Wednesday, November 9, 2011

The deficit and “the banks”

The Medium Term Fiscal Statement released last Friday projects that the general government deficit in 2012 will be €13.6 billion or 8.6% of GDP.  This is the number we have to reduce to less than 3% of GDP by 2015, which is what measures to be introduced over the next few Budgets will be targeting.

The simple question here is: how much of the €13.6 billion deficit is due to the banks?

So far we have poured about €62.5 billion into AIB, BOI, EBS, PTSB, Anglo and INBS and all of this has been accounted for in the general government deficits of the last three years.  No further payments are planned so there are no direct payments to the banks in the €13.6 billion deficit for 2012.

What about providing this €62.5 billion?  Surely there are huge interest costs associated with providing this money to the banks.

Of this money €17 billion came from the destruction of the savings we had built up in the National Pension Reserve Fund.  This money was not borrowed so there are no interest costs.  There is the loss of income that this money could have earned but this loss has no bearing on the general government balance.

Of the remaining €45.5 billion almost two-thirds is accounted for by the Promissory Notes given to Anglo and INBS in 2010.  This €30.6 billion was included in full in the €49 billion general government deficit in 2010 and due to some complications in their construction there will be no interest paid on these notes in 2012. 

In 2011, a cash payment of €3.1 billion was made on the Promissory Notes.  This will not affect the debt as the €3.1 billion simply changes from being a Promissory Note debt to a cash debt.  There is now around €28 billion of Promissory Notes outstanding but this will have no impact on the €13.6 billion general government deficit for 2012.

That means we are down to the final €18 billion.  This is split between €11 billion paid from the Exchequer and €7 billion taken as part of the EU/IMF programme.  The money from the Exchequer includes €4 billion given to Anglo in 2009 and €3 billion paid into the NPRF in the same year to help fund the initial recapitalisation of AIB and BOI.  It also includes the €3 billion payment made on the Promissory Notes this year.  It is safe to assume that all of this money was borrowed (or at least increased our borrowing by the same total which amounts to the same thing).

The €7 billion from the EU/IMF was used to fund the State’s  €17 billion contribution to the  €24 billion recapitalisation of the banks this year.  The other €7 billion came from haircuts to subordinated bondholders, some minor asset disposals and some private sector investment in BOI.

We will assume that the average interest rate on this €18 billion is around 4.5%.  At this interest rate, borrowings of €18 billion would require an annual interest payment of around €800 million.  This interest cost does form part of the general government balance for 2012.

If we do a simple counterfactual and magic away the €62.5 billion we have pumped into the banks, the projected deficit for 2012 would fall from €13.6 billion to €12.8 billion or 8.0% of GDP.  Eliminating the effect of the bank payments would knock 5% off the deficit; 95% of next year’s deficit is not related to the bank payments.

There are many claims that the expenditure cuts and tax increases are being introduced to “bail out the banks”, “repay bondholders” and the like.  The changes are being introduced to bring about the necessary reduction in the budget deficit.  There may be disagreements about the make-up of the changes but 95% of the problem there are trying to address is not as a result of the money we have handed over to the banks.

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