Irish eyes are smiling as Ireland pays less for debt than UK

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By Russell Bruce

The news that the interest rate the Irish government is paying on its debt has fallen below the yield demanded for the London’s Treasury’s gilt debt has no doubt led to raising a glass of Guinness in Dublin.

The UK is currently paying 2.69% whilst Ireland, recovering from their own property bubble and banking crisis, has seen yields on their 10 year bonds drop sharply over recent months. Irish debt yields have dropped to 2.67%, 2 basis points below London.

By Russell Bruce

The news that the interest rate the Irish government is paying on its debt has fallen below the yield demanded for the London’s Treasury’s gilt debt has no doubt led to raising a glass of Guinness in Dublin.

The UK is currently paying 2.69% whilst Ireland, recovering from their own property bubble and banking crisis, has seen yields on their 10 year bonds drop sharply over recent months. Irish debt yields have dropped to 2.67%, 2 basis points below London.

Cheers. Raise that glass of Guinness to the folk over the water. The cost of Irish debt has dropped 8.55% in the last month and is down 24.27% on a year ago. The UK, in contrast, has seen their 10 year bond rate rise by 41.54% over the last year.

Central Bank interest rates impact on the cost of borrowing, so the ultra low bank rates in major economics around the world are also keeping down the cost of borrowing. UK bank rate is currently 0.5%, the lowest it has ever been. In the US and Euro countries, including Ireland, bank rate is even lower at 0.25%.

Markets have been nervous that the Bank of England would raise interest rates due to the Southern frothy property bubble, but that seems to have temporarily eased, for the moment – not the bubble but the threat, as perceived by the market of UK interest rates rising sooner.

In non-Euro EU countries rates vary, but are similar to the trend in western markets. Sweden’s is 0.75%, Denmark’s 0.20% and the Czech Republic’s 0.05%.

In non-EU countries Norway pays 1.5%, rewarding Norwegian savers, and as they have virtually no debt they are hardly concerned about the 2.67% they pay on their debt. Also 2 basis point below UK interest rate payments Norway’s debt risk rating is a great deal lower than the UK’s would be if UK base rate rose to Norway’s 1.5%.

Switzerland, in attempts to keep the value of the Swiss franc from rising has set bank rate at 0.00%. No country can set their bank rate in isolation. All are tied to the prevailing trend to stabilise currency and capital flows.

The correlation between central bank rates, premium for risk, investor demand for a countries debt – plus the effect of quantitative easing (often called money printing, but involves the central bank issuing more bonds, stuffing them in a drawer and paying the interest to itself) all contribute to what a country pays for its borrowings.

Deducting central bank rate from what a country is currently paying gives us an idea of what the premium on the other factors is. On this basis Norway is paying a premium of 1.17% and the UK is paying a premium of 2.19%. Cheers George Osborne. Pour yourself another glass of champagne George and pat yourself on the back.

Unionist politicians are happy to point out that with a currency union Scotland would have no control over interest rates, which would be determined by the Bank of England. Whilst the Bank of England would have to take some cognisance of Scotland’s position they would be most likely to opt for the interest of the largest portion of the currency area. As that is London and the South East, any action to raise interest rates would actually impact more negatively on the North of England than Scotland.

Scotland today has the largest GDP per capita after London. Even if Scotland had its own currency and was able to set interest rates through its own central bank, the freedom of movement would be limited as cognisance of rates in major trading partners, like rUK , would be a necessary constraint.

Changed days from the 60’s 70’s and 80’s when Scotland was last to come out of a recession and first to feel the cold winds of the next. The reality is interest rates in mature western countries do not move in isolation, but in concert with prevailing circumstances, always looking over the shoulder to the action of competing economies.

With rUK national debt predicted to rise to 104% of GDP by the National Institute of Economic and Social Research (NIESR), if Scotland votes for independence, a rise in interest rates will push up the cost of UK borrowing and unleash a new stream of budget cuts.

The Treasury has guaranteed all present UK debt so whatever the outcome of negotiations over the splitting of the debt, the share Scotland took on would be reimbursed as UK bonds matured. We would have an agreement to serve part of the debt, but it would remain rUK debt. Scotland would need to raise some funds so that it could pay the bills, simple cash flow management to level out the periods between tax receipts.

As a share of rUK debt became payable a future Scottish Government could decide how much to pay off and how much it might want to issue as Scottish Government Bonds. Such recourse to the markets will be spread over many years, by which time Scotland will easily have managed its reputation for sound economic management backed by a resilient and diversified economy.

A shorter version of this article has just been published in www.voteyesborders.com of which Russell is editor. Russell will continue to write for newsnetscotland.com on the economy and related issues