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%.
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. The Great British public will not notice. All you have to do is tell them what a great job you are doing and make day trips to Scotland to warn of the dire consequences of Scotland managing its own affairs.