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Irish economy to be powered by a drop of 2% in interest rates


patslatt

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It is early days yet in the government austerity programme (austerity feels interminable!),considering it is under way about a year and a half compared to about six previous years of often profligate spending.Assuming the government sticks with the austerity plan agreed with the EU Commission for another year,interest rates on Irish bonds and Irish banks' international borrowings could begin dropping sharply-maybe two percentage points on ten year government bonds-as fears of an Irish sovereign debt default recede in financial markets. This would lift a massive drag on the economy given that the disinlation and deflation trends in most industries except semi-states make present interest rates very high in real terms.

By removing this drag, a two percentage point drop in interest rates would likely power a strong economic recovery. The government would be less likely to increase taxes as its interest burden lightened and this coupled with the reduction in mortgage and business loan interest rates would encourage both consumers and business* to increase spending strongly. Lower interest rates could also lead to an increased supply of credit to small businesses which desperately need credit. Irish banks could use the two percentage point drop to widen the spreads earned on small business loans over the banks' own costs of borrowing,which would make such lending very profitable indeed.

This outlook could be undermined by several possible negative developments,such as a double dip recession in Europe,a tsunami of Irish mortgage defaults that would require the nationalisation of Irish banks and an attempt by the government to reduce the deficit by increasing taxes instead of cutting spending. The odds of these happening are probably low.

*UK businesses now hold the highest ever proportion of liquid assets and cash to total assets by historical standards, which could power a major economic expansion if and when confidence returns. An interesting question is whether large Irish businesses are in that position.
 
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rockofcashel

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Can ECB rates get any lower?
He's talking about international bond markets and the cost of money given to the Government for sovereign debt.. currently around 5.5%

Given that the German bond rate is around 3%, a 2% drop would mean that international bond markets would consider Irish sovereign debt a better bet than Germany's.

Once again, I have to wonder, what planet Pat is on.
 

Edo

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What interest rates are we talking about here Pat?

Given the ECB rate is at 1% currently 1 -2 = -1???

Or are you talking about the interest we have to pay out on Gov bonds?

Either way - its completely out of the Governments hands and no amount of sweet talking blamaas is going to convince the international markets that Ireland deserves a better credit rating than Germany or even that close to Germany.

Like the israelis we have to create "facts on the ground" to justify this................

Sweet Jesus - if my aunty had balls she'd be my uncle etc etc etc..............
 

Cassandra Syndrome

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Yeah nothing like more debt to fuel the recovery. 500% of our income is just simply not enough. Lets rack her up to 1,000% boy, sink the welly and plough on. How we're sucking diesel....

If this was April 1st I would understand and laugh. But how I want to cry.
 

MPB

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Yeah nothing like more debt to fuel the recovery. 500% of our income is just simply not enough. Lets rack her up to 1,000% boy, sink the welly and plough on. How we're sucking diesel....

If this was April 1st I would understand and laugh. But how I want to cry.
+1

I just cannot understand the blind faith, in the solution of asking ordinary taxpayers, to take on the debt of Banks and Govts, just to make sure that wealthy bondholders and Institutional Investors do not have to partake in the reccession.

Surely the way to Economic recovery is to place the burden on the wealthy bondholders by way of a writedown in the debt to be repayed and to free taxpayers and consumers from the burden of debt.

There needs to be a massive redistribution of global wealth and now seems like as good a time as any to start.
 

waterford

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+1

I just cannot understand the blind faith, in the solution of asking ordinary taxpayers, to take on the debt of Banks and Govts, just to make sure that wealthy bondholders and Institutional Investors do not have to partake in the reccession.

Surely the way to Economic recovery is to place the burden on the wealthy bondholders by way of a writedown in the debt to be repayed and to free taxpayers and consumers from the burden of debt.

There needs to be a massive redistribution of global wealth and now seems like as good a time as any to start.
+100..but oh in dreams we live. :)
 

kerdasi amaq

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Our elected politicians, in this country, are little more than errand boys, permanently squabbling over which of them can please their foreign masters the best.
 

patslatt

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He's talking about international bond markets and the cost of money given to the Government for sovereign debt.. currently around 5.5%

Given that the German bond rate is around 3%, a 2% drop would mean that international bond markets would consider Irish sovereign debt a better bet than Germany's.

Once again, I have to wonder, what planet Pat is on.
5.5 - 2 = 3.5, which is greater than 3.
 

Aristodemus

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The problem is not the cost of credit but its availability.
 

SPN

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patslatt

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Austerity masochism

What interest rates are we talking about here Pat?

Given the ECB rate is at 1% currently 1 -2 = -1???

Or are you talking about the interest we have to pay out on Gov bonds?

Either way - its completely out of the Governments hands and no amount of sweet talking blamaas is going to convince the international markets that Ireland deserves a better credit rating than Germany or even that close to Germany.

Like the israelis we have to create "facts on the ground" to justify this................

Sweet Jesus - if my aunty had balls she'd be my uncle etc etc etc..............
The premiums over German bonds were small for years until Greece blew up. Assuming Ireland sticks to the austerity plan,bond markets will become confident and reduce the Irish premium. It is worth waiting patiently for a year to find out,especially as the economy is recovering.Then if this economic austerity view is wrong, we can renegotiate sovereign debt in good faith after an honest austerity effort and try Keynesian stimulus. The bond market doesn't expect us to be austerity masochists for no interest rate reward,presumably.
 
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patslatt

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Yeah nothing like more debt to fuel the recovery. 500% of our income is just simply not enough. Lets rack her up to 1,000% boy, sink the welly and plough on. How we're sucking diesel....

If this was April 1st I would understand and laugh. But how I want to cry.
A drop in interest rates would help both the government's finances and the Irish struggling with interest bills.
 

patslatt

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Cut of 25% in government spending if debt renegotiation

+1

I just cannot understand the blind faith, in the solution of asking ordinary taxpayers, to take on the debt of Banks and Govts, just to make sure that wealthy bondholders and Institutional Investors do not have to partake in the reccession.

Surely the way to Economic recovery is to place the burden on the wealthy bondholders by way of a writedown in the debt to be repayed and to free taxpayers and consumers from the burden of debt.

There needs to be a massive redistribution of global wealth and now seems like as good a time as any to start.
Debt renegotiation is a last resort and could push the country into bankruptcy and deep depression from an economic shock if handled badly,given that government spending would have to be cut by about 25% as the international bond market shut down to Ireland and its banks.
 

patslatt

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availability of credit is a function of real interest rates

The problem is not the cost of credit but its availability.
The availability of credit is a function of real interest rates. At very low interest rates,the debt burden is lighter,other things being equal such as the inflation rate. Of course, in a period of disinflation and deflation such as experienced in many industries now,even low nominal interest rates can be high in real terms. Interest of say 3% plus deflation of 2% is a real interest rate of 5%.
 

Cassandra Syndrome

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A drop in interest rates would help both the government's finances and the Irish struggling with interest bills.
How? The problem with interest rates isn't that they are too high, its because there is too much debt to begin with.

On the flip side there is no interest for savings. Thats the core of the whole sorry state of affairs.

Debt forgiveness is the only solution to this carnage not more cheap debt.
 

MPB

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Debt renegotiation is a last resort and could push the country into bankruptcy and deep depression from an economic shock if handled badly,given that government spending would have to be cut by about 25% as the international bond market shut down to Ireland and its banks.
I am talking about the solution on a global scale.

The Bond Markets, the big Investment Banks like Goldman Sachs and the Fedral Reserve also a Goldman Sachs controlled entity seem to have convinced the Worlds Govts that the tax payers must pay for the global Bank bailout.

It is time Govts stood up to the BondMarkets and rebalanced the worlds financial system.
 

hammer

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Will not happen, but here`s hoping.

2% of National Debt €100,000 million is a nice little saving of €2,000 million = to tax / spending adjutment in 2011 budget.

2% of Debt in SPV also a further saving :)

Happy days.
 

DCon

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A drop in interest rates would help both the government's finances and the Irish struggling with interest bills.
A drop in the interest rates of government debt will have no effect on the Irish struggling with interest bills.
 
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