Irish Examiner ... "ESRI issues debt warning"

“International banks concerned about our credit rating might be forced to raise the cost of borrowing to Irish financial institutions. In effect that would see Irish interest rates going higher than the benchmark rates laid down by the European Central Bank, which would be unprecedented”

irishexaminer.com/irishexami … qqqx=1.asp

Blue Horseshoe

Wow.

It’s news to me that this was even possible. Were others aware that this 2 tier IR situation was possible?

If true, it frankly makes a bit of a nonsense of EMU.

Hi Chomp

no nonsense at all … it’s all about risk … The ECB sets the interbank base rate, but if a lender thinks the borrower is a slightly higher risk, then they will charge more.

You can see this in action every day with retail lenders … banks, building societies, TV lenders … the higher the risk they apply to you, the higher your % rate of repayment.

Banks are smart borrowers so they shop around, so should always get the “best deal”, i.e. lowest rate. However each bank has a credit rating based on many factors and the quality of their loan book is a major part of that. If your credit rating slips, you pay more.

Blue Horseshoe

Hi BH, compliments of the season.

Sure, I understand the principles, but this seems to me to turn on it’s head the notion that we have a 1-size-fits all currency.

As we know, the primary concern with EMU all along with has been that as economies diverge within any given cycle, it is impossible for a single interest rate to suit them all. Hence, Ireland’s cheap money now will have to be “paid for” by more expensive money in the future when the contintental economies grow.

But this article shows this to be nonsesne. Instead of having different currencies with different/competing IRs, we’ll instead have 1 currency with nominally the same IR, but with different criteria attached to offering the currency at that IR. In effect, this creates a whole new “effective interest rate” not linked to the currecncy’s IR itself, but rather linked to the risk or level on endebtedness of the borrower.

The logical conclusion to this is that you’ll end up with 1 currency but 12 “interest rates”, with international institutions the de facto setters of the rate. For example, The IR for Germany could be the base rate, for France BR + .15, Ireland BR + .25 etc. And just like an actual interest rate, these criteria will ebb and flow over time as conditions change.

And whilst risk assessment has obviously always been in the mix, this to me looks like a brand new application of the principle.

Or am I reading it all wrong?

Hi Chomp

seasons’ to you and yours too!

The article is talking about higher rates to institutions lending to Irish comsumers (OK so thats mostly Irish banks in Ireland) but does not mean that lenders borrow just because of their nationality or location (i.e. because they’re Irish or in Ireland).

If you open Bank of Chomp here in Ireland and a significant part of your lending is to the Irish property market, a lender (another bank) might take the position that there is “significant risk” in lending to you and so will apply a premium. If however, BoC is mostly lending to commercial interests in Ireland who are investing in, say, far eastern manufacturing and so the lending bank takes the position that “that’s a great idea” they will apply a lower risk permium.

There’s no suggestion that Ireland Inc, will experience a rate out of line with the rest of the Eurozone. Indeed, Irish commerce could always borrow from “foreign” banks.

The integrety of the Eurozone is in no way threatend or underminded by such practices, which are standard banking proactices.

Blue Horseshoe