Borrowed billions spent in a few days

EVERY time the National Treasury Management Agency successfully borrows money on behalf of the taxpayer by issuing new bonds, as occured last Tuesday, it is reported as “positive” for the country and by inference a reflection of approval by the free market for the policies being pursued by the government. However, nothing could be further from the truth.

First, the borrowing itself is financially irrational. Based on the current government borrowing requirement for 2010 each of the two €750 million tranches of monies borrowed this week, over six and eight years respectively, will be spent in under 13 days. It is akin to taking a term loan out to go on a two-week summer holiday and the state is doing this on a continuous basis.

Second, the reason the free market is willing to lend such monies to Ireland, rather than impose realistic rates or not lend at all, is that the ECB is backstopping the borrowing by creating an artificial market for such EU government bonds.

The ECB is doing this as it is the lesser of two evils; if certain European governments defaulted it would put in peril the European banking system which has lent them so much money in the first place. Thus the ECB is compelled effectively to faciliate such lending to Ireland at artifically low rates. Paradoxically, this further facilitates the increasing of the debt levels which put these countries in their current difficulties.

What tangled webs we weave.

Anthony Sweeney

In Der Hut

Baiersdorf

Germany