Saturday, March 5, 2011

Swimming in debt of our own making

There is loads of talk of the growing debt pool that is threatening to drown us.  Much of the recent debate has focused on the burden of the bank bailout, but it is important not to forget the biggest reason for our borrowings – the public finances.

At the end of 2007 the National Treasury Management Agency (NTMA) stated the Irish National Debt was €37,559 million which was not a huge increase on the €30,085 million that had formed the National Debt in 1987.  Of course, as a ratio of GDP the debt had fallen from more than 100% of GDP t0 25%.  What we are concerned with here is what has happened to the National Debt since the end of 2007 and what is likely to happen over the medium term. 

Since 2007, we have run substantial Exchequer deficits (% GDP).

  • 2008 Deficit – €12,714 million (7.1%)
  • 2009 Deficit – €20,641 million (12.9%)
  • 2010 Deficit – €18,025 million (est. 11.3%)

These figures exclude any money that was directly pumped into the banks by the Exchequer but does include contributions to the National Pension Reserve Fund.  In 2008, €1,690 million was transferred to the NPRF, and because of a frontloading of the 2010 contribution €3,000 million was transferred in 2009.   From the total amount of the fund some €10,700 million was used to buy equity and preference shares in the AIB and BOI). 

Adding the deficits from 2008-2010 to the 2007 debt, brings up a total of debt €89,939 million.  Virtually all of this was due to government deficits, as opposed to banking measures.

In 2009, the Exchequer pumped €4,000 million directly into Anglo Irish Bank and 2010 saw €100 million go into Irish Nationwide and €625 million in the EBS.  Adding this €4,725 million to the deficit-related debt gets us to a total of €94,664 which is just over a billion more than the “official” end-2010 debt given by the NTMA of  €93,446.  (The difference is likely due to the use of some of the cash that the government has on deposit.  According to the NTMA there was €15,709 million of cash on deposit in the Exchequer and other accounts at the end of 2010.)

This is not the full story and we must add the €30,850 million of Promissory Notes used to recapitalise Anglo, EBS and INBS in 2010.  When added to the NTMA’s figure this brings up a total of €124,296 million, of which €35,575 million or 28.6% is directly related to the bank recapitalisations.  Adding the money used in the NPRF will increase this percentage.

Here are the IMF projections of the public deficits (with % of GDP) for the next three years and we will assume that these include everything except banking recapitalisations over that time.

  • 2011 projected Deficit – €16,700 million (10.5%)
  • 2012 projected Deficit – €14,100 million  (8.6%)
  • 2013 projected Deficit – €12,700 million (7.5%)

The funding for this comes from the EU/IMF deals and would bring our National Debt up to €167,796 million by the end of 2013.  The great unknowns are the amount of additional money that will have to go into the banks and whether the money used to create the National Asset Management Agency (NAMA) will be repaid in full.  We know that there will be a further €10 billion bank recapitalisation over the coming weeks (once a new government is formed).  This will come from the NPRF so will not result in any additional borrowing. 

It is probable that more than this will be required, but how much is anyone’s guess.  After this latest recapitalisation we will have put €56,225 million into the banks (€4,675 million via the Exchequer, €20,700 million via the NPRF and €30,850 million through promissory notes).  The range of estimates of the full cost are from the current €56 billion to €100 billion and more.

I have no great insight into what the total cost of the bank bailout will be.  For sake of argument let’s assume that it will consume the full amount of the €25 billion “contingency fund” set up as part of the EU/IMF deal.  This will be on the extreme high side – I hope!

Of this €25 billion, €17.5 billion will be borrowed as part of the EU/IMF deal, with the other €7.5 billion coming from ourselves, which I assume will also be borrowed (though we may be able to use any remaining cash reserves).  Anyway, adding these additional funds would bring the full cost of the bank bailout to €81,225 million, of which up to €60,525 million will have been borrowed.

Summing all this together brings up a National Debt of €192,796 million by the end of 2013.  This is 113.5% of the IMF’s nominal GDP forecast for 2013.  Here is breakdown of the debt and the proportion attributed to each category.

  • Pre-crisis (2007) National Debt - €37,559 million, 19.5%
  • 2008-2013 deficit-related Debt - €94,880 million, 49.2%
  • Banking-related Debt - €60,525 million, 31.4%

At the end-of 2013 we will have a huge debt.  One-fifth will be what we brought with us into the crisis.  Less than a third will be due to the bank bailout.  About half of our debt will be due to our own deficits.  By 2013 the bank recapitalisations will be over, and we may even see some small return on the money poured into AIB and BOI, with the NAMA process also well advanced.  However, our Exchequer deficits will remain and will continue to require further borrowings.  With the annual deficit still estimated to be 7.5% of GDP in 2013, the 113.5% Debt/GDP ratio at that stage will continue to increase.

The bank bailouts are a colossal waste of money, and do involve huge borrowings, but it is our borrowings for social welfare cash transfers, €29 billion in 2009, and to pay public sector salaries, €20 billion in 2009 (see here) that generate most of our borrowings.  The banks are a huge millstone around our necks but it is the ongoing deficits that will sink us if left unchecked.  “Burning the (foreign) bondholders” makes for impressive-sounding rhetoric but we need to look closer to home to find the biggest villain of the piece.

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