Posts Tagged 'government'

Green Bonds Could Reduce Government Borrowing Costs Too

This post has been updated and moved to the blog’s new domain, conductunbecoming.ie, and you can find it here.

After my post a few weeks ago proposing a form of emissions-linked government bond which I called a ‘green bond’, I’ve realised an unintended benefit that the green 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 green 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 green bond from the government, that green 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 green 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 green 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 green 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 green 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 green 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 green 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?

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Want to show the public and the markets that you’re taking the economic crisis seriously, Mr Cowen? Then appoint Jim O’Hara to the cabinet.

This post has been updated and moved to the blog’s new domain, conductunbecoming.ie, and you can find it here.

While bouncing from economic crises to political crises and back again at an astounding rate, Brian Cowen has stumbled upon a brief opportunity to make a move that would reflect well both upon himself politically, and give a piece of potentially good economic news for the markets to ponder over for once. In a few weeks time, elections will be held to fill two vacant seats in the Seanad. The electorate for both of these seats are current TDs and Senators, and as the government has majorities in each chamber, government nominees are effectively guaranteed to win both seats. This gives Cowen the ability to bring pretty much whoever he likes into the Seanad in time for the new year. What’s more important, though, is that Cowen can, by article 28.7.2 of the constitution, appoint up to two members of the Seanad to the cabinet, which means that he can use these open Seanad positions as a platform to bring expertise into the cabinet that simply can’t be found amongst the ranks of the Dáil.

While such a step would be almost completely unprecedented (the provision to appoint Senators to cabinet has only been used, to my knowledge, once in the history of the state), the situation we’re in is similarly unprecedented. We’re currently in the midst of the greatest fiscal, economic and employment crises to afflict any developed country since the great depression, and there are only three qualified economists sitting in the 166-seat Dáil, two of whom are on the opposition benches. The degree of experience within the business sector in the Oireachtas is similarly underwhelming, which means there is very little the government can do to increase its authority on matters of the economy without bringing in outside help.

Bringing in fresh blood to take over as Finance Minister is not possible, as the position constitutionally has to be held by a TD. However, the second biggest economic portfolio, the Minister for Enterprise, Trade and Employment, is a perfect position to bring outside expertise into. The current Minister, Mary Coughlan, is widely considered to be way out of her depth in the portfolio, and her repeated gaffes are doing the government little help in the popularity stakes. As such, bringing in a suitably qualified person in her place would help show both the electorate and the markets just how seriously the government are taking the current economic crises.

There certainly isn’t a shortage of candidates more qualified than Mary Coughlan for the position, but one that immediately springs to mind is Jim O’Hara. Jim O’Hara is currently Vice President of the Technology Manufacturing Group in Intel, and General Manager of Intel’s Irish operations, where he’s in charge of over 4000 employees. He’s very well respected in the business community, and he represents exactly the kind of high-tech, export-led industry that the government so desperately wants Ireland to become focussed on as we rebuild our economy. Furthermore, he showed during his involvement in the Lisbon Treaty campaign that he’s not only knowledgeable on political affairs, but also that he’s more than capable of presenting himself well in front of the political media.

Bringing him into the cabinet could be done quickly and easily. As it would be best for O’Hara to be seen as apolitical in his appointment, running him as a Fianna Fail candidate for one of the two vacancies directly would not be advisable. However, Cowen could simply call on one of Fianna Fail’s 6 Taoiseach’s appointees in the Seanad to resign from their current seat and run for one of the vacant seats (which they’d be guaranteed to win). O’Hara could then be appointed by Cowen as an independent appointee of the Taoiseach into then-vacant slot. Cowen could perform a mini-reshuffle of the cabinet (most likely giving Coughlan back the Agriculture portfolio she previously held, and pushing Brendan Smith back into a Junior Ministry), and appoint O’Hara as Minister for Enterprise, Trade and Employment before the start of the new year.

Brian Cowen needs to start taking radical steps towards both fixing the economy as well as improving the government’s tattered reputation if he wants to stay in office much longer. Most of the choices available to him would involve substantial opposition from vested interests across the country. He now, however, has the opportunity to make an unprecedented move that would be opposed by virtually no-one but Mary Coughlan. By appointing Jim O’Hara as Minister for Trade, Enterprise and Employment, Cowen could show just how seriously he’s taking the crisis, and that he’s willing to think outside the box in his efforts to do so.

And, as an added bonus for Cowen, the appointment would also be a political jab against Enda Kenny. Kenny decided last month that the Seanad is useless and he’d scrap it if elected Taoiseach, an announcement that was considered rash even by many members of his own party. By using the Seanad as a means to bring extra experience into the cabinet, Cowen could prove to Kenny that it isn’t so useless an institution after all.

Abolishing the Seanad

This post has been updated and moved to the blog’s new domain, conductunbecoming.ie, and you can find it here.

Fine Gael last night announced that, if elected, they’ll hold a referendum to abolish the Seanad. Right now is probably the perfect time to talk about reform of the way our system of government operates, as our Government and Oireachtas are almost completely incapable of dealing with the country’s fiscal and economic collapse, and public confidence in our elected representatives must be reaching an all-time low. Talking about the role the Seanad plays in the running of our country is a vital part of that, and discussions will inevitably come to either reforming the manner in which the Seanad is elected and operates, or getting rid of the Seanad and adopting a reformed unicameral parliamentary system if it’s deemed to make law-making more effective. These sorts of decisions are not to be taken lightly, as the choice of governmental system can have a profound impact on the country for generations to come.

Unfortunately, when Enda Kenny announced the party’s plan to abolish the Seanad, it wasn’t as part of an overarching review of our system of government, with a refashioning of the legislative branch carefully designed to be more effective at devising, amending and passing laws. It wasn’t advertised as a way to allow the country to cope better with the changed circumstances that we’ll have to deal with in the coming decades. Nope, the big headline reason given for abolishing the Seanad was that (along with reducing the Dáil by 20 members) it would save €150 million over the course of a Dáil term. That’s €30 million a year. To put that in perspective, the country’s current annual budget deficit is now approaching €30,000 million. So, Enda wants to make the biggest changes to the constitution in the history of the state, all for the sake of reducing our deficit by 0.1%.

Of course, Enda did hint to more political reforms as part of a “New Politics”, but it doesn’t inspire confidence that the headline reform is so blatantly populist. It also doesn’t inspire confidence that the whole process of devising a new legislative system for the nation has been fobbed off to the party’s environment spokesman, Phil Hogan, who doesn’t even sit on the Joint Oireachtas Committee on the Constitution, the body who’s job it is to discuss electoral reform.

By all means we should start talking about reforming the Oireachtas, in what it consists of, how it operates and how it’s elected. But that debate should be given the importance it deserves, and not simply used as a populist headline-grabbing stunt as Enda Kenny did last night.


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