money is raised on the international bond markets by the National Treasury Management Agency (NTMA). Over the last few weeks the cost of Irish Govt bonds on the secondary market has risen substantially, with rates having risen to 6.459% at close of business today. However, that is not the rate that the state is currently paying for its bonds as those rates are fixed when each bond is issued.

You can see from the graph (from Bloomberg), that in the last month Irish bonds have risen to record highs. The previous spike in May coincided with the Greek financial meltdown and the knock-on effects for the rest of the Euro zone. This month's moves are entirely of our own making.

The big test comes tomorrow (21st September) when the NTMA is holding an auction for between €1B and €1.5B of 4 and 8 year bonds. In the past the spin from NTMA and the Minister for Finance has been how over-subscribed each bond issue has been, while ignoring the rate that is being paid. I have no doubt that tomorrow's auction will also be oversubscribed but with many offers being in the 7%+ range. If the issue comes out with an average cost of 5% or thereabouts then we won't have done too badly. Yes that is still a huge amount more than the Germans pay, but it is still 1.5% less than the market currently thinks we should be paying.

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