What’s the effective interest rate on these bonds?
A comment in the other thread cited 8% and that seems to be consistent with my back-of-the-envelope calculations (don’t have the precise numbers, but we can make a reasonable estimate.)
It’s a 40 year bond, folks. 8% may be above current market rate for a bond with these characteristics, but it’s really not that outrageous, and not outside historical norms at all. It is by no means a recipe for fiscal disaster.
Perhaps the outrage should be that Piggs don’t seem to understand how long-term compounded interest adds up….[/quote]
While 8% isn’t a terrible rate, it is double what you can get a mortgage for. Not that I would expect it to be the same, but still – me thinks they they could get a better rate with a more conventional type of bond. They are paying more for the loan than the should.
Also, I think the concern is – what is the plan for paying it back ?
Lets say I borrow money at 8% and I don’t make any payments for 20 years. Between now and then, I either need to invest the money to get a return better than 8% so that I come out ahead, or – if it isn’t an investment – I should be putting away some of my income from other sources so I am prepared to pay that thing back. Or, I should secure the loan with some capital that the lender can take if I am unable to pay.
Not sure any of that is going to happen.
More importantly, if you aren’t paying off today’s debts today and your debts are piling up interest and you continue to spend more than you take in, it becomes completely unsustainable. Come the day they need to start paying the loan back, it seems entirely possible that they will be in a position to have to borrow more in order to finance the next round of refurbishments, doesn’t it ? So, faced with a payment higher that is 3x their income now, I don’t think that loan app is going to look very strong. What they gonna do – take out another loan and pay that one off 20 years later before they even make a single payment on the current (i.e. 20-year-old) loan. It’s nuts.
To me, it is simply a plan to allow the city to spend more than it makes (i.e. I expect they will spend the borrowed money and all their income every year) without feeling any consequences of their spending until they are long gone.
