Solidarnosc

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The government have finally announced the details of their National Solidarity Bond mentioned in the last budget and previously recommended by ICTU and Fine Gael. The brochure is here. The bonds will pay an interest coupon subject to DIRT of 1% per year and then have a final tax-free balloon payment of 40% when the bond matures at ten years. You can get your money out at any time with seven days notice but the tax free lump sum element is much smaller in this case. Held to maturity, the bond has an after tax Annual Equivalent Return of 3.96%.

On the face of it, the initiative is a bit puzzling. This after-tax rate of interest is lower than the current yield on ten-year government bonds, which is now at 5.2%. However, this scheme will most likely move money out of domestic bank savings accounts (at a time when they really need them) and the government will then be forgoing the DIRT tax that these funds would have paid on the interest payments from those accounts.

For example, if the alternative investment strategy was to obtain a 4% rate for a similar long term savings account, then with DIRT at 25%, the government would be foregoing 1% per year in tax payments. This would bring the real net cost of this scheme to 4.96% per year. Add in the additional administrative cost of dealing with lots of small investors and this doesn’t seem to be a particularly cheap source of borrowing.

In addition, the NTMA already offers a range of products aimed at small investors that carry slightly lower rates with maturities of three or five years. The Solidarnosc bond offers a higher AER in return for tying up your money for a longer period. It seems more like a term premium than national solidarity.

I suspect, however, that my behavioural friends out there will tell me that the existence of a bond with a catchy name like this will uncover a large previously untapped source of funds for the government. Perhaps. I guess we’ll find out. Alternatively, a simple advertising campaign to inform the public about the existence of state savings schemes may have worked just as well.

Finally, I’d note that I don’t agree with Fine Gael’s Simon Coveney that the proceeds from this bond should be ring-fenced for infrastructural projects. Money is fungible. The fact that some money is raised from a new source with a catchy name shouldn’t in any way change the processes used to assess which types of public spending should be prioritised.

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38 Responses to “Solidarnosc”

  1. Brian Lucey Says:

    Karl, Karl….you arent thinking. Sure we will lend this money to Greece at 5% and get a return….
    Its the same as the free money from Brussels that we got for NAMA.

  2. Brian J Goggin Says:

    @Karl Whelan:
    “I suspect, however, that my behavioural friends out there will tell me that the existence of a bond with a catchy name like this will uncover a large previously untapped source of funds for the government.”

    Sure. And popular trust in the government will mean citizens will be anxious to support this new initiative.

    Or perhaps not.

    http://www.irishtimes.com/newspaper/ireland/2010/0429/1224269287302.html

    bjg

  3. vinny Says:

    An absolutely useless product which epitomises the massive dearth of any kind of innovative thinking around issues which are meant to stimulate investment in economic infrastructure – a complete joke………..

  4. Geckko Says:

    I think they have some front calling this a “bond”, given it won’t be a transferable security.

    10 year fixed term deposit, with draconian early withdrawal penalties is more honest.

  5. Brian Flanagan Says:

    Solidarity with who? Arguably, every cent raised by the National Solidarity Bond will be needed to bale out reckless banks and greedy developers rather than improve the infrastructure.

  6. Sickofit Says:

    I don’t understand the logic of this……Normal joe soap will see this as another SSIA and will jump at the 50% return promise. They will gather their deposits from our banks & land the cash in this…..Will this not cause further problems for the banks???

  7. Joseph Says:

    Posted in another thread but should be here:

    @Pat Donnelly – interesting Irish Examiner link/.. “…
    not to use the extra cash as a cover for cutting back on state funds already allocated to the capital building programme”

    I’m sure the thought never entered their (government) heads.

    This isn’t a spoof is it? I would have thought that if anything that looked like another SSIA scheme cropped, up at a time like this, it would take so much money out that the retail sector would collapse

  8. Joseph Says:

    ….. and…..

    …..they won’t be sending this money off to the Isle of Man and then sending it back into Irish bank accounts will they? Better get Charlie Bird and George Lee on the case if they do!!

  9. Joseph Says:

    “…..shouldn’t in any way change the processes used to assess which types of public spending should be prioritised.”

    Would that be the process outlined by Dr. Suiter’s research used on Primetime last night? i.e. priority is given to any minister’s home constituency. Oh well, at least it’s not a complicated process!

  10. Karl Whelan Says:

    @ Joseph

    Hmm. Indeed

    “…..shouldn’t in any way change the processes used to assess which types of public spending should be prioritised.”

    was poorly worded.

    I didn’t at all mean to suggest that current processes were in any way optimal! Just that having money from something called a Solidarnosc Bond wasn’t a good reason to change the composition of spending in some particular way.

  11. Brian Lucey Says:

    this is a sop to the PS unions as I understand. It SOUNDS good, warm and fuzzy. Mmmmmm….solidarity….who could be against that.
    The politics of meaningless optics – now with added second, third and n-th order effects.

  12. Drumroe Says:

    I don’t like “solidarity” with thugs and crooks.

  13. simpleton Says:

    From the Economis website:

    “As a final choice morcel of paranoia, here is a quote from Jean-Paul Fitoussi, a French economist interviewed in the left-wing paper Libération today. M. Fitoussi has some sensible things to say about how the EU’s political cacophony bears a lot of the blame for Greece’s current agonies. But then he asks aloud why Ireland is not suffering the same “market attacks” as Greece, when its debt and deficit numbers are actually worse. Even taking account of the fact that Greece lied about its public accounts, he says, there is another reason:

    “Because [Ireland] is a tax haven for capital. Greece does not have that card to play.”

  14. Eamonn Walsh Says:

    @Karl
    To me, the bond is interesting for two reasons. First, it is puttable – unlike a straight bond, the investor can redeem at par (or above par after year 5). It would be interesting to value this feature. Second, I presume that for governmental accounting purposes, the interest expense will be 1% rather than the >5% payable on a 10 year bond in years 1-9.

  15. MickeyHickey Says:

    I hope that twenty years of prosperity have not left us so soft in the head that we would contemplate buying Irish gov’t bonds. Particularly bonds with an end loaded balloon payment. Reminds me of the shyster leased car market in some countries where the headlines scream no down payment, low monthly payment with the balloon payment on page 7 in small print. Personally I would not touch the sovereign debt of PIIGS with a barge pole. Interest rate freezes and principal haircuts of at least 25% are just about guaranteed. FF have a two year horizon at this point in the game and ten years looks like it will never arrive and when it does FF will hopefully be a distant memory.

  16. Drumroe Says:

    http://news.bbc.co.uk/2/hi/europe/8653238.stm

  17. Drumroe Says:

    That link was for this: Ireland to demolish ‘unwanted’ homes

  18. Drumroe Says:

    How will these bonds help when not even the IMF can help: http://www.zerohedge.com/article/2-trillion-3-year-funding-needs-piigs-imf-helpless-do-anything-sit-back-and-watch

  19. Joseph Says:

    @Drumroe

    Those figures for Italy look pretty frightening. I’m surprised the Italians haven’t come under more scrutiny. Would you know how much the government there receives in tax take every year?

  20. Is the Solidarity bond being sold properly? - Page 3 Says:

    [...] more interested in that than feargach’s blue sky thinking on how best to market the bloody thing: The Irish Economy Blog Archive Solidarnosc) __________________ This signature has been discontinued on account of the [...]

  21. Ciaran Daly Says:

    This is total nonsense, as long as Irish banks can buy gov bonds and get cash from the ECB for them…

    http://baselinescenario.com/2010/04/29/to-save-the-eurozone-1-trillion-european-central-bank-reform-and-a-new-head-for-the-imf/

  22. Drumroe Says:

    We are not living in reality:

    http://www.zerohedge.com/article/treasury-redeems-gargantuan-643-billion-treasuries-april

  23. Jagdip Singh Says:

    @Karl,

    Sorry to be off-topic but the Indie today reports “Meanwhile, the head of financial regulation, Matthew Elderfield, has demanded that banks use the initial haircuts right across their NAMA-bound portfolios, for the purposes of calculating how much capital they must raise by the end of the year to meet regulatory targets.”

    Doesn’t this mean that Anglo’s loansof €35.6bn will have a discount reported at 55% which means a loss of €19.58bn and means a further recap this year of what €8bn? And for INBS it means another €2bn.

    Full story here:

    http://www.independent.ie/business/irish/anglo-to-transfer-first-836410bn-of-loans-to-bad-bank-2161000.html

  24. sean o' Says:

    This ‘bond’ is just another slush fund for central government.
    Better to enact Muni bonds where regional interests can raise money to build bridges,schools etc and then to gain interest relief against national income tax.
    At least at the end of ten years local communities would have something to show for the investment as well as the investors redeeming their bonds.
    However that would require a devolution of powers to local government and as long as FF are in power this aint going to happen.

  25. Bond. Eoin Bond... Says:

    They’re deferring the true cost of the bond for 10 years. Its actually quite clever. Whats more shocking is that this non-controversy has already garnered 24 comments…

  26. Joseph Says:

    @Bond. Eoin Bond… Says. – “Whats more shocking is that this non-controversy has already garnered 24 comments…”

    … and yours too ;-)

  27. Jesper Says:

    It seems the government can’t win by doing something like this:
    Either they are too nice to the investors & then they get told are in effect giving away money for free
    or
    they are to harsh to the investors & then they get told that nobody will invest.

    So the cynic in me wonders why was this done?

    After working for large organisations I am a bit cynical & my initial thought is that this was done to show that something is being done. The perception of doing something grand is seen as better than just doing something basic & useful. And of course someone seen as doing something grand can also justify a high salary while the peon doing the basic & actually useful will struggle along on a low salary.

    It is a dream grand project for a career minded person: Seemingly addressing a current concern but its success can’t be measured. (is it cannibalising or is it creating something new?)

  28. Garo Says:

    Finance is a zero-sum game for a large part. So if the government is doing something clever by deferring the true cost of the bond for 10 years there are two issues here. 1) The piper will have to be paid in 10 years time and who knows what the state of the country’s finances will be then. 2) They are making a fool out of the investors.

  29. Furze Says:

    When we reach rock bottom, it could be used to hold the individual IOUs for part of public service pay bill. Just a thought.

  30. Antoin o lachtnain Says:

    I agree that could be a possibility or even plan. However for that to work the bonds would really need to be tradeable. They would also probably need to be non-redeemable before a certain date.

  31. zhou_enlai Says:

    Is there a danger that drawing citizens into a solidarity bond will exacerbate the consequences of sovereign default if it happens? Talking the talk but not walking the walk can be a sensible option when faced with a very large opponent.

    Does the solidarity bond lash private savers to the boughs of the international bonds? Or is there no material difference? Let’s hope this is not another example of the gambler’s mentality that “we are so kiboshed if this goes wrong that we don’t need to worry about making things worse”.

    I would be interested to know whether people think there is any chance that this bond could raise a significant amount through this bond. One hears flippant remarks from people that there is loads of money out there but that investors don’t want to risk it. Personally I think there is very little money left in Ireland. I think we have seen Krugman style wealth destruction on a grand scale.

  32. zhou_enlai Says:

    EDIT – substitute “bows” for “boughs”

  33. Joseph Says:

    @zhou_enlai – “I would be interested to know whether people think there is any chance that this bond could raise a significant amount ”

    I guess any answer would be speculative. They start selling today? I wonder where we can find out about the take-up in the first few days?

    My guess is that it will be slow. I’m not sure enough people have enough faith in this government to actually want to buy anything from them. The marketing of it has not exactly been ‘ram it down their throats’ either.

    Maybe it’s just symbolic. Why would you want to put so much money into saving the banks then put up a competitor product? Seems a bit odd to me (to take deposits/savings away from them in those circumstances).

  34. irishpancake Says:

    The Greeks really need to get hold of this guy, he will be, I believe, available in the near future, and he sure talks a good game.

    http://www.youtube.com/watch?v=vc8ykHoBXmQ

    Classic from 2008, enjoy if you can !!!

  35. irishpancake Says:

    Sorry, apropos the video link above, it is available on

    http://www.thestory.ie

    Good work from Gavin (Sheridan) :)

  36. irishpancake Says:

    Direct Link:

    http://thestory.ie/2010/05/02/sufficient-room-to-manoeuvre-to-weather-the-present-turbulence/

  37. Liam Delaney Says:

    Karl – I don’t know how well I meet either of the conditions neccesary to be one of your “behavioural friends” but this is not a policy that comes from that literature. There are a lot of things from that area that would help us overcome the massive failure of the type of economics we have been teaching up to now in Ireland. Gimmics with low-return bonds come from entirely different intellectual roots.

  38. Gerard Sheehy Says:

    To be honest, I can’t see a huge uptake on this particular product. IMHO the majority of money on deposit is probably there for fixed terms of less than one year, so I can’t see how folk would suddenly be chompin at the bit for a 10 year term. There is too much uncertainty.

    If folk do ‘invest’, I doubt that the majority will stay the distance. If they introduce a ‘Series II’ that has a more attractive rate of return, they may run the risk of cannibalising ‘Series 1′.

    The one noticable exclusion from this product V’s other State Savings Schemes is the word ‘Guaranteed’. A sop to the banks, perhaps.

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