The Romanian dictator Nicolae Causescu knew his days were numbered on 21st December 1989 when, from a balcony in one of Bucharest’s great squares, he starting giving a typical speech to crowd who suddenly started chanting “Timisoara”, the name of a town in west Romania where the Causescu regime had killed protestors days before. A week later, on live TV, the Causescus – equally repugnant husband and wife – were no more, after being summarily tufted out the door to an anonymous yard, after a trial of sorts, and shot. And in early December 2012, Minister for Finance Michael Noonan should not be surprised if he hears the chant “26th July” as he unveils his budget for 2013. The Memorandum of Understanding with the Troika obliges us to raise an extra €1.25bn in taxes in 2013, though recent statements from the Department of Finance suggest that taking into account the full year effect of tax hikes in 2012, that the true extra tax requirement is closer to €1bn
Yesterday, the NTMA managed to blow this sum in one fell swoop.
Remember the recent Fiscal Compact referendum where the central argument advanced by the pro-Compact side was that the Compact would give access to an insurance fund, the ESM, which would fund this country at sustainable rates in 2013 if the country was unable to get access to traditional bond markets at sustainable rates?
Well yesterday, we did get access to traditional bond markets and raised €5.2bn – €4.2bn of new money and we rolled over €1bn of debt that was falling due in 2013 and 2014. Not only that, but we paid rates which were marginally below those quoted on secondary markets. So we validated the notional rates that we hear quoted by Bloomberg each day and we raised €5bn which pushes the date by which we need more funding out to the end of 2013/start of 2014. So, why the dramatic criticism above?
We’re paying rates which are double those of the rates from the ESM, the “insurance fund” to which the “yes” vote in May 2012 was supposed to guarantee access. Over the lifetime of the €4.19bn of new bonds and the €1bn of rolled-over bonds, we can expect to pay an EXTRA €954m compared with our cost of funding from the ESM (see * and ** and *** below).
Now it should be said that the tax adjustment we’re obliged to make in 2013 must be repeated each year going forward and that we have further adjustments to make in 2014 and 2015 and beyond. So substituting market funding for ESM funding would not have completely obviated the need for further tax adjustments.
But yesterday, at a time when this funding is not needed, the €490,000-a-year plus 80% potential bonus CEO of the NTMA, John C Corrigan decided to issue debt at interest rates which suggest a lifetime premium of nearly €1bn over rates supposedly available from the ESM.
*The statement from the NTMA, with the results of the bond sale, say that €4.19bn of new funds was raised between 5-year and 8-year bonds, the former paying 5.9% and the latter 6.1% and the weighted average is 5.95%, presumably meaning there was €3bn of 2017 bonds and €1bn of 2020 bonds. Newspaper reporting states the Government “borrowed €3.9 billion at a rate of 5.9 per cent on a new five-year bond and a further €1.3 billion on an existing bond due in 2020 at 6.1 per cent”
** The interest rate on existing ESM borrowings ranges between 0.29% for five month funding, 1.73% for 3-year funding, 2.75% for 5.5-year funding and 3.6% for 10.2 year funding. The implied 5-year rate is 2.55% and the implied 8-year rate is 3.2%
*** €3.9bn for five years at 2.55% and €1bn at 3.2% for 8 years compared with €3.9bn for five years at 5.9% and €1.3bn for 8 years at 6.1%