Presuming this is a zero coupon bond (no annual payments), it’s essentially a note saying “we will pay you €1000 in 10 years time”. The price the market is willing to pay for this dictates the interest rate, if I’m only willing to pay €800 for the deal then it’s a 25% interest rate over 10 years, which is 2.2% annually. Presumably selling more would have made them worth less, increasing the interest rate (also confidence might go down if we sold too many).

Thanks Brendan.

There is one thing I still don’t get. You explained that the price of the bonds (and thus interest rate) depends on the demand, and therefore if Ireland had sold more of them the interest rate would have been higher, right?

If I get that right, I don’t understand how it makes sense to say that there was an demand for 12 billions … As the 12 billions on offer would have been for something different than what was sold (bond with higher interest rate). And if lets say 12 billions were on the table for potential 5% bonds, and maybe by offering 5.5% we could have raised 20 billions?

You know what I a getting at? If you change the quantity sold you change the interest rate, so how can you say that for a given quantity that was sold with a given interest rate, the demand was actually higher?

Boris
Ireland (NTMA) was hoping to borrow €3bn. Various different investing institutions made offers of how much they were prepared to lend and at what interest rates. All offers totalled €12bn so in theory NTMA could have borrowed that much if it had wanted to. Instead it chose to borrow to the tune of €5bn at the best interest rates on offer.

I’m not really sure why they chose to borrow an extra €2bn above what was hoped for – my view is that if we had waited until that money was needed we might have got it at a better interest rate.

That’s my understanding of the situation anyway – maybe someone more knowledgeable than me can correct me if I’m wrong…

Ok, makes sense!

In all seriousness. I would love a little refresher in all this bonds business myself as a lot of people just read the misinformed comments and regurgitate.

They are Sovereign Bonds issued at 10 years. This means that we have as most country’s normally do and we did up to September 2010 went to the market saying that we are looking to borrow money for 10 years. Every year we will pay a coupon or better known as the interest only back to the lender and at the end of the 10 years repay the full €5 billion we originally borrowed. What normally happens is we borrow another €5 billion to roll over the debt. Anytime we borrow this way we add to our national debt. This does not affect out existing amount of debt, it’s still there and growing :(

The reason the lending Is such big news is that we are borrowing money from the markets (Private investors, pension funds, banks and other such institution) instead of a direct loan from the EU or IMF where they instruct us on how the money is spent. When we borrow privately they for have any direct oversight in how we spend the money.

Hope that provides some clarity :-)

Kev – We’re spending about a billion euro a month more than we’re raising in taxes. We have to make up the gap by borrowing.

Before the bailout, the cost of borrowing got crazy, which effectively meant we had no choice but to go to the IMF, EU and ECB. They loaned us the money which kept public services running.

NTMA has now been able to borrow in the markets, which (probably) means that we won’t need a second bailout. We still have to pay it back eventually, but not for 10 years, at which point we will probably issue new bonds.

What we do have to pay every year is the interest. That looks to be somewhere less than €215 million a year. The bailout interest rate is 5.8%, so borrowing the same amount from the Troika would theoretically cost us €290 million a year.

The rest is opinion :)

It does Brian (and Emily), thank you very much (judging by my red thumbs this site is becoming less and less about actual information, nor do people want to seek it).

I’m assuming that inflation will mean that we would have to pay less in ten years time? But we would have returned to the markets, so we would actually have an economy at that stage hopefully? In saying that, and please correct me if i’m wrong but isn’t this whole “selling debts to lenders at interest” thing creating the bubble in the markets that is currently screwing us over?

Also Emily are you saying we’d have the option to push the bonds furter down the line in ten years by doing something similar? I think i remember hearing that the UK are still paying off WW1 and WW2 debts today, is this the same story?

Great work Stoksey

We’ll have to pay back €5bn, but you’re right, inflation may have eroded that. If we have inflation of 2.5% a year, that will only be worth about €3.9bn in today’s money. (Only!)

And yes, debt is regularly refinanced – in fact it has to be unless you can run budget surpluses. So we will borrow the same €5bn in 2023, or slightly earlier. If the economy’s prospects are better, then it should be at a better (i.e. lower) interest rate.

Lenders don’t actually want their capital back, except where they can get a better return for their perceived risk elsewhere.

Thanks very much Emily you have made all this much clearer to me.

Thanks Adebayo and likewise to Emily for a fantastic explanation.

http://bit.ly/16s2NVW

But look Ignoreland!!! People reading these comments who would have an opinion without actually reading any information themselves, might actually learn something today thanks to Emily and Brians explanations.

For the benefit of readers who may not have seen it before…

Cheers Gavan

I did! thanks guys!

Bank of Japan, the US Fed and British Central Bank are lending at record low levels. ‘Investors’ borrow from them to lend to high yielding government bonds like Irish ones. A no-brainer, except it all it does is create another bubble and ultimately someone (typically your average tax payer) will pay!

No worries Kev.

You’ve nailed the issue of growth and borrowing on the head. The only way any society can pay down debt which has interest is by hoping to inflate away the real cost of it in the future. Being aboe to get money lent to us on the financial markets doesn’t guarantee that our economy will improve but some would take the confidence shown by other to lend tony as a sign that they believe we are a good bet to grow.

There is a important place for opinion in the comments section as long as its backed by facts but most important is that when people ask for some
clarity they get it.

Have a great day Kev

@ The Irish Bull – Bond selling essentially provides cashflow. If we don’t sell bonds in the international markets, the only income the state is the tax take, and a large chunk of the tax take comes in at one point in the financial year. I honest don’t any Irish government, composed of any party, would be able to keep the country running if it told it’s employees and service providers that they would get paid once a year, a year in arrears. If you have an alternative solution that does not involve selling bonds or regularly borrowing from an outside source, there’s a well-paid job and possibly a NObel prize waiting for you.

@ Jenny – give it a rest, if you’ve nothing to say except blow raspberries..

Not just economically and fiscally illiterate, but gramatically illiterate too…

Nicholas,
These bonds are being bought by the ECB to try and give the perception that the Irish economy is returning to a fiscal normality. If you can’t see that we’ll your loss.

Peter,
Only person who can’t see a Ponzi derived ECB bond buying scam and the illiterate fiscal falsehood of such an action is yourself.

@ Al – oh dear…

1. Where exactly are you sourcing your information? Have you a NWO cigarette-smoking man hidden int eh shadows. Could the rest of us just not handle the truth?

2. Why do the identities of buyers of these bonds make a difference to the yield that we’ve received on the bonds? No whatsoever.

A little less conspiracy theorising and a little more understanding of the subject at hand would do wonders for your credibility.

STOP PRESS: The DCC is cleaning the streets of Dublin to give residents the false perception that the streets are being cleaned. Don’t be a gullible fool and fall for their illusions. Just because the streets have been cleaned doesn’t mean that the streets are cleaner than before they were cleaned. Um…..?

Can you see the flaw in my argument here, Al?