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November 23, 2010



It strikes me that after 13 years of every item of spending being labelled 'investment', we don't actually recognise a real investment when we see one...

Niklas Smith

Amen to what Gary said. Raising nurses' salaries is not "investment", however deserved it may be.

Chris: A very good post as usual. Sweden's finance minister Anders Borg has apparently surprised international media by offering to lend Ireland 5-10bn SEK (£450-900 million). The next morning the radio news here in Sweden reported that such a loan would be highly profitable for the Swedish exchequer because Sweden's borrowing rates are much lower than the likely rate charged on such an emergency loan. Not a word was said about default risk...

Adam Bell

Bagehot has a cracking post on the way in which this liability came about through the EU's funding mechanism. It's very explicitly a liability as consequence of us signing up to the rapid reaction stabilisation fund rather than a UK Gov loan per se:


Tom Freeman

"Lending to Ireland brings with it the risk that Ireland won’t repay"

But Osborne doesn't think so: "we are making a loan to another sovereign nation that we fully expect to be paid back... This is a loan that we can afford to make and which we will get back".

Given that Ireland's credit ratings are well below any downgrade the UK has been threatened with, why was he going around saying such a prospect would be apocalyptic for the government's credibility?


"Given that Ireland's credit ratings are well below any downgrade the UK has been threatened with, why was he going around saying such a prospect would be apocalyptic for the government's credibility?"

He's an idiot or a liar. You get to chose.


If I naively assume the gilt market is perfect, doesn't 7.7% interest reflect a high degree of risk of default?

Also, Osborne cut government spending by £7bn because he said we couldn't afford to borrow it, and because borrowing would risk our credit status. Borrowing it and giving to Ireland seems like a double-whammy if what he said about the UK's credit status was true. We now have £7bn of dodgy loans on our balance sheet.

I don't really understand how Ireland can service 7.7% on its loans when its broke, has little corporate tax receipts and has no real prospect of growth. Where's the money coming from?

Also, wouldn't the money be better spent lending to UK businesses at say 5%, which will increase UK GDP and likely give a greater take from tax receipts than Ireland will give us.


"The terms of the loan are not yet known, but let’s assume for illustration that the interest rate is 7.7%, the current yield on five year Irish gilts"

Hold on a minute. Isn't that the market price of already-issued (at much lower rates) Irish gilts at the moment? Haven't the Irish stopped gilts issuance until next summer?

I thought that if the Irish could only sell gilts at 7.7% they'd be effectively bust and in a debt spiral where the cost of debt servicing exceeds austerity savings.

Ireland could presumably get around 7.7% in the open market by issuance. Therefore, whatever the rate we're lending at is, it's likely to be much less than 7.7%. At which point the question of default risk arises.

The politics of this are likely to be more beneficial than the economics, but I wouldn't bank on either.


So, Osborne can borrow after all and at a cheap rate. Wonder why the austerity is needed so .

It also seems that we will be lending at a rate lower than existing bond yields which factor in the default risk. And if there is a default, that might be because the Irish banks themselves default on their loans, including those to RBS and Lloyds, so we have doubled up the risk.

It is important that we see the terms of this loan, including interest rate and currency. Luckily it will need to be passed by Parliament so there will be some transparency.

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