(Peter Martin’s article from the ABC NEWS Australia on 29 December 2020)
Naturally enough, the offer was accepted. The Australian
Government needed $1.5 billion, which it promised to repay on March 26. It
sought tenders. What was the lowest return an investor would accept to lend it
the money?
It wasn't short of offers. It fended off $8.2 billion of bids, and some of them were prepared to accept very low returns indeed. The lowest was -0.01 per cent. The minus sign indicates that, instead of the Government paying the lender a return for lending to it, the lender would pay the Government a return for the privilege of lending to it — a perfectly legal backhander if you like.
The lowest offer
for the $1.5 billion loan was at a negative interest rate.(Australian Office Of
Financial Management (AOFM)) The Government got a fair chunk of the $1.5
billion for less than nothing.
Some of the
bidders demanded more, but nothing too far into positive territory. It happened
because the sale of bonds benefits both parties: the Government gets to borrow
money it needs and the investor gets a safe place to park their money.
In those circumstances,
where benefits flow in both directions, there's no reason to suppose that the
final payment will flow in only one direction. And sometimes the direction
chosen is arbitrary. Economist Joshua Gans made the point on Twitter talking
about the coronavirus vaccine.
He said:
"Half of the economists out there think people should be paid to be
vaccinated, the other half think they should pay to be vaccinated earlier. Can
we at least work out whether the price is positive or negative?"
