Rostowski: Lower interest rates as a reward for programme compliance

Jarek Rostowski is finance minister of Poland. Writing in the FT, he argues that a record of compliance with the agreed EU/IMF programme should lead to a dramatic decline in the interest rate, with the near-complete elimination of the margin over the cost of funds. The article is here.

15 replies on “Rostowski: Lower interest rates as a reward for programme compliance”

A good matching of the stick to the carrot. The reduction of rates should be retrospective for period under supervision (e.g. each quarter) if possible without affecting creditworthiness of funds.

This is an interesting contribution at several levels, not least because of the fact that Poland is now presiding the EU but is not in the Eurogroup as it has yet to adopt the euro.

The idea of reducing interest rates is a non-starter against the background of the German (and Dutch) attitudes to the countries “in a programme”. The concept undrpinning the EFSF and its presumed successor, the ESM, is in any case inherently internally inconsistent (as the article, wittingly or unwittingly, reveals as it is hardly possible to design a programme enabling a country to emerge from the risk of default while at the same time charging an interest rate that attempts to guard against such a risk).

The possibility of private investors becoming involved also seems to be increasingly remote.

There is, of course, an answer and it is the one outlined by Juncker/Tremonti in the FT in December, 2010. Having tried everything else, will Berlin now accept to do the absolute minimum required which is self-evidently to allow the EFSF to purchase bonds in the secondary market and fund the cost of retiring them, which I believe is the technical term. In this way, the private investors would carry their share of the cost and the governmemst that allowed a monetary system which is their creation to get out of hand theirs. Adopting the full Juncker/Tremonti proposal would relieve the governments of even that cost.

The key extract from the Juncker/Tremonti article is proably the following.

“A new market would also ensure that private bondholders bore the risk and responsibility for their investment decisions. In this way, the E-bond proposal usefully complements recent decisions aimed at providing clarity about a permanent mechanism to deal with debt restructuring. It would help to restore confidence, allowing markets to expose losses and ensuringmarket discipline. Allowing investors to switch national bonds to E-bonds, which might enjoy a higher status as collateral for the ECB, would help to achieve this. Bonds of member states with weaker public finances could be converted at a discount, implying that banks and other private bondholders immediately incurred the related losses, thus ensuring transparency about their solvency and capital adequacy”.

Where do these savings go ?

I would have thought some moons ago that the purpose of savings is to increase the potential for capital investment – but if there is little to no physical capital investment where does it go ?

Somebody is consuming this surplus me thinks.

“Even worse, the examples of Ireland and Portugal suggest that once market interest rates significantly exceed the high rates in the EFSF, they may spiral out of control. Investors then expect countries to enter programmes where rates will be lower, but also to lose access to market financing for an extended period.”
Since entering the programme our rates have consistently risen with the spread on bunds today at 10.13% and rising. The rates are spiraling out of control but not in the sequence outlined by the Polish minister.

This won’t be of much use to Ireland anyway, as the country has never been in full compliance with the agreement and never will be in full compliance.

How can you be in compliance with an austerity programme when you’re still buying new cars and Rolls Royce pensions for your senior employees?

Seafoid – the permagrowth at least from the 70s and possibly before was merely capital extraction.
We can get back to growth but we need to actually create wealth through technology rather then farming depleting oil fields and turning it into credit for mindless consumption.
Without a change of the entire monetory structure we are indeed screwed.
But we won’t change it if we just say please.
Guys that create something in the physical world rather then financial enginners that can only create more debt is what is needed.
Fascinating interview with a true creator of wealth – there are so few now.

@ Ceterisparibus

The effect you describe is exactly what the rating agencies and numerous commentators have been predicting for some time. As the ESM is closely modelled on the EFSF, proceeding with it unchanged when the test aircraft is clearly falling to pieces in the wind tunnel seems rather unwise.

There is now the appalling prospect that the past eighteen months have devoted – on the insistence of the divided duo of Merkel and Schaeuble (Sarkozy being no more than an irrelevance at this stage) – to the pursuit of gravely mistaken policies the political investment in which is such that they cannot now be abandoned. What is need is an alternative aircraft as advocated by the ECB and other powerful players.

According to an opinion poll, both SPD contenders, Steinbrueck and
Steinmeier, would defeat Merkel if a poll was held tomorrow. A major plank in both their policy positions is that Merkel has failed to explain to the German people the importance of the euro.

@ seafoid: “Of course a quick return to permagrowth underpins the Troika

This assumes, cert par and all, that the underpinning of the underpin is not a pyrite composit – which it appears to possess all the qualities of.

Brian Snr.

there is something i do not get about Merkel. At the start of this she was vehemently opposed to nationalising the debt of the banks (causing the bonds markets to go ape) she was called Madame Non because she wouldn’t play the game with Sarkhozy and Obama.
But now everything has changed. Why?
did she get new advice?
Or did she see which way the wind was blowing in German politics?
Or was she always this way and I miss read the situation before

Its not the interest rate thats the issue, the reason nobody will give money to the Irish government is its possible 300billion exposure to its banks. The rating agencies actually say this in their downgrading statements. Stop the state garauntee tomorrow and watch the iinterest rates tumble.

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