Tag Archive for 'government debt'

A Perfect Opportunity

Published on 20 February, 2010. 0 Comments

A couple of months ago, I blogged about the possibility of an experienced outsider being brought into the cabinet as Minister for Trade, Enterprise and Employment (Jim O’Hara being that outsider). Through the various twists and turns of Irish politics over the past week or so, a sequence of events has given Brian Cowen the perfect opportunity to make just such a shake-up:

  1. Willie O’Dea’s resignation from the cabinet
    With O’Dea gone from the Department of Defense, a cabinet reshuffle is now inevitable. While many are speculating that Cowen will simply appoint one of the junior ministers to fill O’Dea’s post, he hasn’t reshuffled his cabinet since taking office in 2008 (in a very different economic climate), and now would be the perfect time to do so. What’s more, with a vacant seat on the cabinet, an independent minister could be brought in without having to relegate any of the sitting Fianna Fail ministers to the backbenches. This could help diffuse any animosity that the FF parliamentary party might have about bringing in someone from outside Fianna Fail.
  2. Deirdre de Burca’s resignation from the Seanad
    As well as an opening in the cabinet, there’s now an opening in the Seanad, thanks to Deirdre de Burca. As she occupied one of the 11 Seanad seats reserved for nominees of the Taoiseach, Brian Cowen can now appoint whoever he likes, at as short notice as he likes, to replace her. Indeed, he could nominate someone on Monday morning, and by Monday evening they could be sitting at the cabinet table. Of course, as the seat was previously held by a Green, the Green Party will undoubtedly want another of their own to replace her. Cowen would do well to remind them that Fianna Fail recently elected Niall O’Brolchain as an additional Green senator to replace Labour’s Alan Kelly, and that Cowen’s appointee would be independent, rather than from Fianna Fail. Of course, if that didn’t work, a promise of an additional junior minister post for the Greens in the reshuffle would probably do the trick.
  3. Mary Coughlan’s cock-up over the Ryanair hangar proposal
    Mary Coughlan has made quite a few mistakes and gaffes during her tenure as Minister for Enterprise, Trade and Employment, but, at a time when unemployment is at its highest in a generation, her inability to secure 500 jobs that seemed to be offered on a plate by Ryanair is the first one to really make her position look untenable. What’s more, after O’Dea’s resignation, any further revelation in the Coughlan-Ryanair saga could have catastrophic consequences for the government. It would be best for Cowen to reassign her to a different portfolio as part of a wider cabinet reshuffle, which would prevent any arguments over her handling of Ryanair’s proposals from becoming a resigning matter. In order to illustrate that her movement out of the portfolio is simply part of the reshuffle and not a demotion, she could keep the position of Tanaiste in her new role.
  4. Greece’s future is still shaky
    Within the the next week, Greece is expected to try to raise up to €5 billion euros from international bond markets, which will be a big test of market confidence in their finances. If Greece struggles through this test, renewed pressure will come not only on them, but also on the other ‘peripheral countries’ in the eurozone, including Ireland. Brian Lenihan’s budget in December bought us a bit of leeway compared to Greece, Spain and Portugal, but we can’t count on that goodwill from the markets to last forever, and now would be a very good time to differentiate ourselves once again, by bringing in an outside expert to a major economic post on the cabinet. By picking the right person, and handling the international press well, any potential fallout from Greece’s problems could be neatly defected, keeping our own borrowing within reasonable costs.

I had previously suggested Jim O’Hara to take over the role of Minister for Enterprise, Trade and Employment, and I still think that he would be a very good choice. Of course, so long as Cowen were to avoid appointing anyone who was in any way involved in either the property or finance industries, there are quite a few successful Irish businessmen and businesswomen who would fit the bill, including some of the members of the Taoiseach’s own innovation taskforce. The important thing is to appoint someone who would be respected by the international business community, with any experience in high-tech exports as an added bonus.

Whoever Cowen were to choose, he now has a perfect opportunity to create a rare piece of good news for the government, and to end a dreadful couple of weeks for his party (and Irish politics as a whole) on a high note. Of course, whether he has the fortitude to make good on this opportunity is a different matter entirely…

Tags: , , , , , , , , , , , , , , , .

Carbon Bonds Could Reduce Government Borrowing Costs Too

Published on 2 December, 2009. 0 Comments

After my post a few weeks ago proposing a form of emissions-linked government bond which I called a ‘carbon bond’, I’ve realised an unintended benefit that the carbon bonds would bring to any government that issues them: they would reduce long-term borrowing costs. This actually surprised me when I realised it, as it certainly wasn’t one of the intended consequences of issuing the bonds, but after considering the matter, it’s actually quite clear that borrowing costs would be lower for governments offering carbon bonds, subject to a couple of conditions.

I’m not going to go over a formal mathematical proof here (I like to think my blog hasn’t become quite that nerdy yet), but here’s the reasoning behind my claim:

Assume creditors are buying ten-year government bonds at an interest rate n. Now, if they also have the option of buying a ten-year carbon bond from the government, that carbon bond is going to have a base interest rate m, which would be increased by r if the government goes over its promised allocation of emissions permits by some given amount. We’ll assume that the market of creditors will place a probability p on the government actually having to pay out the higher m + r interest rate. The only reason that p would be zero would be if the markets had absolute and complete confidence that a government would never renege on its promises. We know that’s not true, so we can say that p is nonzero.

The expected interest payment for the carbon bond will be the base rate m plus the increment r times the probability p that the increment will have to actually be paid. That is, expected interest will be m + (p * r). Given the choice between either the regular government bond or the carbon bond, if one has an expected interest rate which is higher than the other, then creditors will simply all buy the one with the higher rate. This means that, in an efficient market, the expected rate for both should be equal, ie n = m + (p * r). Now, we know that both p and r are nonzero (if r was zero, then it would just be a regular bond), and are both positive. This means that m must be less than n for the market for both bonds to operate. That is, the base interest rate on the ten-year carbon bond has to be lower than the interest rate on standard government bonds. Which means that, so long as the government doesn’t actually deviate from its proposed emissions limits, issuing carbon bonds is going to be a definitively cheaper way to raise cash.

Of course, this is a simplified explanation; there would actually be a range of possible rs depending on how far over the emissions schedule the government went, and then a range of possible ps for the expected probabilities of each of those rs being paid out. However, the principle remains the same; markets are going to be willing to accept a lower base interest rate on carbon bonds so long as there is some non-zero probability that a higher interest rate will have to be paid out instead.

Interestingly, what a government would actually be doing with this scheme is betting on its own trustworthiness. The government is assuming with certainty that it will stick to its promises, whereas the markets don’t have the same faith. By issuing carbon bonds, a government can actually leverage this lack of trust in the form of lower interest rates. Of course, to benefit from these lower base rates, the government would actually have to stick to its promises, and can it really be that confident of itself?

Edit (30/03/2010): This post was originally written using the term ‘green bonds’. I’ve since changed all references to ‘carbon bonds’ instead. This is to bring the terminology closer to that used by Michael Mainelli and Jan-Peter Onstwedder in a proposal made last year, where they used the term ‘index-linked carbon bonds’ to describe effectively the same thing. The change should also remove any confusion with other uses of the term ‘green bonds’.

Tags: , , , , , , , , .