Interest Expenditure in Ireland

The non-financial institutional sector accounts include items for ‘interest paid’ and ‘interest received’.  However the number reported by the CSO is the total after adjustment for FISIM (financial intermediation services indirectly measured).  

The purpose of this is to try and account for financial services that are not paid for directly but are paid for indirectly via the gap between deposit and lending rates of financial institutions.  Thus a part of interest expenditure is to pay for the cost of the money provided and a part of it is to pay for the cost of financial services provided.  This latter part is included in consumption for households and as part of intermediate consumption for non-financial businesses.

The release last week by the CSO includes interest figures but these are after the adjustment for FISM has been carried out.  However, eurostat publish item D.41(g) which is “total interest before FISIM allocation” which allows us to produce the following table.

The total amount of interest paid was nearly €20 billion or 12.4% of GDP. 

If we were to assume an average interest rate of 4.0% that would imply a total debt of around €500 billion.  At 4.5% the debt would be around €440 billion.  These figures give the ballpark for what the aggregate debt burden of the government, household and non-financial corporate sectors is.

The FISIM adjustment for the household sector seems ‘large’.  For all years from 2002 to 2008 it was below €2 billion but from 2008 to 2009 it jumped from €1.6 billion to €4.3 billion.  It has remained high since then.  The FISIM for the non-financial corporate sector similarly rose in 2009 but it has fallen back since then.

A table of total interest paid since 2002 and some further details on FISMIM are below the fold.

The interest charge for the economy peaked in 2008.  Since them the amount of interest paid buy the NFC and household sectors has fallen significantly, while the interest bill for the government sector is going in the opposite direction.

Here are the FISIM amounts for each sector in the same period:

A query to the CSO on FISIM and the reason for “jump” in 2009 returned the following:

The FISIM adjustment is calculated on the basis on a  reference rate which is the average of the short term interbank rates up to 12 months maturities - this is considered to be the risk free interest rate .

FISIM is measured as the difference between this reference rate and the actual rate paid by these corporations applied to their loan liability positions.  The collapse in the reference rate from 2008 - 2009/10 meant that practically all the interest paid was recorded as FISIM.

FISIM is calculated in line with the agreed methodology outlined in ESA 95 - the EU standard.  However in the wake of the financial crisis it has become clear that this measure needs to be disaggregated into the service element and the risk premium  element.  To try to resolve this both OECD and Eurostat have Task Forces working on finding a solution to this matter.

Consolidated Loan Liabilities

The release on Thursday of the 2011 Institutional Sector Accounts by the CSO gives an insight into the financial stocks (assets and liabilities) and non-financial flows (income, consumption and savings) of the main sectors of the economy.  One addition to this year’s release is the inclusion of ‘consolidated’ tables for the financial tables.  As the release says:

This year both consolidated and non-consolidated tables are presented for the first time for the Financial Accounts.  The consolidated analysis allows a clearer view of transactions and balance sheet positions between institutional sectors. Transactions between entities in the same institutional sector are netted out in this consolidated presentation.

The end of year (consolidated) stock of financial assets and liabilities is shown excluding stocks which exist between units within the same sector. This view of the accounts can be very useful when analysing financial instruments such as loan liabilities as the consolidated view removes inter-sectoral balances.

Here are the consolidated debt liabilities of the household, government and non-financial corporate sectors at the end of 2011.

The differences between the non-consolidated and consolidated figures for the household sector are zero, while there are about €5 billion of extra liabilities on the government’s non-consolidated accounts (likely related the Housing Finance Association).  

The big difference is for the NFC sector where the consolidation reduces the liability figure by €45 billion.  These are liabilities owed by the resident NFC sector to other counter-parties in the resident NFC sector, i.e. domestic intra-company loans.

A recent table from the IMF which included the following 2012 totals for the gross, non-consolidated debts of the three sectors as a percent of GDP got a lot of attention, including in The Wall Street Journal.

• Household: 117%
• NFC: 258%
• Government: 118%

It can be seen that the figures for the household and government sectors reconcile roughly with those in the above table.  The 2012 deficit and return to bond markets of the government sector explain the increase that will be seen in 2012.  The figures that can’t be similarly reconciled are those for the NFC sector.

The 258% of GDP figure used by the IMF is a much greater than the 168% of GDP figure consolidated figure now provided by the CSO.  Some of the difference is due to the consolidation that removes domestic intra-sectoral balances.  It is also the case that the CSO have revised down the earlier figures. 

When they first reported the 2010 non-consolidated loans figure for the NFC sector it was €337 billion.  In this year’s release that figure has been revised to €298 billion.

It will also be the case that a significant proportion of the consolidated loan liabilities of NFCs are to the Rest of the World - predominantly the borrowings of foreign multinational
corporations resident in Ireland.  Thus the 168% of GDP figure in this week’s release is still an exaggeration of what might be considered “Irish” corporate debt, which is some level less that 168% of GDP.

According to data from the Central Bank lending from Irish-resident banks to Irish-resident NFCs peaked at €175 billion in the third quarter of 2008, of which €115 billion was to property-related sectors.  The lending to the property-related sectors is a mess and huge amounts of it won’t be repaid.  Transaction data shows that the €60 billion of non-property related lending to Irish NFCs has declined by the €6 billion in the interim.

The figure for “Irish” NFC debt will be high at the moment but it is still the case that much of the NFC loans are delinquent property-related loans that will not be repaid.  A large portion of these remain to be resolved but this process will reduce the NFC debt figure.

This process also means that the total of household, government and NFC debt results in some double-counting.  There are around €50 billion of property-related loans now controlled by NAMA in the NFC figure and the government loans figure includes the €25 billion of Promissory Notes to the IBRC to cover the losses on these loans. 

Either the developers will repay the loans they have taken out (they won’t) or the government will repay the Promissory Notes (they will).  They won’t be paid twice.  The government debt figure also includes monies for the recapitalisation of the pillar banks.

The most recent recapitalisation from March 2011 provided money to cover losses on household and business lending that the banks will incur before the end of 2013.  This has added to the government debt figure but when these inevitable losses are (eventually) resolved they will reduce the household and NFC debt figures.

Both the household and Irish NFC sectors have seen reductions in the amount of debt they are carrying for the past four years.  This process will continue through repayments and the eventual writing down of unpayable debts.  The ongoing deficits mean that the debt of the government sector continues to increase.

Ireland has a massive debt problem, and this top-level analysis does not reflect the huge difficulties faced by individual households and businesses, but the problem is not intractable.  The level of debt is probable somewhere around €500 billion.  This is three times GDP and four times GNP.

The Level of National Indebtedness

Writing in today’s Wall Street Journal, Eddie Hobbs has an article under the banner ‘Don’t Expect a Celtic Comeback’.  The overall thrust of the piece is true.  At best, we are at the end of the Celtic Collapse and the future direction of the economy is still uncertain.  Here, though the focus will be on a paragraph early in the article on the level of Irish indebtedness.

The myth of Irish pluck continues today, even amid the financial crisis. Prime Minister Enda Kenny recently graced the cover of Time magazine. But according to data from the International Monetary Fund, Ireland has displaced Japan as the world's most indebted economy. Government, household and nonfinancial company debt add up to 524% of Irish GDP. (The Central Bank of Ireland uses a different basis for calculating the debt of nonfinancial firms; its estimate for total debt would be lower than the IMF's.) Funding this gargantuan load at an average cost of 4.5% would swallow nearly 24% of GDP—in other words, Ireland's entire industrial output.

If the numbers used here were true then the Irish economy would be completely swamped by debt and would not even be treading water.  There is no way that an economy with a GDP of  €161.7 billion in 2012 would be able to carry a debt of €847 billion and an imputed annual interest bill of €39 billion.  As will be shown below the actual figures are around €500 billion and around €16 billion and these figures are determined from data hinted at in the article but then rather inexplicably ignored.

Although not attributed in the WSJ it appears that the numbers used come from this recent post over on the Trueeconomics blog.  The Irish economy is in dire straits but anything that suggests that the income of the economy needs to be compared to a debt mountain of close to €850 billion and an interest bill of nearly €40 billion is not grounded in reality.  We have a massive debt problem but not that massive.

The figures used comes from the recent release of the IMF’s Global Financial Stability Report.  The table can be seen on page 2 of chapter 2 and a spreadsheet of the data used in the table is here. 

As soon as the report was released I suggested that the debt numbers in relation to Ireland would be misinterpreted and today’s WSJ has confirmed my fears.  No breakdown of the 524% figure was provided in today’s article but using the IMF data linked above (and the IMF’s nominal GDP forecast from the World Economic Outlook) we can see that the breakdown is:

One is immediately drawn to the €467 billion gross debt attributed to the non-financial corporate or business sector.  This is more than 55% of the total debt figure.  There is little dispute or misunderstanding about the gross debt position of the household sector and after some wild claims about the government debt around the start of the EU/IMF programme, outside of a few coverage issues (NAMA, IBRC), the extent of our public debt is now fairly well established. 

Although there are some caveats noted below the headline figures above accurately reflect the broad difficulties in the household and government sectors and even though both are worthy of further examination the initial emphasis here will be on the non-financial corporate figure as it provides the bulk of the 524% of GDP headline figure.

This is something I have already addressed across various outlets such as on Irisheconomy.ie here and here, on Independent.ie here and this site here, here and here.  Parts of these are worth repeating.

Last March, the CSO and the Central Bank made a joint presentation to the Oireachtas Finance Committee on the issue of non-corporate debt in Ireland (transcript).  The slides provided by Michael Connolly of the CSO are particularly information.  Here is the CSO data on non-financial debt from 2001 to 2010 on which the IMF data are based.

The series shows that at the end of 2010, the CSO measure of non-financial corporate debt was just under €350 billion.   However, as is illustrated in the graph the most dramatic rise in debt occurred after the peak of GDP in 2007.  At the end of 2007 business debt was just over €200 billion but it then surged to the €350 billion figure shown above.   The IMF project that this will have further increased to more than €450 billion in 2012.

The huge increase after the bubble had burst and, more importantly, after the banks had ‘shut up shop’ suggests that there was something other than lending to Irish businesses driving the increase.  A subsequent chart explains the increase.

It can be clearly seen that the increase since 2007 is down to increased lending from Treasury operations, with indicates that the increase in gross debt is down to MNC activities rather than domestic firms becoming more indebted.  One final chart from the excellent CSO presentation show that the net financial position of the non-financial corporate sector has not significantly deteriorated, i.e. the increase in debt liabilities has been offset by an increase in financial assets.

All this was summarised  nicely by Michael Connolly during his presentation to the Dail Finance Committee:

Michael Connolly: “We referred to the numbers increasing dramatically after 2008. What we see is that the treasury companies in the IFSC are lending substantial amounts of money to their affiliates in the non-financial corporate area. They are managing the international cash management for the multinationals. The lending by the treasury companies to multinationals in this country is increasing each year, certainly after 2008. We also find that they are lending to each other. I refer to affiliate lending between affiliates in the same corporate group. We then also see that borrowing from abroad, which is listed on the top bars in the chart, is increasing too.”

“When we look at bank borrowing, we see that borrowing from banks has been decreasing since 2008. That is all I have to say. I am just trying to provide context and to shed light on the big macro numbers that come out for this sector.”

“What I am telling the committee is that when one looks at the detail of the overall scale of debt for this sector, it is nowhere near as serious for the real economy of this country as one might imply at first sight. When one looks at the detail, it is really about a globalised, internationalised economy which has very large debt but also has very large assets. The two are off-setting one another when we take a net view on it. Of increasing importance is the interlinkage between some of the multinational corporations we have in the sector and their treasury affiliates in the financial sector. It is difficult to look at numbers in isolation because everything is intertwined.”

So how much debt is actually being carried by the business sector in Ireland?  This was helpfully answered by the presentation from Joe McNeill of the Central Bank at the same Oireachtas meeting.  The WSJ indicated that the Central Bank had an alternative measure of corporate indebtedness and given the problems with the gross, non-consolidated data assembled by the CSO shown above it is not clear why the Central Bank data was ignored.

The figures are taken from this dataset on the Central Bank website and the surge of lending to the construction and real estate sector is very evident.  Lending to other more cash-flow based business sectors does not follow the same pattern.

The data show that lending from Irish banks to non-financial enterprises in Ireland peaked at €175 billion in the third quarter of 2008.  This is the extent of non-financial corporate lending by Irish banks and is the debt that matters for the Irish economy.  Most of the €467 billion that opens the piece has little relation to the actual economy.  There are a number of reasons for the dramatic drop since the September 2008 peak.

1. As is continually pointed out access to credit is tight in the Irish economy so repayments on existing debt will have exceeded the issuing of new debt.
2. There will have been some write-down of business loans.
3. Bank of Scotland (Ireland) ceased operating as a bank in December 2010 and its €15 billion business loan book (mainly property loans) was transferred to Certus, a debt collection company.  These loans still exist but they are omitted from the above chart.
4. Most importantly, €74 billion of developer loans were transferred from five of the covered banks to the National Asset Management Agency up to the end of 2010.  Again, most of these loans exist but are omitted from the above series.

During the Finance Committee session Joe McNeill revealed that once items 2, 3 and 4 were accounted for the reduction in business lending as a result of transactions alone (drawdowns and repayments) has been around 6% per annum since 2008.  The dataset shows that business lending, excluding property-related sectors, has fallen from €60 billion at the end of 2008 to €39 billion in June 2012.   This is close to the rate of decline indicated by the Central Bank.

At a time when the gross non-consolidated figures from the CSO suggest that the lending to non-financial corporates in Ireland has increased hugely it should come as no surprise to see that when it comes to the ‘real’ economy it has actually declined.  The CSO figures track the Central Bank data up to 2007 and the huge divergence since then is explained by MNC activities as detailed by Michael Connolly.

It is possible that Irish non-financial corporates could have sourced loans from banks based outside Ireland and that they could have raised finance by issuing bonds directly rather than drawing down a loan.  There are not many Irish businesses who would be in a position to do this.  The €175 billion from the Central Bank data will be the bulk of Irish non-financial business debt as both of the above factors unlikely to have been more than €10 billion.  

These will be included in the gross figure provided by the CSO and has the first chart about shows this figure was around €200 billion at the peaking of the economy/credit bubble in 2007 before the distortions from the MNC sector skewed the figures.  With the reductions to non-property lending and some repayments and writedowns of property lending it is likely that gross lending to the Irish non-financial corporate sector is no more than €170 billion in 2012, and is probably lower.

At the peak, banks in Ireland had issued €115 billion of loans to property-related sectors.  Most of this is still included in the €170 billion figure but it is pretty clear that all of this won’t be repaid.  The covered banks transferred about €50 billion of developer loans in Ireland to NAMA and crystallised losses of around €30 billion in the process.  This loss was covered by government recapitalisations and a lot of this money is now included in the gross government debt.

This means that if we use a €190 billion figure for gross government debt and a €170 billion figure for gross non-financial corporate debt we are actually double counting around €30 billion of property debt.  Either the developers will repay the full €50 billion they owe on their Irish loans to NAMA (they won’t) or the government will make good the losses through the bank recapitalisations and the Promissory Notes (they will). 

The same is true for probably another €20 billion of non-NAMA property, mortgage, consumer and other loan losses that remain as part of the gross debts on the covered banks’ balance sheet.  These loans will not be repaid and, in time, will be written down, but as a result of last March’s stress tests the banks have been recapitalised to cover these future losses so for the moment the debts are counted as household and corporate debt in the banks and also as government debt.  Just like the developer loans they will only be paid once.

A better estimate of the level of gross indebtedness of Ireland in 2012 is likely to be:

• Household: €189 billion
• Government: €190 billion
• Corporate: c. €171 billion
• Total: €550 billion

The non-financial corporate debt is an estimate based on Central Bank data.  And as we have noted above the figure for the Government Sector has been inflated to cover losses on loans in the household and corporate sectors that will not be repaid.  All told, Ireland is looking at a massive debt overhang of around €500 billion.  We don’t need to highlight the dangers of this excessive debt level by trying to pretend that the total is €850 billion.

And huge amounts of this debt won’t be repaid.  All told the covered banks have been provided with enough capital to cover close to €100 billion of loan losses.  The non-covered banks comprise about one-third of the Irish banking market and they have already made provision for close to €25 billion of loan losses. 

These losses need to be worked out but over time it is likely that close to one third of the €350 billion that was lent into the private sector during the credit bubble will not be repaid.  These make the gross figures look large now but repayments and writedowns will reduce it.

It is also true that looking at gross indebtedness only gives a part of the picture.  The IMF data show that as well as having €189 billion of financial debt the household sector has financial assets of €308 billion and thus a net financial position of plus €109 billion.   It should also be noted that around €32 billion of the debt relates to buy-to-let mortgages which have offsetting non-financial income-generating assets.  There are severe difficulties in this sector including negative equity and loan arrears as highlighted by provisional details released this week. 

It should also be noted that around one-third of the household sector debt is in incredibly cheap tracker-rate mortgages.  This reduced the interest burden of the debt.  More on this below.

The government has €190 billion of gross debt but has an offsetting cash mountain of nearly €23 billion, still has around €6 billion in the discretionary portfolio of the National Pension Reserve Fund, owns Irish Life the pensions and life assurance business as well as semi-state enterprises, has a €3 billion subordinated bond in the covered banks and is currently in negotiation to try and sell the state-owned equity in the viable banks to the ESM.  All these can offset the gross debt figure. 

The IMF put the net debt position of the government sector at €167 billion but a lower figure could be justified.  The net financial position of the non-financial corporate sector is around negative €100 billion as shown above.  The aggregate net financial position of the government, household and business sectors in Ireland is around minus €150 billion.   This is a long way from a gross debt figure of €850 billion.

Finally the WSJ piece said that:

Funding this gargantuan load at an average cost of 4.5% would swallow nearly 24% of GDP—in other words, Ireland's entire industrial output.

This is wide of the mark.  24% of GDP is around €40 billion.  Eurostat provide figures on the amount of interest paid in the sectoral non-financial accounts.  It is available as item D.41g in ‘non-financial transactions’ here.  The most recent figures for Ireland are from 2010 and the total interest paid by sector was:

• Household: €6.3 billion
• Government: €4.9 billion
• Corporate: €4.9 billion
• TOTAL: €16.1 billion

This was 10.4% of 2010 GDP and as shown here puts Ireland above the EU average but with an interest burden that is comparable to Belgium’s and lower than those of Greece and The Netherlands among others.  Even with increases in government debt since 2010 (and there have been reductions in household and corporate debt to somewhat offset that) it is clear that an article with an imputed interest bill of €40 billion is over-stating the true position by more than a factor of two.

There is no need for this exaggeration.  A €500 billion debt burden and a €16 billion interest bill are awful enough.

Repaying the Debt?

A lot of attention recently has been given to the fiscal rules that formed the basis of the recent EU treaty (inter-governmental agreement?).  One that has attracted significant attention is the Debt Brake or “One-Twentieth Rule”.  The balanced budget rule allowed a structural deficit is no more than 0.5% of GDP is probably more important but some of the commentary on the Debt Brake is worth considering.

On last night’s Primetime, Miriam O’Callaghan introduced a question to Kieran O’Donnell by saying:

“People are talking about €6 billion needed to take out on an annual basis”

On the previous night’s Vincent Browne, Stephen Donnelly said:

“To pay down €100 billion in five years you’ve got to pay down €5 billion a year, that’s what the treaty says.”

I have read the treaty and I don’t know where this is coming from.  The opening report on Primetime suggested that if our debt peaks at 118% of GDP in 2013 we would then have 20 years to reduce the debt and that we would have to “dramatically pay down this debt”.  The prospect of repaying debt is not an attractive one given the current state of the Irish economy.  However, it is not a prospect we are are not likely to face.

Ireland is currently in an Excessive Deficit Procedure which is largely about getting the annual fiscal deficit below 3% of GDP.  For 2012, we are targeting a deficit of 8.6% of GDP, and the current plan is to get that down to 2.9% of GDP by 2015.  As long as a country is in the EDP it is that annual deficit rather than the total debt that is key metric. 

And then once the country gets the deficit below 3% of GDP it enters a three-year transition period before the debt rule becomes effective.  This was explained in this Council Regulation:

"For a Member State that is subject to an excessive deficit procedure on 8 November 2011 and for a period of three years from the correction of the excessive deficit, the requirement under the debt criterion shall be considered fulfilled if the Member State concerned makes sufficient progress towards compliance as assessed in the opinion adopted by the Council on its stability or convergence programme. "

The implications for each country are more clearly detailed in this press release.  The last line confirms that Ireland will not be subject to the "numerical debt reduction benchmark", the one-twentieth rule, until 2018.  This is likely to be the earliest.  The three-year transition period does not begin until the excessive deficit has been corrected.  In this three-year period a country has to show is “sufficient progress towards compliance”, which is rather woolly.

It is also important to note that the “one-twentieth” rule does mean the debt has to reach the 60% of GDP target in 20 years.  It specifies that about one-twentieth of the gap between the current debt level and the 60% of GDP target must be closed each year.

Under the rule a country with a debt of 120% of GDP has 20 years to get the debt down to 70% of GDP, with the one-twentieth improvement getting so small that it can take another 20 years to bring the debt down to the 60% of GDP level.

The required reductions in the debt ratio appear large at first but do moderate significantly as the debt converges on the 60% level.  This is not a linear projection that will require €x billion to repaid each year.

Given our deficit problems, the focus until 2015 and beyond will be on bringing down the deficit rather than repaying debt.  There is no requirement to repay debt and bringing down the deficit will stabilise and, in time, reduce the debt ratio.

So what happens in 2018?  Will we have to start “taking out” money from then?  Debt projections out to 2018 are unlikely to be very reliable.  In its last published review the IMF projected a General Government Debt of 111% of GDP in 2016.  With the planned reduction in the deficit that could be down to 105% of GDP in 2018.  No one can be sure.

If the debt brake is applied for a country with a debt of 105% of GDP they would have to reduce the debt ratio to 101% of GDP the following year. [Technically they only have to budget to achieve the required debt reduction rather than actually achieve it.]

A country with a balanced budget would achieve that with a real growth rate of 2% and an inflation rate of 2%.  There would be no necessity to make any debt repayments.

In fact, once the debt ratio gets below 90% of GDP, a country with 2% inflation and growth rates would be able to run (small) deficits and still meet the debt reduction requirements.  The debt brake does not eliminate the potential to borrow additional money but it does substantially limit the rate at which this money can be borrowed.

From an Irish perspective (and the perspective off all other countries) the balanced budget rule  is far more significant.  This requires a structural deficit of no more than 0.5% of GDP (1.0% of GDP for countries with a debt of below 60% of GDP).  If by 2018 Ireland has a structural deficit of less than 0.5% of GDP it is likely that we would satisfy the conditions of the “one-twentieth” debt brake rule without the need for any additional measures.

If the budget has been brought into balance by 2018 (a big if but we have the luxury here of just having to assume it) it is likely that growth and inflation would do most of the heavy lifting for the debt ratio reduction.  With a balanced budget an inflation rate of 2% and a growth rate of 2% would be enough to bring the debt ratio down from 105% of GDP to 101% of GDP and all the way down to the 60% target.  We would not have to make any debt repayments but could choose to do so.

As stated above it is the balanced budget rule which will potentially have a greater effect .  The conditions and effect of the debt brake are fairly objective and clear.  There is no consensus on how a structural deficit should be measured so the precise implications of the balanced budget rule cannot be objectively assessed.  The 3% limit on the overall budget deficit remains.

Interest on the Promissory Notes

A restructuring of the €31 billion of Promissory Notes given to Anglo Irish Bank and Irish Nationwide (now merged in the Irish Bank Resolution Corporation) has been getting a good deal of attention recently.  Much of the focus has been on reducing the interest rate coupon on the Notes but as we have said a number of times it is not clear that this would actually save the State money.

Here is a table of the issued Promissory Notes from a previous post.

When we account for the “interest holiday” taken in 2011 and 2012 the equivalent annual coupon for Tranche 4 is 8.6%.  This means that the average annual coupon rate across the €31 billion was about 5.8%.

The interest rate on each tranche was based on the yield Irish government bonds of the same maturity on the day the tranche was provided to Anglo/INBS.   This increased from 4.17% to 8.60% as the tranches were issued beginning on the 31st March 2010, though the second and third tranches on the 31st of May and 28th of June 2010, and finishing with the final tranche on the 31st December 2010.

For the first six months of 2011, Anglo reported it had Interest Income of €644 million on the €25.3 billion of Promissory Notes that it had received.  The amount of the Promissory Note outstanding was reduced to €23.8 billion when the first annual payment was made on the 31st of March.

The “bank” also paid €519 million of interest to the Central Bank of Ireland for use of Emergency Liquidity Assistance (ELA).  The total amount of ELA the bank was drawing down stood at €45.0 billion on the 31st December 2010 and had reduced to €40.8 billion by June 30th 2011.  With an haircut of around 20% applied to the use of the Promissory Note as collateral it is clear that the Promissory Notes were supporting about half of the ELA that Anglo was drawing down.

Therefore we could allot around €260 million of interest expense to the ELA backed by the Promissory Notes.  In the first six months of 2011 Anglo made an interest profit of around €380 million on its Promissory Notes transactions.  As Anglo is 100% state-owned this profit is not lost.  Any reduction of the interest rate on the Promissory Notes will simply reduce this profit and no money will be saved.

What about the €519 million of interest Anglo paid to the Central Bank of which around €260 million is due to the Promisory Notes-backed ELA?  We don’t have the 2011 Annual Report for the Central Bank of Ireland yet but we we can track the flow of the interest that was paid to the Central Bank over the past few years. This is given under the heading 'Other' in the Income Received total in the Central Bank Annual Reports

2008: n/a
2009: €240.5 million
2010: €510.2 million

Given the level of ELA that was issued during these years it is possible that the interest rate charged was around 2.5%.   In 2010, Anglo paid €435 million in interest to the CBoI for ELA so it is clear that the bulk of the ELA was issued to Anglo.

The full extent of the ELA (up to €50 billion) only arose in late 2010 so it will be interesting to track the 'Other' Income Received when the Central Bank publishes the 2011 Annual Report later in the year.

It is hard to see if this interest is paid on to anyone else by the Central Bank, with anyone else of course being the ECB.  Earlier this week John McManus in a very good piece on the Promissory Notes in the Irish Times said:

"The Central Bank is in turn getting the money it lends to Anglo from the ECB at a much lower and not disclosed rate which is reported to be 2 per cent or less. It keeps the difference. The real cost to the State is the rate at which the ECB provides cash and it is far from penal."

In a piece from last February on the ELA, Laura Noonan of the Irish Independent wrote:

“While money that comes directly from the ECB is issued for terms ranging from seven days to 90 days, the money given out through ELA is typically granted for seven days.”

I’m not so sure the Central Bank needs to get the money.  This might be the case but it is also possible that the Central Bank of Ireland just created the money as only central banks can do.

 This little note on the ELA mentions nothing about a payment to the ECB and, says:

The little known ELA facility allows national central banks (NCB) to provide funds to domestic financial institutions in financial difficulty over and above the liquidity provided by the ECB's regular refinancing operations. These operations are separate from the Eurosystem, but the ECB's Governing Council can with a ⅔ majority oppose the granting of further ELA, if, for instance, it considers the emergency assistance provided constitutes monetary financing.

The assistance provided is supposed to be temporary and to an illiquid but solvent financial institution. The lending is not subject to ECB collateral requirements. Thus a bank can present its NCB collateral which would not be acceptable by the ECB (but which would be acceptable by the NCB).

If you really want to get into ELA you can read this five-page note from Citigroup’s Willem Buiter.   On the first page it states:

Any profits or losses made from the collateralised lending of NCBs under their ELA facilities are for the account of the NCB alone and are not shared/pooled with the rest of the Eurosystem.

There is lots of technical sounding stuff here but it really throws little light on the subject.  To try and track these profits we can look at the Central Bank surplus that is payable to the Exchequer each year.  Here it is for the past six years.

2005: €109.2 million
2006: €98.5 million
2007: €183.4 million
2008: €290.1 million
2009: €745.9 million
2010: €671.0 million

There could be other reasons for this but the Central Bank surplus has increased in the period in which the ELA has been provided.  The interest received from the ELA doubled to €500 million in 2010 but the Central Bank surplus fell.  Again it will be the 2011 Annual Report that will give a more telling indication of the impact of the ELA in the surplus that is transferred to the Exchequer.

We know for definite that the interest profit that Anglo makes on the Promissory Notes is not initially lost as Anglo is 100% state-owned.  It remains to be seen what Anglo will do with these profits.  It appears that the chunk of the interest that the Central Bank takes for providing the ELA also stays within the State.

3.55% Interest on the EU/IMF loans

Here is an update of a table showing the interest rates on the loans we are getting as part of the EU/IMF programme (HT: Kevin).  The data is for loans drawn down as of the 14th of November 2011.  Click image to enlarge.

When we last looked at this back in August for loans drawn down by June the average interest rate was 5.58%.  We can now see that this has been reduced to 3.55%.  This is because of the reduction in the EU loans agreed at the EU summit on July 21st last.

The interest rate on loans from the European Financial Stability Mechanism (EFSM) has fallen from 6.99% to 2.97%, while the interest rate on loans from the European Financial Stability Fund (EFSF) has fallen from 5.90% to 3.06%.

The highest rate is the 4.83% that applied to the UK bilateral loan but that is due to be reduced.  As a result of this the IMF loans will have the highest rates but they could also be reduced as there are some suggested changes to Ireland’s quota with the IMF.

A previous post suggested we need to source around €25 billion of funding to get through 2014, as the €67.5 billion of funds under the current EU/IMF programme will be exhausted by the end of 2013.  From the above we can see that we need to be in a position to begin repaying the EU/IMF loans (by borrowing from someone else) from July 2015. 

Replacing funding that comes at a cost of 3.55% will not be easy but for the moment it does keep a cap on our interest payments.

State Funding through 2013

Over the next two years the Irish government needs about €46 billion of funding.

We still have to draw down around €33.5 billion of the loans agreed as part of the EU/IMF programme.    The remaining €12.5 billion can come from a combination of our existing resources, State Savings Schemes and some market funds. 

There was €13 billion in the Exchequer Account at the end of 2011.  The NTMA have suggested that this could be reduced to around €5 billion over the next two years although the European Commission have indicated that they would prefer to see the cash buffer maintained at its current level.

It is forecast that €1.5 billion a year will be raised from the State Savings Schemes over the next two years.  This is well above the 2000-2007 average but in line with performance over the last few years.  At €1.36 billion the amount raised in 2011 was just below this. 

If the €1.5 billion a year is achieved then the State needs around €10 billion to see it through to the end of 2013.  We have €13 billion of cash on deposit (and there is also around €5 billion remaining in the National Pension Reserve Fund (NPRF)). 

How much of this cash is used will depend on how much market funding can be raised.  The plan for the NTMA to “dip its toe” back in the markets before the end of this year, but given the amount of cash on reserve this can be delayed until 2013.

All told the State is in a reasonably secure position for the next 24 months (where ‘reasonably secure’ simply means we won’t run out of money).  After that there is the small matter of a €12 billion bond maturing in on the 15th January 2014.

We are due to begin repaying some of the EU and IMF loans in 2015 and there is also the need t0 find funding for the €10 billion Exchequer deficit due to arise in 2014 and the €7 billion deficit in 2015.

While the plan is to “dip” back into bond markets before the end of 2012 we have to ensure that we have the capacity to meet the €12 billion debt rollover in January 2014 and that year’s €10 billion Exchequer deficit.  Even if the balance on the Exchequer Account is allowed to fall from €13 billion to €5 billion we will still need to raise around €25 billion of market funding by the end of 2014.

This will be a challenge but we will not face a crunch until the start of 2014 and there is a lot that can happen over the next two years.

National Savings Schemes

Although have we been “shut out” of bond markets, the EU/IMF is not the only remaining source of funding for the State.  The National Treasury Management Agency (NTMA) run a series of State Savings Schemes and they have seen a substantial inflow of funds in the last few years.

After seeing annual increases of no more than a couple of hundred million between 2001 and 2006 and even a reduction in 2007 the annual change in the amount held in various State Savings Schemes soared from 2008 on.  In 2010 almost €3 billion was put into this schemes and this dropped to under €1.5 billion in 2011.

The total amount in the schemes is almost €12 billion.

We don’t have details for 2011 yet, but the NTMA’s 2010 Annual Report gives some insight into the breakdown of the total amounts and annual changes for the different schemes in 2010 when inflows peaked at about €3 billion.

There was also close to €2.5 billion is various Post Office Savings Bank Deposit Accounts (including savings stamps) which took in almost €500 million in 2010. 

Although small in the greater scheme of things this source of funding makes a useful contribution.  An added advantage is that is cheap, the average interest rate is likely to be less than 3%.  The average rate of the EU/IMF funds we had drawn down by the middle of November 2011 was 3.55%.  At the end of 2011 the €12 billion in the State Savings Schemes will make up around 7.5% of Ireland’s General Government Debt. 

Expenditure in the Exchequer Statements

We seem to spend an inordinate amount of time going through every possible representation of the tax revenue figures in the Exchequer Statements.  The latest post is a good example of this.   Why not devote even a fraction of this attention to the expenditure figures in the Exchequer Statements?

The answer of course is that the Exchequer Statements do not contain expenditure data that can be analysed in any meaningful fashion.  The appendix with the Analysis of Net Voted Expenditures shows that net voted expenditure was €45,711 million in 2011; in 2010 it was €721 million higher at €46,432 million.  What does this mean?

It is very hard to say.  Net voted expenditure is gross expenditure adjusted for departmental receipts (known as appropriations-in-aid).  If net expenditure changes it can be difficult to determine if this is as a result of expenditure changes or changes in departmental receipts.

This leads to statements like the following in the Information Note to this month’s Exchequer Statement:

The underspend on the Social Protection Vote was due to higher than expected PRSI receipts, which more than offset overspends on a number of schemes, including Jobseekers Allowance. 

Huh.  Spending is down because receipts are up.  Underspending and overspending in the same sentence.  All in all it is almost impossible to tell if spending is up or down.  There are changes and adjustments in the tax revenue figures but in general they are easier to track, and more information is presented, than those in the expenditure figures.

Note 4 in the Exchequer Statement indicates that expenditure in health has increased to €12,897 million from €11,578 million in 2010.  In the current era of austerity and expenditure cuts it seems unusual to suggest that expenditure in health increased by 11.4% in the last year.  Of course, this is nonsense but that is what the Exchequer Statement shows.

The reason for the change is the abolition of the Health Levy.  In 2010, the Health Levy was a departmental receipt for the Department of Health.  The receipts of €2,018 million were subtracted from gross expenditure to get the net expenditure figure for health reported in the Exchequer Statements.

Although net voted expenditure for health has risen we cannot use this to say that we are spending more money on health.  We don’t get monthly updates of actual (i.e. gross) expenditure in the Exchequer Statements but we can get the annual figures from the Databank provided by the Department of Public Expenditure and Reform. 

Gross expenditure in health fell from €15,169 million in 2010 to €14,316 million in 2011.  There was a 5.6% reduction in expenditure in health in 2011 but it is impossible to determine this from the monthly Exchequer Statements.  It would be extremely useful if the gross expenditure figures were also provided in the monthly Exchequer Returns. 

As it is the best we can do are annual tables like the following for the Health Group.

Reporting net expenditure figures as is done in the Exchequer Statement has no impact on the reported Exchequer balance but we do not see how the figure is reached.  Even if monthly gross expenditure figures were provided for every department there would still be difficulties due to the abolition and creation of some departments and changes in the functions and responsibilities of others.

Anyway, the conclusion is that expenditure in health fell in 2011, particularly non-pay expenditure of the HSE (-8.5%) and the Office of the Minister for Children (-45.3%) even if the Exchequer Statement is reporting an increase in “net” expenditure.  As a result of issues like this there is little value in spending much time exploring the expenditure figures in the Exchequer Statements.

Some general government debt developments

Back in May, Morgan Kelly snapped us out of a Saturday morning stupor with another thought-provoking article in The Irish Times.  Among many topics the issue of Ireland’s public got an airing.

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending. Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion, but these differences are immaterial: either way we are talking of a Government debt that is more than €120,000 per worker, or 60 per cent larger than GNP.

This €250 billion projection was immediately latched onto and generated some articles in response from Murphy and Leddin & Walsh.  In both cases the €250 billion estimate was said to be the result of “double-counting” and other errors.

However, I think the Kelly analysis is technically correct but is inflated by some overly pessimistic assumptions.   It may seem like this is going over old ground but it does give a starting point to summarise the debt developments that have occurred since May.

Up to today it was believed that the general government debt at the end of 2010 was €148 billion.  From the four-year National Recovery Plan (page 110) the planned general government deficits for the years 2011 to 2014 were forecast to be €15 billion, €12 billion, €10 billion and €5 billion.  These are exclusive of any banking costs.  Adding these deficits for 2011-2014 to the 2010 debt of €148 billion brings us to the €190 billion starting point of Morgan Kelly.  There is no double counting of bank-related sovereign debt.

These deficits were revised up in April’s Stability Programme Update (page 50) by a cumulative €8 billion to a total of €50 billion.  The reduction in the interest rates on our EU loans will have brought this down again and this is likely to be reflected in the revised macroeconomic projections to be released by the Department of Finance on Friday.  Of course the starting point in 2010 was reduced by just under €4 billion as a result of a real double counting error in the Department of Finance.  Between the ups and downs it looks we are looking at a 2014 debt of around €190 billion before we start adding bank-related debt.

Thus far, this is equally as  pessimistic as Morgan Kelly so we better inject some optimism into proceedings.  From €190 billion he adds €35 billion for bank recapitalisation and €45 billion for NAMA.  While these figures have an actual basis (and were used in the original Namawinelake estimate) it is now commonly accepted that they will not be simple additions to our government debt.

The €35 billion figure was the “worst-case” contingency amount set aside to recapitalise the banks as part of the EU/IMF programme.  As we know the actual recapitalisation amount was €24 billion as revealed in the March PCAR announcement.  As a result of haircuts to junior bondholders in the banks and some private sector involvement the portion to be covered by the State was around €17 billion.

Of this, €10 billion came from the further destruction of the savings built up in the National Pension Reserve Fund so will not add to our debt.  Although we poured €17 billion into the banks this year, only €7 billion of this is to be added to our debt as €10 billion came from our existing resources.

Some of the money not used will be diverted to the credit union sector where it is anticipated that up to €1 billion could be used to prop up ailing credit unions.  This will add to the general government debt.

The official general government debt (GGD) measure excludes NAMA so we are now looking at a 2014 GGD of around €198 billion.  Using the IMF’s nominal GDP forecast for 2014 of €174 billion this would put the debt-to-GDP ratio at 114%, and it is projected to fall from that point on.  This does not account for three assets that will also be on the balance sheet:

1. €15 billion of cash we had on deposit at the end of September
2. €5 billion in the remaining portion of the NPRF
3. €3 billion of contingent capital provided to the banks to be returned in 2014.
4. Possible resale value of the banks (AIB, PTSB and 15% share in BOI)

It is hard to put a value on the banks and hopefully the view that they have “moved from being a liability to an asset on Ireland’s balance sheet” will gain a greater foothold.  It is easy to suggest that the above four items would reduce Ireland’s net debt to GDP ratio to below 100%.  If you prefer GNP as the appropriate measure of the Irish economy we are probably looked at a net debt to GNP ratio in 2014 that will be less than 125%.  Large but not terminal.

The €45 billion figure for NAMA was the estimated total if all property and construction loans of more than €5 million in the participating banks (AIB, BOI, EBS, Anglo and INBS) were transferred to NAMA.  As we know the transfer of developer loans above €20 million was completed.  In total NAMA bought about €72 billion of these loans and paid €31 billion for them.  The loans of less than €20 million were never transferred to NAMA and the expected losses on these were included in the PCAR analysis undertaken by BlackRock Consultants as part of the stress tests so have been accounted for.

It is impossible to know what the final outcome of the NAMA process will be.  NAMA did create €31 billion of bonds to buy the developer debt, but it bought assets which also had a notional value of €31 billion as valued in November 2009.  If these levels were to be maintained beyond the November 2009 valuation date, NAMA would have no effect on our net debt position.

Of course, property prices have not been unchanged since November 2009 and they have tumbled onward ever downward.  The excellent Namawinelake (the “best source on the Irish economy” remember!) estimates that the value of property backing the loans has fallen by a further €6 billion since the NAMA valuation date. 

It is impossible to use this as a projection of possible NAMA losses.  In most cases NAMA has control over the loans and not the assets.  NAMA has been making substantial disposals for the past few months but we are not told if the agency is making a loss or even possibly a profit on these transactions. 

NAMA has the potential to make a call on the State’s resources to cover a shortfall on its operations.  Unless there is almost complete collapse in asset values it is hard to see how this shortfall could be more than €10 billion, and it is likely to be substantially less than that. 

It is not clear that there will be losses on the Emergency Liquidity Assistance (ELA) provided by the Central Bank of Ireland.  The banks have been provided with sufficient capital to absorb the losses on their loan books so they should be able to repay the central bank liquidity.   In fact the chief executive of the biggest user of ELA has said that the State is providing them with €1 billion to €4 billion more than is required to meet all their liabilities.

Even with the net value of NAMA included, the 2014 debt level will not be more than €210 billion and may be closer to €200 billion.  This is truly massive, but the difference between a debt of €200 billion and a debt of  €250 billion is material.  We could not survive a debt of €250 billion. If we have to carry a debt that large we would be in a similar crisis to one that Greece is now having to face up to. 

A €200 billion government debt is massive but it can be carried and does not make default inevitable.  Just like in the domestic mortgage market, it is important to distinguish between a borrower who simply can’t pay and one that just won’t pay.  Of course, unlike most mortgages we have little intention of ever repaying this debt.  We need to get into a position where we can sustainably service the interest costs of the debt.

Greece is bust and cannot carry it’s debt which even in the EC’s baseline scenario is forecast to be close to 190% of GDP by 2014.  In Greece the news has been consistently bad.  In Ireland we have some positive debt developments since the Morgan Kelly piece in May:

• lower bank recapitalisation costs,
• lower interest rates on EU loans,
• and even a lower 2010 debt because of a DoF accounting error.

By 2014 our debt to GGD ratio will be 114%.  Even if we went through the equivalent of the banking crisis again and had to borrow an additional €63 billion for some reason this would bring our debt to around €270 billion which would be 155% of GDP.  We would still not be even within touching distance of Greece if the equivalent of the banking catastrophe was to the hit us again.

Greece is bust and their economy is broken.  The EU deal on the table does not go far enough and cannot rescue Greece.  We can fix the mess we find ourselves in without resorting to the tyranny of default.  It will require hard choices but it can be done.

Debt projections edge downward

This week has seen the release of three separate outlooks on the Irish economy.

• ESRI: Irish Government Debt and Implied Debt Dynamics
• IMF: Third Review under the Extended Arrangement
• EC: Economic Adjustment Programme Summer 2011 Review

The nominal GDP forecasts until 2015 are largely consistent.

The forecasts of the Primary Balance (the government balance excluding interest costs) are also fairly consistent.  It should be noted that these forecasts are all dependent on substantial budgetary adjustments (expenditure cuts and tax rises) being introduced over the next few years continuing with Budget 2012 in December.

Apart from the IMF’s forecast for 2015 there is little to separate them.  We have looked at the IMF 2015 forecast in more detail before.  The cumulative primary deficits to 2014 are €15 billion for the ESRI, €16.6 billion for the IMF and €15.5 billion for the EC.

The remaining part of the General Government Deficit is the annual interest cost incurred by the State.  It is here that a divergence begins to emerge.

Both the IMF forecast that the cumulative interest bill over the next five years will be around €47 billion.  The total from the ESRI is €39 billion.  The ESRI’s forecast is based on a 2% interest rate reduction on all €45 billion of our borrowing from the EU as part of the rescue programme.  The IMF and EC have not factored in savings on the full amount.

In fact when compared to the last IMF Review in May, they have increased their forecast of the interest bill for the next five years from €45.7 billion to €47.4 billion.  The EC has also increased it’s forecast of the cumulative interest expenditure from €45.2 billion to €46.7 billion since it’s last review also in May.

All indications are that our interest bill will be reduced but the assumptions used by the IMF and EC and the fact that they have yet to account for the July 21 interest rate changes has resulted in their forecasts of this expenditure item increasing.  We can expect this to fall in subsequent reviews.

Here are the General Government Debt forecasts. First in nominal terms.

And as a percent of GDP

All show the debt stabilising by 2013 though it is worth repeating that this is based on the implementation of continued budgetary cuts over the coming years.  All of the projections are that the debt to GDP ratio will stay below 120%.  Previously the IMF has been forecasting that the debt would peak at 125% of GDP.  This peak forecast has been, and continues to be, revised down as this graph in the IMF review shows.

When the EU/IMF programme was initiated the IMF were projecting that Ireland’s 2015 GGD would be around 122% of GDP and a very gradual rate of decline.  Using preliminary estimates of the impact of the lower EU interest rate is now forecast to be around 114% of GDP which a slightly accelerated rate of decline.

This is still a huge debt level but if we were still projected to follow the full blue line above it is difficult to see how our debt would ever become sustainable.  The green dotted line shows that the debt ratio is now projected to peak at a lower level and fall slightly faster. 

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.

ABSTRACT
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.

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.

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).

Interest Rates on our Public Debt

As it stands Ireland’s public debt is made up of five distinct types (estimated size at 30th June 2011)

1. Government Bonds (€89.7 billion)
2. Retail Debt (€13.7 billion)
3. EU/IMF & Bi-lateral Loans (€22.4 billion)
4. Promissory Notes (c. €28 billion)
5. NAMA Bonds (c. €28 billion)

These all come with different costs and interest rates.  The interest coupons on the €89.7 billion of outstanding bonds can be seen here and ranges from 3.9% to 5.9%.  The retail debt pays prizes to winners in the case of Prize Bonds and fixed interest rates in the case of Savings Certificates and Bonds.

The concern here is with the costs of items three and four.  Here is a very useful table which was provided via an interested reader. (HT: Kevin).  This table shows the drawdown amounts and interest rates on the EU/IMF loans at the end of June.

The outcome of the Brussels summit on the 21st July was that our borrowings under the EFSF would be reduced to something close to 4%.  As we can see from the above table we have drawn down around €3.6 billion at an interest rate of 5.9%.  In total we are due to borrow €17.7 billion from the ESFS so there will be some savings. 

It remains to be seen if the interest rate reduction will also apply to our borrowings from the EFSM.  As we can see above these funds carry on interest rate of up to 6.48%.  Under the programme it is expected that we will borrow €22.5 billion from the EFSM so substantial savings will be earned if (or when) the reduced interest rate is applied.

The other €4.8 billion of the €45 billion in loans from the EU is being arranged through bi-lateral agreements with individual countries and we already know that the UK has committed to reducing the rate on the loan it is providing.  It is not expected that there will be any change on the €22.5 billion of loans from the IMF.

Yesterday’s statement from S&P takes account of this uncertainty.

Following the Heads of State or Government of the Euro Area and EU Institutions statement of July 21, 2011, we expect the interest rate on the European Financial Stability Facility portion (€17.7 billion) of Ireland's €67.5 billion external support package to decrease to about 4.5%, from about 6.0%. We estimate the saving to the Irish government on interest payments will be around €0.9 billion (0.6% of GDP) cumulatively over 2012-2015. The maturities on EFSF loans are also expected to be lengthened as part of the Heads of State agreement. Meanwhile, it is also possible that interest rate reductions will be extended to Ireland's European Financial Stability Mechanism (€22.5 billion) and bilateral borrowings (€4.8 billion).

When thinking about these rate reductions a sudden thought flashed across my mind that maybe these would have some impact on the interest rate charged on the Promissory Notes provided to Anglo and INBS.  I briefly hoped that the interest rate might be calculated from some blended average of other government borrowing rates.  Hopes were soon dashed.  From the Information Note provided by the DoF last November.

The interest rate charged is based on the long term Government bond yield appropriate to when the amounts will be paid.

The interest rate on the Promissory Notes has nothing to do with government interest costs but is directly related to the yields on governments bonds in the secondary market.  Pretty quickly my hope had turned to fear.  These are not very low.

Information provided by the DoF shows the interest rates chargeable on the Promissory Notes.  This is not new information and was provided by the then Minister for Finance, the late Brian Lenihan, back in January.  See here.

The interest rate on the first three tranches is not out of line with our other borrowings.  However, the €9.1 billion that makes up tranche four has an annual coupon equivalent to 8.6%.  This is by far our most expensive debt.

We were up in arms at the 6% being charged to us by our EU partners, but we ourselves are paying nearly 9% to the two zombies that now make up the Irish Bank Resolution Corporation (IBRC).

We have been told that this new entity will not need any further capital injections from the State.  This must be considered in the light of the €17 billion interest cost the Promissory Notes will impose on us during their lifespan.  This is an implicit injection by the State.

Should we just payoff this €9 billion of 9% Promissory Notes with extra money borrowed at 4% from the EFSF?  This would generate an annual interest saving of around €350 million.  Of course we would actually have to pay the interest if we borrowed it from the EFSF rather than just rolling it up as accrued interest in the Promissory Notes.

This would eliminate the possibility of ever reneging on this portion of the Promissory Notes, but according to the current Minister for Finance we have no intention of doing so anyway.