Here's a summary of Eurostat's figures for the twelve Euro-zone countries for 2008 (which was when the wheels started to come off):
| Government | Average interest | |
| debt-to-GDP | rate on govt | |
| ratio | liabilities | |
| Luxembourg | 14% | 2.2% |
| Finland | 41% | 2.9% |
| Spain | 47% | 3.4% |
| Ireland | 49% | 2.1% |
| Netherlands | 66% | 3.2% |
| Austria | 66% | 3.9% |
| Germany | 69% | 3.9% |
| Portugal | 75% | 4.0% |
| France | 76% | 3.7% |
| Belgium | 93% | 4.1% |
| Greece | 104% | 4.4% |
| Italy | 114% | 4.5% |
1. All these countries use the same currency, so the main influence on the interest rate must be counter-party risk or credit risk, and in turn the main influence on that is how high the government debt-to-GDP ratio is.
2. An X-Y scatter graph of the above figures shows a fairly straight line (Ireland is an outlier), so we can assume that as a rule, the interest rate that a government pays is roughly equal to 2.2% (at a debt-to-GDP ratio of 14%) plus another 0.23% for every 10% of GDP it owes above that.
3. For example, France owes 76% of GDP. 76% minus 14% is 62%, divide that by 10% = 6.2, so we'd expect it to be paying an interest rate of (6.2 x 0.23%) + 2.2% = 3.6%, which is pretty close to the actual figure of 3.7% from the table above.
4. If you then work out the marginal interest rate on each extra 10% of GDP that the government borrows, you'd find that Italy would have had to pay around 7.4% to borrow any more, i.e. €114 principal x 4.50% interest rate = €5.13 interest; €124 principal x (4.5% + 0.23%) interest rate = €5.87 interest; €5.87 minus €5.13 = €0.74, which you divide by the additional €10 principal borrowed = 7.4%
5. This is a lot higher than the interest rate on corporate bonds issued by larger Italian companies such as Enel. We can safely assume that government borrowing and spending to a large extent 'crowds out' private sector spending, and that a government will invest less efficiently than the private sector, so it must be pretty clear that beyond a certain point, all this 'fiscal stimulus' is wealth destruction on a grand scale - not just on the spending side but on the borrowing side as well.
6. Conversely, I could understand it if the low-debt countries like Luxembourg or Finland went on a bit of a splurge - their marginal interest rate would be around 3%, which is lower than the rate at which the private sector can borrow. In their case, it might just work.
Just sayin', is all.
PS, apparently Greece had to pay 6.4% interest on the bonds it issued yesterday, which is probably the average rate on Greek government debt - if that is their average interest rate, it wouldn't surprise me if their marginal interest rate were considerably higher than 10%.
5 comments:
My version of Excel gives a regression line of 2.08% plus 2.24% per 10% extra increase with an R^2 of 0.6648. Taking Ireland out gives 2.36% with an increase of 1.97% per 10% and an R^2 of 0.7875. In case you're interested....
Why is Finland paying so much more than Spain?
E, I used the magic fag packet to work out the regression line.
PS, the figure for Finland was a typo, it should have read 2.9% effective interest rate, a lot lower than Spain. This may be because F was running a surplus at the time and S a deficit, or because F borrows short and S borrows long.
Look at it this way. The Euro is the Deutschmark. The other 'countries' in the Eurozone are akin to 'Local authorities'. The 'local authorities' have to/like to borrow money to pursue their local projects. The bond markets set their prices by their perception of the various LA vis a vis the central government borrowing, that is German borrowing. The market also assumes that if any of the lA's gets into difficulties they will bne bailed out by Germany. Therefore each LA cost of debt should be expresed as a %age of German debt.
L, that's the general perception, but Germany is in fact roughly in the middle of the table (or was two years ago).
http://the-free-lunch.blogspot.com/ mailed me a link to this table. Interesting, and useful. However, to be used differently. Your first point and premise does not apply. I would argue that the interest rate is a function of (and perhaps mainly determined by) the success of the relevant national debt agency (or Ministry of Finance) in timing and apportioning tranches of bond issues. Remember, Germany's government bond yield remains the benchmark for euroland (i.e. it is mostly the lowest). But this table refers to the average interest rate on outstanding government debt. So if Germany issued much debt during a time of high interest rates, this would push up its average, etc. This is likely to be the dominant feature. This should explain why Ireland has such low and Germany such high interest on debt.
Warm regards,
Richard Werner,
Providence Asset Management Ltd.
Profit Global Macro Fund AGmvK
www.profitfund.com
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