A long ways to go

Michael Taft: It is difficult to come to a judgement on the NTMA bond sale. That we entered the bond market accessing new money is a plus, especially against a backdrop of yet another twist in the Eurozone crisis. That it builds up liquidity assets in anticipation of a large bond redemption in January 2014 is another plus. However, there are downsides and disappointments.

NamaWineLake compares the costs of the new bonds with borrowings from the EU-IMF bailout and finds that it will cost us nearly €1 billion more in interest payments up to 2020. However, this may not be the best comparator as it is the intention to exit the EU-IMF deal late next year. To test the water, so to speak, was always going to prove expensive at first.

There are two better comparisons. First, how do the interest rates compare with the secondary market? On the day of the bond sale, this is how the comparison stood using Bloomberg data.

For the 5-year bond (raising €3.9 billion):
• Bond sale: 6.1 percent
• Secondary market: 5.3

For the 8-year bond: (raising €1.3 billion):

• Bond Sale: 6.1 percent
• Secondary market: 6.2 percent

The majority of funds (from the 5-year bond sale) were borrowed at rates that compare badly with the secondary market. This is a disappointment. The 8-year sale just beat the interest rates on the secondary market.

Another comparison is with the beginning of 2010 – the year we started sliding into the bail-out with interest rates getting out of control. However, at the beginning of the year out interest rates were sustainable, though still high by comparison with most other EU-15 countries.

For the 5-year bond sale:

• Bond Sale: 5.9 percent
• January 2010: 3.3 percent

For the 8-year bond sale:

• Bond Sale: 6.1 percent
• January 2010: 4.5 percent

Again, the 5-year bond compares badly while the 8-year comparison shows a significant gap.

Can we close these gaps on a permanent basis by the end of next year? The only thing we can conclude from last week’s intervention is that we have a long, long way to go.

Posted in: Banking and finance • Fiscal policy

Tagged with: NTMA • bondmarket

Michael Taft     @notesonthefront

Michael Taft is an economic analyst and trade unionist. He is author of the Notes of the Front blog and a member of the TASC Economists’ Network.