Thursday 27 July 2017

High price to pay for our credit binge

The Government's need to borrow is not being met by a willingness to lend, creating a deeper crisis, writes Colm McCarthy

The Irish debt crisis intensified during the week, with market yields on 10-year government bonds reaching 9 per cent on Thursday. Financing either the Government or the banks at rates as high as these is not feasible, and something has got to give. The debt crisis should be seen as having two elements.

The Government has a large deficit, since its revenue falls well short of spending. So it must seek to add to its outstanding debt for as long as the deficit persists. But both the Government and the banks also have substantial outstanding debts to the international markets, and the bank debt is guaranteed by the Government. These debts are not in the form of a permanent overdraft but are for fixed terms. They have to be repaid as their term expires, so new debt (at today's interest rates) has to be issued continuously to pay off the maturing liabilities. At current interest rates, this is simply not feasible. The markets have flashed the yellow card and it is turning red day by day.

Think of your own household. You have loans with the bank which mature and have to be paid back at various intervals over the next few years. You are also overspending, and would like to take out some fresh loans to finance this, as well as the loans needed to replace the ones that mature. The bank is worried and is quoting interest rates which are not affordable. It looks as if you cannot re-finance the maturing loans, nor can you find lenders for the new borrowing to finance the overspending.

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