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News : Irish Economy Last Updated: Aug 26, 2015 - 2:54 AM


Irish Economy: Debt sales with interest rates at lowest levels since Babylonian Empire
By Michael Hennigan, Finfacts founder and editor
Nov 22, 2012 - 3:45 AM

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Source: BBC/Bank of England

Irish Economy: In the Great Recession there have been many historic milestones; on March 05, 2009, the Bank of England cut its key benchmark rate to 0.5%, the lowest since it was founded in 1694. In recent years interest rates in many countries have been as low as at any time going back to the Babylonian Empire according to the classic 'A History of Interest Rates' [pdf: 11mb - - updated] by Sidney Homer, that was first published in 1963. So as the euro debt crisis continues and Ireland faces years of economic stagnation (the multinational sector will continue to provide the illusion of real growth), the current market perception of Irish risk is lower than that of the other economies which are in intensive care.

Interest rates were commonly at double-digit rates in Babylonian times and Homer wrote: "After the Persian conquest, 539 BC, there is some evidence that 40% became a common rate of interest in Babylonia. This was after Mesopotamia had lost her independence. Babylonia was no longer a great capital city."

On Wednesday, the 3-month EURIBOR rate was 0.91%; it was 5.29% in early October 2008.

Finfacts reported earlier this year that the yield on 10-year British gilts dropped to a record low of 1.92% in January, which was below the previous low of 1.96% recorded in 1897 and the lowest level since Bank of England records began in 1703.

In July France joined Eurozone countries such as Germany and the Netherlands in selling short-term debt at negative interest rates.

Days before, the European Central Bank cut its key policy rate to a new low of 0.75% from 1%  and reduced its deposit rate to zero.

US non-financial companies hold about $5tn in cash -- equivalent to a third of the annual economic output of the United States.

The Wall Street Journal said last month that Apple had about $121bn in cash holdings, up from $117bn in June. Put in perspective, only 18 companies in the S&P 500 had higher market caps than that.

There is a search for yield and the market perception of a lower risk in Irish debt compared with the other struggling economies of the Eurozone has been positive for selling debt.

Seamus Coffey, the UCC economist, summarised the recent activity:

"The NTMA’s 3-month Treasury Bill programme has almost become routine.  The results of last week’s auction saw a bid-to-cover ratio of more than four and a yield of 0.55%.

The semi-state utilities engaged in longer-term issues with bids for ESB’s 7-year bond covering the €500m offered last week 12 times while Bord Gáis's €500m 5-year bond issued Wednesday was covered 13 times.

Also last week, Bank of Ireland issued a €1bn covered bond on offers of €2.5bn after initially announcing that would be seeking €0.5bn.  The bond was given a Baa3 rating by Moody’s, one notch above the Ba1 non-investment grade rating assigned by Moody’s to the bonds of the Irish government.

Both Moody’s and Fitch issued statements about Irish government bonds last week (covered here) with the only minor change being a change in outlook by Fitch from negative to stable.  Today, there were some largish price moves in Irish government bonds, particularly at the long end.

The daily report from the Irish Stock Exchange (archived copy) shows that the price of all bar one of the bonds from 2017 on rose by at least 0.8%, with both the 2020 bonds rising by more than 1.0%.  The yield curve has a fairly standard shape and all the yields out to 2025 are below 5%.  The five-year yield from the October 2017 bond is around 3.1%."

In 'The Birth of Plenty: How the Prosperity of the Modern World was Created' (read first chapter here), author William Bernstein writes:

Interest rates, according to economic historian Richard Sylla, accurately reflect a society’s health. In effect, a plot of interest rates over time is a nation’s 'fever curve.' In uncertain times rates rise because there is less sense of public security and trust. Over the broad sweep of history, all of the major ancient civilizations demonstrated a 'U-shaped' pattern of interest rates. There were high rates early in their history, followed by slowly falling rates as the civilizations matured and stabilized. This led to low rates at the height of their development, and, finally, as the civilizations decayed, there was a return of rising rates. For example, the apex of the Roman Empire in the first and second centuries A.D. saw interest rates as low as 4%. The above sequence holds only on the average and over the long term, with plenty of shorter-term fluctuations. Even during the height of the Pax Romana in the first and second centuries, rates briefly spiked as high as 12% during times of crisis.

After the Fall of Rome (traditionally dated A.D. 476), rates in the Empire skyrocketed. Little more than two centuries later, Western commerce received yet another staggering blow—Mohammed’s Hejira and the rise of the Arab empire, which overran most of the Iberian Peninsula. By acquiring control of the Gibraltar Straits, the Arabs effectively cut off Mediterranean trade.

The historical trace of interest rates simply disappears during the late Roman period and does not reappear until almost a millennium later, in England. There, rates well in excess of 40% were recorded in the twelfth century, and in Italy, rates averaged about 20% later in the same century. The first glimmer of a more reasonable future appears in Holland, where rates fell to as low as 8% as early as 1200.

Such high interest rates suggest a virtual absence of capital markets and constituted a commercial and economic straitjacket from which there would be no escape for centuries. As religious doctrine strangled intellectual progress, so, too, was everyday commerce hamstrung by the absence of capital markets. The Christian prohibitions against moneylending did not help. The ban’s origins were scriptural, starting with Exodus 22:25: 'If thou lend money to any of my people that is poor by thee, thou shalt not be to him as a usurer.' Saint Augustine held that 'business is itself an evil,' while Saint Jerome opined that "a man who is a merchant can seldom if ever please God.'

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