Ireland’s Public Debt CrisisIs Ireland’s public debt ‘sustainable’?SEAMUS COFFEY
May 2011Irish insolvency is now less a matter of economics than ofarithmetic. If everything goes according to plan, as it alwaysdoes, Ireland’s government debt will top €190 billion by 2014,with another €45 billion in Nama and €35 billion in bankrecapitalisation, for a total of €270 billion, plus whatever lossesthe 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 itwill be closer to €250 billion.Prof. Morgan Kelly, “Irelands future depends on breaking freefrom bailout”, Irish Times, 7th May 2011
The Namawinelake ForecastSo general govt debt of €148bn in 2010 + €43bn deficit 2011-2014 + additional capital for banks (€35bn earmarked of which €25bn is described as a contingency) + debt redemption nil (rollover) + NAMA €45bn (€40bn bonds including pyt for sub-€20m exposures and €5bn development debt) + swapping of ECB/CBI ELA for national debt x,So €271bn + x for ECB/CBI ELA swap for general government debt.Obviously NAMA will have some value as will ELA and we start offwith some funds in the NTMA/NPRF so the net will be less than that ,but I would have said €220bn as a rough ballpark.www.namawinelake.wordpress.com, 8th February 2011
Reaction“There are grounds for believing that Kelly’s estimate is wrong tothe extent of between €50 and €60 billion and that the real figurewill be closer to €190 billion.”Antoin Murphy, “This time Morgan Kelly is wrong”, SundayBusiness Post, 15th May 2011“For undisclosed reasons, he feels the resulting figure is toooptimistic and adds a further €30 billion as a contingencyprovision. This brings his projection of the gross GGD to €250billion at the end of 2014.Kelly’s inclusion of €35 billion under this heading is doublecounting.”Tony Leddin and Brendan Walsh, “Clarity needed when figuringout Government debt”, Irish Times, 20th May 2011
The ‘Kelly’ ApproachThere is no double counting.2010 GGD: €148 billion2011-2014 Deficits: €42 billionBank Recapitalisation:€35 billionNAMA: €45 billionGROSS TOTAL €270 billionPlus CB lending loss: €x billionLess value of assets -€y billionProjected 2014 Debt €250 billion
What is the reality?What is the general government debt (GGD)?What is in the GGD?What is not in the GGD?When is public debt ‘unsustainable’?
“We are where we are”How did we get here?Where are we going? START: 2007 = €47 billion MIDDLE: 2011 = €167 billion END: 2015 = €??? billion
2008 to 2011: From €47bn to €167bnFour reasons:1. Annual Deficits: €60 billion2. Increase in Cash Balances: €14 billion3. Bank Payments: €15 billion4. Promissory Notes: €31 billion2007 GGD of €47 billion plus this €120 billion2011 General Government Debt = €167bn
What is in the General Government Debt? The GGD is currently made up of: - Government Bonds: €80 billion - EU/IMF Loans: €40 billion - Promissory Notes: €28 billion - State Savings Schemes: €14 billion - Other Debt: €5 billion TOTAL: €167 billion
What is not in the GGD?The following do not enter the GGD:- National Asset Management Agency- Irish Bank Resolution Corporation- Commercial Semi-State Companies- Central Bank of Ireland ELA- Future Liabilities (pensions, aging costs)
What is not in the GGD?What assets could give a measure of net debt?- Cash: €18 billion- NPRF: €5 billion- “Viable” Banks - AIB/EBS: 99.80% (NPRF) - BOI: 15.10% (NPRF) - IL&P: 99.25%- Commercial Semi-States?- Other Assets?
2012 to 2015: From €167 bn to ???What’s remaining?1. Cumulative Primary Deficits: €5 billion2. Further Bank Recapitalisation: €2 billion3. Interest on National Debt: €31 billion3. Interest on Promissory Notes: €5 billion2011 GGD of €167 billion plus this €43 billion2015 General Government Debt = €210bn
2015 Government DebtITEM €billion2007 General Government Debt 47Accumulated Deficits 2008 to 2011 60Borrowings for Cash Balances 14Direct Payments to Banks 17Promissory Notes to Anglo/INBS 31Promissory Notes Interest to IBRC 5Projected Deficits 2012 to 2015 362015 Projected General Government Debt 210Cash Balance on hand 18
Breakdown of this €210 Billion Debt2007 Pre-Crisis Debt: €47 billion2008 to 2015 Deficits: €96 billionBank Related Borrowing: €53 billionCash Borrowings: €14 billionTOTAL: €210 billion
Debt Developments in 2011Some pieces of ‘good’ news:1. Bank Recap Costs: €35bn versus €17bn2. Reduction in EU interest rates: c.€1bn p.a.3. ‘Double Counting’ error: €3.6 bn
Domestic UncertaintiesOn the liability side:1. Slippage in the annual deficits2. Potential Losses on €30 billion of NAMA loans3. Further losses in the banks - AIB/EBS, PTSB, BOI - IBRC - Credit unions4. Central Bank Liquidity: €66bn/€45bn
Debt SustainabilityWhat does sustainability mean?Is there a sustainability threshold?How you stop the debt ratio rising?Will the Irish debt ratio stop rising?