Consequences of the debt

Pa ElGrande

European Central Bank has bought half of Irish bond sales in 2020

The ECB purchased €3bn of Irish Government debt in August and September via its Public Sector Purchase Programme (PSPP) and Pandemic Emergency Purchase Programme (PEPP) schemes.

It has bought €11bn of Irish government bonds since the start of this year.

By flooding the bond market with cash the ECB creates scarcity that means bondholders are forced to accept lower yields if they want to hold the debt. This has slashed borrowing costs for countries including Ireland. While the scale of purchases is enormous, the ECB's rules mean it should not hold more than around a third of Irish bonds.

The ECB has bought €44bn of Irish bonds so far, while the Central Bank here holds another €7.5bn of government floating rate notes, a type of bond, linked to the old Anglo Irish Bank promissory note. The Central Bank is now by far the country's biggest creditor while its purchases are a key factor in driving down borrowing costs for the State and making the deficit this year, expected to be more than €20bn, affordable.

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ECB has essentially destroyed the bond market for European government debt. The artificial pricing gives governments a the inventive to run up debts and no doubt there will be economists saying the government should load up while it is so cheap. Irish taxpayers collectively will be €248 billion in the hole within 2 years at this rate, this currently costs €5.2 billion to service the interest alone on the debt, which is coincidentally the same as the revenue from so called environmental related taxes, so you can guess where the en vogue method of tax increase is going.

Eddie Hobbs: Your savings are collateral damage in the new rules of the game

The latest surge in excess global debt cannot be serviced, except by crushing interest rates for up to a decade or longer. Central Banks know this, that letting loose inflation is the only way out, while Governments jack up borrowing to world war levels hoping to reignite growth faster than the debt piles up. The ECB intends to ride shotgun, letting time and inflation erode the real value of outstanding debt while they play their part by crushing rates into negative territory.

Savings are collateral damage in the new rules of the game. Irish Banks are charging up to -0.65% to hold cash. So far, it has sharply curtailed Credit Unions capacity to take in cash and is hurting corporate deposits, trusts and charities, but it is coming your way next year once it seeps down from seven-figure consumer deposits. You can ignore bank propaganda to the contrary.

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There is no such thing as a free lunch and debt schemes like this run out of road eventually, or did we learn nothing from the building boom and bust? All that debt got transferred to the taxpayer and the central back via the ECB. Even the ECB cannot play this game forever and even though they have been at this since 2014, they are not getting the inflation rate they want. Debt default and reset and consequences that follow seem the only way out, eventually will Ireland be the next Argentina?

mariaalice

Pa ElGrande wrote: »

European Central Bank has bought half of Irish bond sales in 2020



ECB has essentially destroyed the bond market for European government debt. The artificial pricing gives governments a the inventive to run up debts and no doubt there will be economists saying the government should load up while it is so cheap. Irish taxpayers collectively will be €248 billion in the hole within 2 years at this rate, this currently costs €5.2 billion to service the interest alone on the debt, which is coincidentally the same as the revenue from so called environmental related taxes, so you can guess where the en vogue method of tax increase is going.

Eddie Hobbs: Your savings are collateral damage in the new rules of the game




There is no such thing as a free lunch and debt schemes like this run out of road eventually, or did we learn nothing from the building boom and bust? All that debt got transferred to the taxpayer and the central back via the ECB. Even the ECB cannot play this game forever and even though they have been at this since 2014, they are not getting the inflation rate they want. Debt default and reset and consequences that follow seem the only way out, eventually will Ireland be the next Argentina?

What would you do, its alright given out but you have to have a solution.

Who is the money borrowed from?

Smee_Again

What’s the alternative? Massive cuts to spending, increased unemployment and higher taxes?

Borrowing is fine if the borrowed money is spent wisely, remains to be seen if it is though. A huge increase in social/affordable housing is needed so hopefully they can deliver on that.

Fred Cryton

Agree with you OP. Creates an incentive for governments to run up debts, and of course the Irish government are the first to fall for the magic money tree.

It is true however that debt only matters as a percentage of your income. Doesn't matter in isolation. A €200k mortgage is crippling to someone earning €25k per year, but is not a bother to someone earning €150k.

Basically the bet is that we will grow our way out of the problem. Debt to GDP ratio is what matters, alongside the actual servicing cost. If we have a prudent government which reduces the deficit steadily and encourages business growth, then we should be ok. The markets must be shown that we know what we're doing. For this reason the biggest threat by FAR to the stability of this nations finances is SF getting into power.

mariaalice

The OP hasn't come back with their solution?


Anyone else got a solution that would not involve almost collapsing the economy.

Cluedo Monopoly

What advice would you give to the ordinary punter on the street with respect to their savings etc?

Smee_Again

Cluedo Monopoly wrote: »

What advice would you give to the ordinary punter on the street with respect to their savings etc?

Pay down debt or invest in a pension.

Pa ElGrande

mariaalice wrote: »

What would you do, its alright given out but you have to have a solution.

Given the traditional restraints on EU governments imposed by high interest rates and devaluation have been removed (no brakes), the ultimate solution will probably come in the form of sovereign debt default and dissolution of the euro. I don't really know what form the next financial crisis will take but if I am trying to compute the consequences of a sovereign debt default for Ireland many dystopian consequences open up for a state with a high welfare dependence. Any solutions will be dictated by the market situation that exists when the current cycle ends.

The debt means further erosion of whatever sovereignty Ireland still has which affects relations with our neighbour (GB and N. Ire), we are now a dependency of Brussels and have to walk their line to keep the "free debt" flowing.

suicide_circus

It was decided after the austerity which followed the last recession that with interest rates so low that national debt is an irrelevancy. Financial prudence is an anachronism. Borrow borrow borrow - what could go wrong?

Nobotty

I posted this in the budget thread
But if it pans out correctly and with the caveat that we don't know what covid will bring in 21,I don't think Ireland's rates will go up much at all if by anything

https://twitter.com/drdanmclaughlin/status/1316307040877383683?s=19

Pa ElGrande

Nobotty wrote: »

I posted this in the budget thread
But if it pans out correctly and with the caveat that we don't know what covid will bring in 21,I don't think Ireland's rates will go up much at all if by anything

The rates have been artificially held down due to the actions of the ECB since ~2014, so while that holds there won't be much.

Nobotty

I think QE like that might have another decade to run by the looks of things
The low or negative borrowing has fueled Irish growth as has its other consequence, the dampening of the Euro
I'm not too worried as long as things stay prudent, covid excepted.