Author: Philip Lane

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.

The presentation file is here.

Update:  supportive FT editorial here.

Some key points (from the ongoing press conference):

• Central Bank expected to hold the government bonds for a weighted average of 15 years  – so the cheap ECB funding will not be extinguished very quickly.  The gap between the interest rate it receives on the bonds and the cheap ECB funding will flow back to the government via the profits of the central bank.
• (Only if financial stability restored would the central bank sell the bonds on an accelerated schedule, beyond the minimum specified path. But if financial stability restored, sovereign bond yields would be lower, so selling the higher-interest bonds sensible.)
• There are liquidation costs in 2013, so no material difference in this year’s general fiscal balance
• In 2014-2015, the fiscal balance improves by 0.6 percent of GDP.

here.

Kieran Kennedy led the ESRI from 1971 until 1996 and wrote extensively on Irish economic development and on the unemployment problem – an account of his career is available on the ESRI website here.

My condolences to his family.

Story here.

Dukes confirms the IBRC board ‘has been liquidated’ – here.

Update – live blog here.

Update –  Q&A file from DoF here.