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There is a lot of noise in the debate about the deal, much of it relating to how to place a value on future obligations.

One element in this is how to think about the value at maturity of the new long-term bonds.  25 billion euro of bonds will be placed at the central bank.

The interest costs of these bonds will vary with the euribor (plus a fixed spread).

However, the nominal value of the principal is fixed.

2013 GDP is about 168 billion euro, so 25 billion is 15 percent of 2013 GDP.

The average maturity of the bonds is 34/35 years.

If nominal GDP growth is 2% a year for the next 35 years (0% real + 2% inflation for example),  2048 GDP will be 336 billion, so the maturity value of the debt will be 7.4 percent of GDP.

If nominal GDP growth is 3% a year, 2048 GDP will be 473 billion, so the maturity value of the debt will be 5.3 percent of GDP.

If nominal GDP growth is 4% a year, 2048 GDP will be 663 billion, so the maturity value of the debt will be 3.8 percent of GDP.

19 Responses to “Discounting”

  1. Jose Refojo Says:

    Makes you wonder what would happen if Ireland gets into a situation like the Japanese one since 1995 over the next 34/35 years, with no or negative GDP growth, doesn’t it?

  2. Eureka Says:

    Good post. Well put.
    Problem is what happens in stagnation? A return to decent growth is far from certain.
    My reading of it is that the ECB have factored in inflation and hence we’ll end up paying the same overall amount but I take your point

  3. OMF Says:

    There is a lot of noise in the debate about the deal, much of it relating to how to place a value on future obligations.

    I liken such considerations to classifying the genus of a rhinocerous as it charges down on you.

    Again I state the core problem with the deal: The ECB has not agreed to it.

    If anyone can produce an offical document or statement from the ECB which approves/authorises this deal then I am wrong and I will admit that I am wrong. But statements of “taking note” of this deal betwen Ireland and itself are meaningless. There seems to be a worrying degree of complacency sourrounding a pretty critical point here.

  4. christy Says:

    But these two variables are not really independent – if growth is high then euribor is more likely to be high

    May have been better to get a fixed rate bond – (maybe be would could interest rate swap it?)

    A fixed rate bond allows us to gamble in teh sense that if nominal growth is high teh burden will be light – and if nominal growth turns out to be low – well, we would be going bust anyway in that event so we we may as well push all-in so to speak

  5. Peter Stapleton Says:

    Surely what matters is the present value of the interest payments plus the principle at redemption?

  6. michael burke Says:

    That is only one element, as you say- the principal, not the interest payments.

    Properly accounting for the real likely cost of the debt would have to include both, usually with some discounted cashflow model to arrive at the net present value of the debt.

  7. bazza Says:


    It doesn’t matter that the principal is fixed. What about the interest payable on the bonds.

    Inflation will remain at 2%, but it is highly likely that the EURIBOR 6M rate will not remain at the subdued level it is at now. If EURIBOR6M is 3% and the Irish Govt spread is 2%, then we will be paying 5% interest on the bonds.

    That will negate any effect of inflation.

  8. christy Says:

  9. Seamus Coffey Says:

    @ michael burke,

    A rough attempt at that is here.

  10. Bond. Eoin Bond Says:

    @ OMF

    “If anyone can produce an offical document or statement from the ECB which approves/authorises this deal then I am wrong and I will admit that I am wrong.”

    In fairness, i don’t think there’s any need for that. Everyone is already quite well aware that you are wrong. The ECB doesnt (indeed would never) need to make an announcement on something they deem to not need an announcement (ie cos its not mon financing).

  11. seafóid Says:


    Isn’t the ECB’s byzantine communication style in this case designed “pour encourager les autres” , particularly Spain ?

  12. zhou_enlai Says:

    Is there a new limit on post lengths or something? My posts seem to be accepted but then they are not visible?

  13. seafóid Says:

    @ Zhou

    The server hamster is suspected of having eaten a snippet of horse burger

    I was hoping that with the PN issue resolved we might get some new software for the website but it looks as though what Joe Durkan says about sov debt viz ” it would take “decades” (to reduce public debt to safe levels)” is also pertinent to the software used on the site .

  14. zhou_enlai Says:

    Can anyone clarify whether the NAMA/ELA aspect of the arrangement creates a newly crystallised debt additional to the Promissory note?, i.e., Whereas the funds provided to IBRC on foot of the Promissory note will be available to distributed parri-passu (our old friend!) won’t any shortfall covered by the ELA have to be made up by this action?

    Obviously the method of funding looks pretty cheap, but shouldn’t we be asking how much is involved?

  15. zhou_enlai Says:


    I thought I was on the naughty step!

  16. David O'Donnell Says:

    The Fianna Fail conceptualization [unfortunately not yet historic] of “The Fullness of Time” may prove useful, if unquantifiable, to the discussion.

  17. David O'Donnell Says:

    Minor point:

    We are paying for feeding a “black hole” from which nothing concrete or in any way useful will ever emerge.

    Were we to pay “Zero” it would make no difference whatsoever to the “Black Hole”.

    Entities that enter a “Black Hole” are lost “Forever”.

    This remains an exercise in “Madness”.

  18. David O'Donnell Says:


    BEEF €4,000

    PORK €2,500

    HORSE €700

    They eat horses, don’t they?

  19. Mickey Hickey Says:

    @ Jose Refojo

    Ireland has been in the situation you describe for half a century after the foundation of the state in 1922. Even with a very high birth rate, adequate rainfall, fertile land and being on major shipping routes we mired ourselves in poverty. It should be noted that the party that blundered into the present disaster in 2008 is now ahead of the incumbent party in opinion polls. We have a rare talent for electing serial incompetent governments. Our entry into the EU provided us with adult supervision. Unfortunately the EZ worshipped at the altar of the sovereign state and sadly lacked supervision. Hopefully the improvements being negotiated such as EZ wide deposit insurance will be accompanied by EZ wide supervision.

    The fatal flaw of the Irish is electing politicians to cater to their personal interests with no thought given to the collective good. How a people that have been highly successful world wide can screw up so badly at home is a mystery to me.

    Reducing the interest rate and extending the repayment schedule was the logical move in the circumstances. It was the idiotic political game playing leading up to the decision that I have a problem with. France is likely to join the PIIGS and Cyprus in 2014. That will mean major changes to the financial and political landscape. The fact that Greece and Spain are nearing the critical 30% unemployment rates that brought about major regime changes in the past and that France is headed down the same road virtually guarantees an early end to austerity in Europe. Hope springs eternal in the human breast as that great English philosopher said many years ago.

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