Tuesday, September 6, 2011

Could Ireland’s 2014 debt be €190 billion?

The ESRI has a new research article out from John Fitzgerald and Ide Kearney on projections of Ireland’s public debt.  It can be read here.

This article examines the debt dynamics facing the Irish State over the period 2011 to 2015. The analysis takes account of the reduction in interest rates on EU borrowing agreed at the EU Council meeting in July 2011 and it makes very conservative assumptions on the interest rate available after 2013. The base case estimates suggest that the net debt to GDP ratio will peak at between 100 and 105 per cent of GDP in 2013 and that it could fall back to 98 per cent by 2015. The related gross debt to GDP ratio would peak in 2012 at between 110 and 115 per cent of GDP before falling back to between 105 and 110 per cent of GDP by 2015.  This is much lower than had been assumed in official figures earlier this year, partly because the cost of bank recapitalisation was lower than anticipated and also because of the reduction in EU interest rates.

Here is Table 8 on page 22 which contains the elements on interest to us – projections of Ireland’s General Government Debt. Click to enlarge.

ESRI GGD and GGB Projcetions

The prediction is that the 2014 General Government Debt will be just over €191 billion.  It is not so long ago since we were questioning suggestions that it would be €250 billion by 2014.  However, €191 billion is much lower than all official estimates from the DoF, IMF and EU.

In this note, written in May, we estimated that the 2014 General Government Debt would be €208 billion.  With a previously expected deficit of €5 billion for 2015 this is an implied forecast of €213 billion for 2015.  This is nearly €19 billion more than the estimate provided by the ESRI.  We know that €250 billion is too high but is something close to €190 billion too low?

Here is a summary of our 2014 estimate of the General Government Debt.

2014 Projected Debt

There is a number of quick things we can do to reconcile the €208 billion figure here with the €191 billion figure provided by the ESRI.

  1. The above table assumed that the final cost of the 2011 bank recapitalisations would be €20 billion.  It was actually €17 billion.  The ESRI add €7 billion to the debt for the recapitalisations rather than the €10 billion used above. 
  2. The lower interest rates agreed at the July 21 EU summit reduces the projected deficits from 2011 to 2014.  This reduced the debt by a further €2 billion.
  3. The ESRI assume that €7 billion of our accumulated cash reserves are used to meet expenditure over the 2011 to 2014 period.  The above table assume that our cash reserves of €16 billion at the end of 2010 are held intact.
  4. The ESRI assume that €3 billion of “contingent capital” provided to the banks in 2011 is returned to the Exchequer in 2014.  This is not assumed in the above table.

The four elements account for €15 billion (3 + 2 + 7 + 3 = 15) of the €17 billion difference between the two figures.  The remaining €2 billion is accounted for through interest losses on holding €16 billion of cash and other minor discrepancies.  It is very possible that our 2014 General Government Debt will be €191 billion.

There may be some who will accuse the ESRI of making some “nice” assumptions but the only one that has a significant doubt attached to it is number 4.  It is fairly certain that the reduced interest rate will apply to all Ireland’s EU borrowings,  the 2011 bank recapitalisations did cost €17 billion and we have €16 billion of cash that can easily absorb a drawdown of €7 billion.

I would prefer to see our cash balances held (even if it does incur an interest cost) as a buffer against any further negative shocks to the economy. It is also a bit early to be forecasting that the banks will be in a position to return to the €3 billion of contingent capital in 2014.  They may be but it is far from guaranteed.

Accounting for the changes that have happened since May  (lower interest rates and lower bank costs) the revised estimate of the 2014 General Government Debt is €203 billion.  Whatever hope there is that it will be €190 billion (it actually might!) there is very little chance that it will be €250 billion (it still might be but it is very very unlikely).

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