5 May 2016

Effective Interest Rates on European Public Sector Debt 1995-2015

Here's something I wanted to do when Eurostat released the figures for European Public Sector Debt and Interest charges on the 21st April. Unfortunately, I was very busy putting together a €11.4 million project to create the Toulouse Mind & Brain Institute (TMBI). I finally got the thing submitted yesterday, having managed to round up well over 300 members from 25 different labs in Toulouse, of whom 240 have permanent positions. If you are interested, feel free to download my handiwork here.

But now have a bit of time for some more fun things ;-)

I did something pretty simple, given that the Eurostat gives an almost complete set of data for Public Sector Debt and Interest payments for every EU country since 1995.

So, if you know how much the government owed at the end of a particular year, and how much tax payers money was handed out during the year, you can easily calculate the effective interest rate that was being paid. Just divide one by the other. Here's the result.

The good news is that the average rate has been dropping. In 1995, we were paying nearly 8% interest on public sector debt, with some countries (Greece, Hungary, Romania, Slovakia and Slovenia all paying over 10%. The Romanians win the prize for the highest rates, because they were paying interest at nearly 24%. Were they using a credit card maybe?

But, rates over 10% have been a thing of the past since 2003, and in 2015, the average rate was a bargain 2.7%. Only Croatia, Hungary and Romania were paying over 4%. Wondeful, right? We should all be celebrating.

But then there is the bad news. Haven't we all been told that Central Banks have been offering money at knock down prices to anyone in the Financial Sector who can be bothered to ask. The list of current rates for European countires can be found  here
  • Eurozone : 0.0% 
  • Czech Republic : 0.05%
  • Denmark : 0.05%
  • Hungary : 1.05%
  • Norway : 0.5%
  • Poland : 1.5%
  • Sweden : -0.5%
  • Switzerland : -1.25% 
  • UK : 0.5%
You can find the historical information here where you can see the historical evolution of rates for 1 year, 2 year, 5 year and Maximum duration loans from the Fed, ECB, Bank of England and so on.

Here's the ECB 5 year loan rates since 2000 - well under 1% since 2011.
And here are the 5 year rate at the Bank of England since around 1990 - 0.5% since 2009 or so.

In both cases, it is clear that taxpayers in the Eurozone and the UK have been paying way over the market rates on Public Sector Debts. Why?

If you've got a mortgage, and they are charging you 10%, but you can get loans at 2%, you renegotiate, and pay off the 10% loan with the 2% right?

So, why don't our governments do the same thing? Why don't they just say to the Primary Markets or the GEMMS (the banks that have a monopoly on lending our governments money), that they will not pay more that 1% above the market rate. When the market rate is 0%, that's 1%.

Are we being ripped off? You bet we are.

But this racket has been going on since 1694 when the Bank of England (a private bank) discovered that the King was too stupid to realize that when they lent him money to fight wars, they just invented the money out of thin air. UK taxpayers have been paying an average of 4.4% in GDP every year since 1694 with peaks of 10% of GDP following the Napoleonic wars, and around 9% for an entire decade after World War 1. The roaring twenties really were roaring if you were anywhere near the bankers who had lent the warring nations non existent money for fighting the war. Of course, as we know, they couldn't keep it going, and things went belly up in 1929.

This wonderful system, invented by my compatriots I'm ashamed to say, got foisted on the rest of the world from the 1970s onwards. And now, with the Lisbon treaty, no government is allowed to borrow directly from the central banks at the market rate of 0% (or whatever). Instead, they have to go via our friends in the Banking system who impose a slight markup. Currenly, in the Eurozone, that slight markup is 2.66%. That racket cost Eurozone taxpayers €250 billion last year - equivalent to 2.4% of GDP.

Does anyone else think that this is insane? Does anyone else think that this racket should be stopped immediately? No government should ever pay interest at a rate above the one provided by Central Banks to commercial profit making banks. Full stop.

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