62 thoughts on “Draghi’s Bond Rally Means Bailed-Out Ireland Can Borrow for Free”

  1. Ok.
    IF we could raise significant sums (10-20b plus) at these low rates, and then be happy with the maturation being so short then it would be good. Right now, ultra low rates = ultra high prices = windfall gains for someone. More disconnect of the financial system from the real economy.

  2. Hail Mario
    Full of Balance sheet,
    the future is with thee.
    Blessed are thou among Central Bankers
    and blessed is the fruit of thy QE, Jesus!
    Holy Mario Father of Pragmatism ,
    pray for us investors
    now and at the hour when the market eventually turns
    Amen

  3. Eoin
    Can we though? If we can, great. Pay off some of what we have. Is there a demand for 20b of Irish government debt out there? We read of auctions of a few hundred million from the NTMA, which suggests there might not be that much of a demand. Its like a mcdonalds eurosaver burger vs going the full morgan spurlock for a month.

  4. We will be able to borrow freely at 1% for 7 years when the ECB bows to the inevitable and locks crazy Jens in the cellar. Give it 6 months

  5. Sam

    They sold 3.75bn on an order book of 14bn in the 10Y bond back in January. They’ve sold another ~3bn of that bond in the meantime. Demand out there is plentiful.

  6. @ Eoin

    As your one of the more knowledgable on the topic, can I ask: IYO How low can we get the average interest rate on all debt and how fast can we get it there? Assuming they pull of the IMF loan deal.

  7. CBs are pulling strings but it’s still not there
    http://www.rte.ie/news/business/2014/0905/641669-us-jobs-august/

    “Nonfarm payrolls increased 142,000 last month, the smallest increase in eight months, the Labor Department has said.The unemployment rate fell one-tenth of a percentage point to 6.1% as people dropped out of the labour force.”

    There is something weird in terms of the system about not getting any return on an asset . I mean, it’s great for bond traders and Gilmore can put it in his memoirs but what does it actually mean in the bigger picture ?

    http://monthlyreview.org/2013/10/01/primitive-accumulation-and-imperialism/

    “But the fundamental drive of the capitalist economy, which is different from other economies, is the imperative to accumulate capital. Under the imperative to accumulate capital and being born a world system (and necessarily so), the pressure to seek out new investment opportunities is continuously present.
    I strongly endorse the tendency for the younger economists to plunge into economic history and examine what imperialism is all about, rather than try to rationalize and theorize abstractly on the basis of fancy formulas without first having studied history”

  8. Odd that the ECB is striving to encourage the private sector to take on more debt when, in many countries anyway, households and firms think they already have too much and want to delever.
    Yet the conventional policy wisdom in Europe argues that the public sector should delever, even when the cost of borrowing is at rates never seen before ( or perhaps again)

  9. In order to understand long term dynamics of macro data like debt, return on ivestment, and interest rates, you have to look at a large country, with a long enough history, which is at the productivity leading edge,

    and that is the USA only.

    Please take a look at

    http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

    his excel sheet is pretty useful.

    Now add Inflation to it, and tax (as long as you dont want to go into very detail, just simplify with 25% federal)

    and you will find that people have lost 0.6%/ year on average on cash like holdings (“t-bills”, duration < 1 year) even with ignoring any fees.

    Longer term (10 years) are pre tax about 1% higher, post tax and fees, barely breaking even, if at all.

    Now our societies get older (Ireland just a tiny abberation), and from the folks with money, not the lower 2/3, many have an incentive to save, even when the return is mildly negative.

    And after building all that infrastructure in the last 20 years, enhanced by the EU subsidies, there is no need anymore for grand infrastructure expenses, in the mature West.

  10. QE as designed by Draghi will improve bank capital levels by improving net interest margins and generating capital gains. Whether it gets lending to SMEs going in Italy and France remains to be seen.
    What would be better would be a programme of public capital investment across the EZ plus some proper defence spending to deter Putin. This should be back stopped by QE. It will come.
    Amazing that 7 years into the crisis the EZ is now only just getting around to doing the right thing and only grudgingly so.

  11. Not sure banks will have enough quality assets to meaningfully avail of ECB offer on ABS. Also Basel 111 regulations on short term liquidity requirements, longer term funding (net stable funding ratio) and capital weights on ABS are issues for banking sector and will also limit effectiveness of QE lite

  12. Japan spent about $6tn on infrastructure projects in 1991-2008 which didn’t solve the economic problems – some economists argued that spending was spread out over too long a period rather than having a big bang impact, while others said that ramping up spending on schools and education, and pensions would have had a greater impact.

    Construction is always attractive as what the Americans call ‘shovel ready’ jobs can become available in a short time and reports suggest that US infrastructure is in need of an upgrade – roads, airports and railroads.

    Last year the European Commission announced the tripling of EU financing for transport of €26bn in 2014-2026, which would be just the seed capital for investments.

    Juncker’s proposed €300bn plan would have some impact but it would unlikely solve the demand problem.

    Governments should have deficits during a recession while capital projects are completed in a few years.

    The grim truth is that low demand is the new normal as Martin Wolf and others have argued.

    In the early period of the crisis, demand from China and other emerging markets helped to soften the impact of the recession. Now as activity in the US and the UK is rising, EM demand is falling.

    Governments have also less influence than in the past on big companies.

    Wages are falling in many developed countries and this week the Fed in its triennial survey of consumer finances reported that for the most affluent 10% of American families, average incomes rose by 10% from 2010 to 2013. For the rest of the population, average incomes were flat or falling.

    BASF, the world’s biggest chemical company, which according to The Wall Street Journal, consumes as much electricity every year at its main German plant as the entire country of Denmark, said in May it would substantially reduce its investments in Germany as a result of the country’s energy policy.

    In Japan one of the typical benefits of a weaker yen until now has been its impact on boosting exports. But the fall in the value of the yen this time around hasn’t given exports the expected shot-in-the-arm.

    A shift of production facilities overseas by many major manufacturers to make themselves less vulnerable to currency swings means that the yen’s depreciation by over 20% since Prime Minister Shinzo Abe returned to power in December 2012 hasn’t resulted in a huge surge in export volume.

  13. Michael,

    do you have some more detailed reports on American infrastructure?

    When I moved there in 1996 I was at first also a little bit astonished that a lot looked older and a little dirty. And then they built that bicycle lane in pink cobblestones along the highway (Route 9) 300 meter away from my house, looking beautiful, but nobody was using it.

    Krugmans favourite was another tunnel under the Hudson, hugely expensive and a horrible cost-benefit analysis, and some high speed train in California, some 2 billion? but barely any time advantage for the customers.

    In the 1980ties we also spend a lot of money on upgrading infrastructure in Germany. Every 25 k town had a 50 meter long public swimming pool (500 k Dresden has none) and a city concert hall, and this and that, iceskating rings.

    And now they have to pay through their nose for the maintenance of stuff, which is rarely used.

  14. Dan,
    Reasonable points. But if the ECB wants to expand its balance sheet to the extent implied by Draghi, it has got to build a bridge and get over these issues. If you want to inject upwards of 400bn into the system via asset purchases you have got to buy something.

  15. @ francis

    According to the US Treasury Department, infrastructure spending in the US is about 2.4% of GDP – – half of what it was in 1960 — and compares poorly with China (9%) and Europe (5%). Most of the infrastructure dates from the years after the Second World War. The interstate system was mainly built in the period 1956-1972 and roads generally have a 50-year life span.

    American Society of Civil Engineers’ Report Card for America’s Infrastructure

    http://www.infrastructurereportcard.org/a/#p/home

    The dollar value of the gas tax that is used to fund infrastructure has not changed since 1993

  16. WADR, HK and Sing are small island states – UAE is barely populated and oil rich. Large, spread out mixed countries means NLD and CH and FR are top

  17. Michael,

    you are actually making my point,

    the “Dwight D. Eisenhower National System of Interstate and Defense Highways” was started in 1956, AFTER a slight recession

    and at that point in time this investment made a lot of sense.

    Faster growing population, Much more and faster cars.

    Today practically every reasonable road is built , and they just have to maintain them.

  18. @seafoid

    ‘“But the fundamental drive of the capitalist economy, which is different from other economies, is the imperative to accumulate capital. Under the imperative to accumulate capital and being born a world system (and necessarily so), the pressure to seek out new investment opportunities is continuously present.
    I strongly endorse the tendency for the younger economists to plunge into economic history and examine what imperialism is all about, rather than try to rationalize and theorize abstractly on the basis of fancy formulas without first having studied history”

    +1

    Where would we be without ‘power’?

  19. @ Tull

    “Amazing that 7 years into the crisis the EZ is now only just getting around to doing the right thing and only grudgingly so.”

    They had to get rid of Draghi’s predecessor first and then address the complacency. It’s baby steps all the way. Maybe deflation brought the hardcore around.

  20. how about we put some timetable up

    Tue 09/09/2014 release of the preliminary report on MH17

    Sun 09/14/2014 state elections in Brandenburg and Thuringa, 7 -10% for anti Euro AfD likely, http://www.wahlrecht.de/umfragen/landtage/index.htm

    Tue 09/16/2014 Scottish independence vote

    10/15/2014 results of the AQR (asset quality review) stress tests to be out
    what the chance of any hiccupo coming out?

    Tue 11/04/2014 US congress, likely to be taken by the GOPs http://fivethirtyeight.com/features/fivethirtyeights-senate-model-is-back-and-it-gives-republicans-the-edge/

    May 2015 UK elections, what is the chance for Cameron ? 5% 15% …. ?
    what else, … not overstretching the 2 link limit?

    Sometime ? 2015 french elections

    06/2016 Draghi successor, Weidmann ?

    11/2016 successor Obama

    05/2017 successor Hollande

    09/2017 Merkel releected … : – )

    01/2018 US short term rates back at 3.5%

    whats missing ?

  21. why not do a CRA (community reinvestment act) 2.0 ?

    https://beta.congress.gov/bill/113th-congress/house-bill/5148

    “Access to Affordable Mortgages Act of 2014 – Amends the Truth in Lending Act to exempt from property appraisal requirements certain higher-risk mortgage loans of $250,000 or less if such a loan appears on the balance sheet of the creditor of the loan for at least three years.

    Exempts certain individuals required to make such reports from penalties for failure to report any appraisers reasonably suspected of failing to comply with the Uniform Standards of Professional Appraisal Practice, of violating applicable laws, or of otherwise engaging in unethical or unprofessional conduct.

    Amends the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to exempt such higher-risk mortgage loans from property appraisal or evaluation standard requirements.”

    After it crashes you can blame it all on the Germans.

    Goebbels was more diligent to hide his intentions.

  22. http://monthlyreview.org/2014/05/01/stagnation-and-financialization/

    “In May 1983, Harry Magdoff and Sweezy published a landmark article, entitled “Production and Finance,” arguing that the financial explosion then taking place was the main factor counteracting stagnation and represented a qualitatively new historical development—since never before had a major financial expansion occurred under conditions of economic slowdown (as opposed to the peak of the business cycle) and on a continuing, long-term basis. What was emerging, they contended, was a huge “financial superstructure” on top of the underlying productive base of the monopoly-capitalist economy. Moreover, there was the possibility that the whole process could go on “for a long time.”
    Referring to what was to become known as the “wealth effect”—i.e., the stimulus to luxury consumption from financial asset appreciation—they pointed out that:

    Recent years…have shown that the financial sector can prosper while the productive sector continues to stagnate.
    ….

    The whole argument on the dialectic of stagnation and financialization was brought together by Magdoff and Sweezy in a book entitled Stagnation and the Financial Explosion, published in 1987—the year that Reagan appointed Greenspan chair of the Federal Reserve Board.21 That same year witnessed the 1987 stock market crash, which shook the entire world economy bringing it to the brink of a global meltdown. Faced with the prospect of financial Armageddon, the Federal Reserve Board under Greenspan issued an unprecedented statement on the morning of the second day of the financial crisis indicating its “readiness as a source of liquidity to support the economic and financial system.”22 It backed this up with its power in effect to print money, and a complete meltdown was avoided.

    Yet that simply meant that the problem was to loom even bigger in the future. It was at this point that the writing was on the wall, making it clear that financialization as a way of combatting stagnation would serve to intensify the structural crisis of the system, without removing the root causes. On the first anniversary of the 1987 stock market crash, Magdoff and Sweezy stated:

    It is now clearly only a matter of time before a new break [in the financial system] materializes…. But you may ask, won’t the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again and on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed…. We will then face a new situation as unprecedented as the conditions from which it will have emerged.

    Today there is no denying that this was what actually occurred. ”

    Very hard to argue with that.

  23. Seafóid: Much obliged for that Magdoff + Bellamy Foster h/t. Makes a change from faffing around with regression equations of questionable validity – and incomprehensible R^2 estimates.

    “Will they ever learn?”. Appears not. The mindsets put me in mind of the wife’s favourite linens – after she has carefully washed, starched and ironed them – you understand. They are crisp, neat, … thin!

    Thanks again for the various references. Very informative.

  24. just getting carried away a little bit:

    btw, the organizer wasmeier is a mere NCO at the Bundeswehr, and scored just 3 international medals,

    whereas our sniper girl http://de.wikipedia.org/wiki/Magdalena_Neuner
    with 21 international medals is a member of Schäuble’s Elite Alpine Financial hunter team (Zoll-Ski-Team : – )

    And after some refresher as “tunnel rats” in Palestine http://www.tagesschau.de/ausland/bundeswehr-israel-101.html

    they will find there way around any central bank in the world in no time

  25. @Frank Galton

    Jose Manuel Barroso is trolling Ernie Ball

    That speech snippet is a must read, short but wildly incoherent fiscal conservative word salad – blustering power drunk self belief. It is not just trolling Ernie, it is a rambling “f**k *o*” to the entire reality based community from the heart of European Union technocracy. (perhaps it read better in the original Newspeak.)

    Sure it throws in a half hearted request to make all that legally required fiscal contraction less, eh, contractionary but it then says that without the SGP the markets would be cracking open the skulls of widows and orphans and eating their delicious brains. We can shuffle cuts but the cuts go on forever, or things might get really bad.

    In the speech fragment “structural reforms” are mentioned three times, economics one time and unemployment and national debt no times. When he does mention economics it is in a dismissive way (“There is in-build flexibility and, in fact, after the revision of the Stability and Growth Pact we are now putting much more the emphasis on the structural deficit than on the nominal deficit, taking into consideration the so-called economic cycle“).

    Aidan Regan’s The Fairytale of Europe’s Magic Improving Dust Formula never gets tired.

    At one point Barroso says “The rules of the Stability and Growth Pact have to be respected 100%. This is in the treaty. The worst thing we could do now is to appear that we are not respecting our own rules. The rules are there.”. It is all rules, all stay the course, no “Maybe we should see how these policies have been doing so far…” or “These rules seem to be not working.”

    Strong determination in place of reflection, willful ignorance in place of analysis, legalism in place of economics.

    http://europa.eu/rapid/press-release_STATEMENT-14-274_en.htm?locale=en

    I know, I know, why get worked up? It is nothing new, just another euroliberal crie de coeur noir to avoid the dangers of doubt and Keynesianism and focus on confidence and structural reform. It should be incredible though – six years of what would be career ending and humiliating failure in a national government has had zero effect on the emissions from Brussels. The next set of commissioners are again mainly people who are too unpopular to progress politically in their home countries (Hi Phil! Eat lots of mayonnaise with your chips. Lots.).

    And remember, there is no way to get rid of these fools and no accountability, Barroso got his cool quarter million a year tax free for four years (twice) regardless of what happens.

    Follow the @EU_Commission on twitter for more assaults on you intelligence from the European Comission’s El Presidente.

  26. @ BWS

    2 other things in that article are the drop in average growth rates per decade since the 60s and the drop in average investment over the same period, also by decade.

    Wall St getting excited about another batch of Non Farm payroll numbers- it’s almost laughable.

  27. ‘”So what’s going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That’s because the power of the printing press gives their words a distinct power’

    http://edwardhughtoo.blogspot.ie/

    This is what the philosophers’ like Austin, called a performative utterance. I dub thee a recovering economy. It’s all there in Pierre Bourdieu’s ‘Language and Symbolic Power.’

    The Brad de Long link in the Hugh paper is interesting.

    ‘So: My conclusion. I have very serious doubts about my ability to analyze the situation we are in. Whenever I cast myself back in time and think how confident I was ten years ago, and how wrong, my first response is maybe I should give up this business and stop pretending I have knowledge.’

    That is a real expert.

  28. On borrowing for free and the options this presents Wolfgang Munchau at the Financial Times has a little fun with the EU institutional consensus on economic policy and how Draghi may be trying to trick them into making it less wrong.

    What Mario Draghi must do next to fix Europe’s economy (Eurozone policy makers and their economic advisers are structuralists by inclination)

    What they (the “structuralists” dominating the EU establishment) could never explain is why it was possible for the eurozone’s unreformed economies to perform well in the past, and why Finland, the world champion of structural reforms, has lately turned into an economic basket case.<…..> If, for political or legal reasons, structural reforms constitute a quid pro quo for further fiscal easing, then let us have them right now. I am happy to accept a cranky theory if I can have the better policy as a byproduct.

    The best policy for a long time has been to laugh derisively at the austerians. Reason failed, time for humiliation.

  29. http://www.rte.ie/news/2014/0908/642115-economy/

    “Ibec calls for tax cuts of €400m in upbeat economic report”

    http://www.ft.com/cms/s/0/44772c4a-2e96-11e4-afe4-00144feabdc0.html

    “The dismal picture painted by The Shifts and the Shocks is a forceful warning against the unfounded optimism that has episodically struck each of the countries in the north Atlantic as they grasp at any wisp of positive news: we are mired in a malaise, from which we are not likely to emerge any time soon.”

  30. @ seafood

    Glory be to Mario
    And to the ECB
    And to the IMF
    As it was during the crisis
    Is now
    And ever shall be
    Debt without end
    Amen

  31. Surely, it makes sense for the DoF to issue long term Irish government bonds to finance the promissory note extension now – as Dragbi seems to want.
    Or is there something I am missing ?

  32. @Micheal McNelis

    The coupons on the CBI holdings go to CBI rather than investors. Long term redemption yields are not zero.

    If you accept that these should be sold beyond the minimum (and the Irish do not) then financing is currently cheap.

  33. @ seafood

    Our Mario, who art in the ECB
    Hallowed be thy salary
    Thy Kingdom come
    Thy will be done, in Ireland as in the EZ
    Give us this day our QE
    And forgive us our recklessness
    As we forgive those (Germans) who lent to us
    And lead us not to borrow again
    but deliver us from austerity, Amen

  34. What Ireland needs is the ability to issue Euro 40 to 60 billion of 30 to 50 year bonds at a rate of 2% or less. That should supply the headroom for a resurgent economy. Provided of course that Kenny/Noonan does not follow IBEC’s advice to cut taxes and run operating deficits. Unfortunately any benefit would be used for short sighted vote buying.
    Are there no opportunities in Ireland to improve infrastructure in water, sewage, public transit, schools, hospitals, old age homes. Now is the time as the cost of funds are at 500 year lows. The two year term would simply become an expensive trap when rolled over.

    What rates do you think Ireland would get on 10, 30 and 50 year bonds in 10 billion plus tranches.

  35. Mickey,
    I think you are n to something, 30 year project finance bonds issued at 2% financed as part of the ECB ABS programme. As part of the QPQ, Germany should opt out and be expelled from the EZ and EU. So the euro would depreciate the neuer DM appreciate.

  36. The Canadian Gov’t placed 50 yr 2% bonds a few months ago that sold off at 1.97% on the opening.

    I was flabbergasted.

  37. Link to 10 yr bond rates, note EZ 0.28%, DE 1%, FR 1.34%.

    http://www.tradingeconomics.com/bonds

    Austria 10- 50 yr
    http://www.investing.com/rates-bonds/austria-government-bonds?maturity_from=180&maturity_to=310

    Germany
    http://www.investing.com/rates-bonds/germany-government-bonds?maturity_from=180&maturity_to=290

    France
    http://www.investing.com/rates-bonds/france-government-bonds?maturity_from=180&maturity_to=310

    The opportunities are there if it were not for the penchant of Noonan/Kenny, IBEC and others to go for the popular ten day headlines. Mna na hEireann and Padraig Pearse are spinning in their graves.

  38. http://www.bankofcanada.ca/2014/04/government-canada-issues-first-ultra-long-bond/

    2.75% coupon
    2.96% yield

    present yield 2.67%

    http://www.comdirect.de/inf/anleihen/detail/uebersicht.html?SEARCH_REDIRECT=true&REDIRECT_TYPE=ISIN&SEARCH_VALUE=CA135087C939&REFERER=search.general&ID_NOTATION=102443529

    Canada also happens to have about 20 trillion $ in proven energy reserves, about 550 000 $ per capita,

    OECD Annex Table 33. General government net financial liabilities
    42.8 Per cent of nominal GDP

    Now, Mickey Hickey, what risk premium would you charge these people?

  39. @Francis
    Most people are not aware that Canada and Venezuela’s oil (Tar) sands industry is an energy intensive carbon producing business. Opposition is growing against pipelines from Canada in the USA. The proposed pipelines to saltwater (China market) are under assault by aboriginal groups that have sovereignty over their treaty lands.
    Argentina is one of the most (renewable) resource rich countries on earth, that does not make them good credit risks. Japan and Ireland, both resource poor actually honour their obligations. For example Germany was no paragon of rectitude when it paid its obligations in Pfennigs (wheelbarrows of cash) on the RMark in the Weimar era.

    Risk assessment over a few decades is an extremely risky business. In my opinion London, New York and Frankfurt could collapse like a house of cards, without notice. Beijing, Moscow and Sao Paulo could prove to be more resilient in a developed world crisis.

  40. “Canada also happens to have about 20 trillion $ in proven energy reserves, about 550 000 $ per capita …”

    Indeed they may, but how much (of those reserves) do you have to spend to conduct the extraction, processing, refining, transportation – and of course site remediation – or do we just skip that? What’s your economic nett? I fancy its a lot less. And who will the customers be? And will they be able to afford to consume the product?

    Do folk know, like really know, how many wells that means? Some early photos of Oklahoma oil drilling come to mind. There are nasty rumours circulating that those wells in the sands have a pretty short production half-life. Just saying.

  41. The Canadian tar sands are profitable above $80 Cdn per barrel. In the long run every molecule that can be burnt will be burnt. But as usual we are concerned about the short to medium term. Nitrogen and Ammonia based fertiliser, now reliant on natural gas feed stock will continue to be produced and used to ward off worldwide famine. Natural gas (produced locally) is also used to make the bitumen flowable (pipeline distribution). Maize (Corn) is now grown to produce Ethanol (15% in Petrol) which is used to reduce oil imports in US. You can see what will happen to Maize production (Fertiliser) when natural gas becomes expensive.

    Fracking has fast depletion rates compared to conventional oil and gas. It will be more of a blip than an era such as conventional oil and coal production. We are headed for interesting times that will be characterised by destruction of the commons with no end in sight as selfishness and greed run rampant.

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