Euro bonus – only for some


Under the surface the Euro crisis is producing dramatic consequences, which will be addressed in two different articles. The topic of my first post is something I´d like to call Euro bonus.

The credit worthiness being contested for many national borrowers, has led to an abnormal demand for bonds issued by a few stable economies – which in its turn has pushed down their interest rates to abnormal levels. Thus the well managed economies can borrow money at levels less than the real interest rate, in reality getting paid to borrow.

The outcome of this course of events is a giant redistribution of capital and welfare in Europe. Let me take an example.

The Swedish GNP amounted to 3495 billion SEK in 2011. The national debt was as of April 2012 1077 billion SEK. At the same time the current rate of interest at a 10-year government bond is around 1,5 per cent (approximately the same level as in Germany).

As a comparison the real rate of interest, is normally assumed to be around 2 per cent long term (10 years) – and as everybody knows the Central bank of Sweden (Riksbanken) is aiming at a level of inflation, also at 2 per cent. Together these two figures indicate a 10-year bond rate of 4 per cent p a.

For the time being Sweden could thus be considered to enjoy a bonus, corresponding to the difference between the current and the normal rate of interest – i.e. 2.5 percentage points. To amplify the significance of this, the difference could be multiplied by the current debt, indicating a bonus of 27 billion SEK p. a.

Now the Swedish state of course has several loans issued at higher interest rates than the currently prevailing.  The impact of the difference will therefore not be instantaneous, but spread out over time. Nevertheless the conclusion is that we are talking big money.

Would the artificially low interest rate hold for say 10 years, the bonus might be converted to a present value exceeding 200 billion SEK – and that based on a national debt which is relatively low.

My conclusion is that the ongoing crisis is redistributing enormous amounts of capital every day. From the most indebted countries to the well managed ones. Being obliged to pay the correspondingly higher interest rates, the aforementioned countries are deprived of resources, at least to the same extent as the well behaving countries are fed with benefits of the same sort.

However, it cannot be argued that the well managed countries are grabbing assets at the expense of the weaker ones – obviously they have put themselves in the mess.