Originally Posted by Harmonica

Is this really that good? Does this not mean we repay more money but at slower rate?

If we were trying to pay back the capital, perhaps. As it is, national debt is very rarely paid off (seriously, we didn't pay off any during the Celtic Tiger) - instead, it's rolled over when it matures (in other words, you borrow again to pay back the original lender).

So originally you had €67.5 billion at, say, 6.4%, for €4.32 billion a year, and you had to find a way of rolling it over in 7.5 years, which means that in about 2018 you have to borrow a fresh tranche of money to pay back the EFSF et al.

If the rate goes down to 3.5%, then you're paying €2.36 billion a year - and you borrow the fresh tranche in 2026 rather than 2018.

Most importantly, the debt will be there in 2026 either way. Seriously, it won't be paid back, or at least is hugely unlikely to be paid back. In the first case, the borrowing to roll it over happens in 2018, in the second case it happens in 2026. That makes a difference because there's a lot more room for growth and inflation between here and 2026 than there is between here and 2018.

Inflation reduces the value of the debt (assuming we're paying off the interest) - if we assume an inflation rate of c. 2% for the period, then the €67.5 billion debt from 2011 will be worth in effect €58.76 billion in 2018, or €50.15 billion in 2026. And economic growth reduces the relative burden on the economy.

In terms of interest repayments, the difference isn't as large as you might think - 6.4% for 7.5 years means €34.56 billion, 3.5% for 15 years would be €37.8 billion - you save a good deal more than that on the inflationary adjustment. And, as I said, the debt won't be paid off in 2018 anyway - it will be rolled over, which means paying the market rate interest for the subsequent 7.5 years. If that's 3.5%, then the total interest in the original deal is 7.5 years @ 6.4% and 7.5 years @ 3.5% (total €53.44 billion), whereas the new deal is potentially 15 years @ 3.5%.

So, if the new deal really is 3.5% over 15 years compared to a current 6.4% over 7.5 years, then the deal has the potential to save €24.25 billion over the next 15 years - €8.61 billion in inflation adjustment, €15.64 billion in reduced interest payments. That's €1.62 billion a year, which is not small.

Still, the details won't be exactly like that.

Originally Posted by Cassandra Syndrome

Sorry, its a Karl Whelan spreadsheet I downloaded a couple of weeks ago. I can't find the link. Back in January the Euro interest rate swap was 2.47% for 5 years, than by May it was 3.54% for 10 years. The difference being the rise in the Euribor and the maturity dates. The EU added on a margin of about 3% to bring it up to between 5.5% and 6.6%.

Today the 15 year interest rate swap is 3.66%, so the EU is putting a negative margin of -0.16%? It doesn't make sense.

Presumably that is why our new rate has been reported as being "between 3.5% and 4%", because we'll be paying whatever it costs to borrow the money, with no premium added on as previously. So at the moment that would be 3.66% as you say.

Crucially, does anyone know if this new rate will apply retroactively? In other words, will we get any kind of refund on the higher interest rates we've been paying to the EU since the bailout began?

Originally Posted by commonman

Its just going to be another fudge to get them by for a few more months. The euro project is going to end in a diaster and there is nothing they can do about it. And i used to think that people like Nigel Farage were mad in the head, how right they were.

too many rich people would loose out , the elites always find a way of protecting the system , while the euro will weaken , thier will be no appocolypse

Yay, we'll be paying less interest on money we don't owe.

Win fncking win.

Originally Posted by dresden8

Yay, we'll be paying less interest on money we don't owe.

Win fncking win.

Wrong,

We will be paying more in interest over a longer period of time on money we dont owe.

Originally Posted by ibis

If we were trying to pay back the capital, perhaps. As it is, national debt is very rarely paid off (seriously, we didn't pay off any during the Celtic Tiger) - instead, it's rolled over when it matures (in other words, you borrow again to pay back the original lender).

So originally you had €67.5 billion at, say, 6.4%, for €4.32 billion a year, and you had to find a way of rolling it over in 7.5 years, which means that in about 2018 you have to borrow a fresh tranche of money to pay back the EFSF et al.

If the rate goes down to 3.5%, then you're paying €2.36 billion a year - and you borrow the fresh tranche in 2026 rather than 2018.

Most importantly, the debt will be there in 2026 either way. Seriously, it won't be paid back, or at least is hugely unlikely to be paid back. In the first case, the borrowing to roll it over happens in 2018, in the second case it happens in 2026. That makes a difference because there's a lot more room for growth and inflation between here and 2026 than there is between here and 2018.

Inflation reduces the value of the debt (assuming we're paying off the interest) - if we assume an inflation rate of c. 2% for the period, then the €67.5 billion debt from 2011 will be worth in effect €58.76 billion in 2018, or €50.15 billion in 2026. And economic growth reduces the relative burden on the economy.

In terms of interest repayments, the difference isn't as large as you might think - 6.4% for 7.5 years means €34.56 billion, 3.5% for 15 years would be €37.8 billion - you save a good deal more than that on the inflationary adjustment. And, as I said, the debt won't be paid off in 2018 anyway - it will be rolled over, which means paying the market rate interest for the subsequent 7.5 years. If that's 3.5%, then the total interest in the original deal is 7.5 years @ 6.4% and 7.5 years @ 3.5% (total €53.44 billion), whereas the new deal is potentially 15 years @ 3.5%.

So, if the new deal really is 3.5% over 15 years compared to a current 6.4% over 7.5 years, then the deal has the potential to save €24.25 billion over the next 15 years - €8.61 billion in inflation adjustment, €15.64 billion in reduced interest payments. That's €1.62 billion a year, which is not small.

Still, the details won't be exactly like that.

We need inflation, which the Germans won't let us have, in case it turns them all into Jew murdering nazis again.

As inflation tends to.

Originally Posted by AlanDukesofMoralHazard

So, to use an analogy, my neighbour's car loan I've been forced to pay has been converted to a mortgage? Which will cost more with accumulated interest in the long run?

Yes and no. The total amount is higher, but your annual repayments are lower. And because the repayment term is long, inflation gradually makes a higher amount in nominal terms, less in real terms.

As an example, in 1974 my parents bought their current house. The mortgage was repayable over 30 years, at a fairly high fixed interest rate, and all their friends said they were crazy, it'd be a millstone round their necks forever, etc etc. But in 1991, and without either of them changing job (my mum only ever worked part-time anyway), they paid off the remaining capital early. This meant that they no longer had to make a monthly mortgage payment of, errrrr....... IR£40. On a capital sum of IR£4,000.
Now I know there was very high inflation in the late 70s and 80s, higher than we'll see in the next decade, but the point still stands - the millstone round their necks in 1974 would now be less than the cost of a meal for two in an average restaurant today. That's what inflation does to debt.

Originally Posted by Bi ciuin

Wrong,

We will be paying more in interest over a longer period of time on money we dont owe.

I stand corrected.

Originally Posted by Bi ciuin

Yep several, and at the end of the mortgage I own the property and it has a value. I once purchased a house with a mortgage and sold it for a massive profit.

Care to explain to me we what will be getting for our money?

A State that functions, and can provide services to its people.

Originally Posted by dresden8

We need inflation, which the Germans won't let us have, in case it turns them all into Jew murdering nazis again.

As inflation tends to.

The ECB has a 2% inflation target - to keep inflation about that level, not to eliminate it. The Germans worry about hyper-inflation, but 2% isn't hyper-inflation.