Stabilising Ireland’s Debt Ratio

To explore Ireland’s chances of avoiding default, the tool of choice has been simulations of debt dynamics under various assumptions about growth rates, interest rates, primary balances and the direct costs of the banking bailout.   Various domestic and international commentators have usefully produced such analyses, but they can be hard to compare given the combinations of assumptions involved.  Unfortunately, there is still a lot of confusion about our chances of stabilising the debt ratio.  An additional complication is that in their recent “Information Note on the Economic and Budgetary Outlook” the Department of Finance did not report their assumptions for interest rates and the primary balance.   This makes it hard to do a clean sensitivity analysis of the DoF’s projections. 

In a brief note (available here; associated spreadsheet here), I use a simpler decomposition of the change in the debt to GDP ratio than normal, but link the analysis closely to the DoF’s baseline case.   Under their baseline, they project the debt ratio will peak in 2012 at 106 percent of GDP before falling to 101 percent of GDP in 2014.  However, there is concern that the growth projections are too optimistic: 1.75%, 3.25%, 3.00%, and 2.75% for real GDP growth from 2011 to 2014.   For some reason they do not report nominal growth rates for 2012 to 2014.   However, the decomposition allows us to infer the nominal growth rate assumptions.  

To test the robustness of the DoF’s projections, I examine a quite pessimistic growth scenario with just 1 percent real growth and 1 percent inflation (GDP deflator) in each year out to 2014 holding the projected deficits as a share of GDP at the DoF target levels.  Under these assumptions the debt ratio is not stabilised — though we still come surprisingly close.   Encouragingly, however, a sustained additional adjustment in the deficit equal to 1 percent of GDP in 2011 would stabilise the ratio at 112 percent of GDP in 2013.   Moreover, combining the low growth scenario with a 10 percent of GDP increase in the starting debt ratio due to a higher bank bailout cost, we still have the debt ratio peaking in 2013, but at the higher level of 121 percent of GDP. 

While the challenge of bringing the deficit down and avoiding explosive debt dynamics (and ultimately default) is daunting, I see these simulations as reasonably hopeful.   Even under a quite pessimistic scenario on growth and banking costs — there may be views on whether it is pessimistic enough — the gross debt ratio is stabilised at what should be a manageable level for a high-income country.   This also does not take into account our cash reserves and assets in the Naional Pension Reserve Fund, amounting together to 28 percent of GDP.   Provided we have the political capacity to make the needed adjustments, the path through the crisis without default and back to creditworthiness is clear enough. 

60 replies on “Stabilising Ireland’s Debt Ratio”

@John McHale

The critical ASSUMPTION – that the Irish Citizenry will wear the DEBT SOCIALIZATION jersey.

Albeit late in the process, this assumption needs to be continuously challenged.

Possible that EU policy is .. er.. the wrong policy. The BIG BIG BLACK HOLES are not in Ireland … Daniel Gross appears to think so.

This isn’t Capitalism – it is Neo-Liberal Feudalism – and far closer to the indentured slavery that still exists in parts of the less-developed world.

@ John

I dont think your pessimistic there.

What happens when the ECB raises interest rates?
– Was it Weber that was hinting at this….

What will be the effects of the cuts in Govt spending?
– A few years of Govt downsizing, in our model will not release money into the economy,.., it just wont be borrowed from outside the country.

I try to share the optimism though…

The Banks have achieved their objective, you, the Irish have been dealt a humiliating defeat, not by physical force but by stealth. You are now in enslavement, what are you going to do, lay down and roll over?

Nice one john. We’ll need an optimistic force on the site now that JTO has gone stateside till the new year.

I can’t get to the note either…

Trying to find an .xlsx filter for my ancient copy of excel, any chance of a trad .xls?

Yes the link to the note is broken.

As I mentioned here a number of recent research reports indicate that Ireland is ‘solvent’, i.e. the country/taxpayer can pay if squeezed hard enough (assuming the cost of funding is no more than 5-6%). A wildcard is the interest rate that will apply in 2013 and later, if Merkel’s new rules are brought into force.

The is greater debate about whether the country/taxpayer should or will pay. I think it will pay as the necessary squeezing will take place.

Never mind the .xls, have liftoff!

A question, which might be answered in the note –
– what’s the debt starting point? National debt or GGD?

You are adding an extra 10% of GDP to the starting value of debt to reflect a worse outcome in terms of the costs of solving the bank situation than the government is currently estimating. This is obviously an important number. Do people think this is an optimistic, a pessimistic, or a middle-of-the-road number?

Cheers John great tool to be able to play around with.

What levels of cuts would be needed to acheive the targets under the lower growth scenarios?

Does it effect the numbers if you rerun with GNP rather GDP?

One very troubling section in the note:
“The implied nominal growth rate for 2014 is 7.1 percent. This in turn mainly reflects the high implied rate of inflation (4.4 percent). With the IMF projecting that the Irish economy will not return to potential until 2015, such a high rate of inflation looks questionable”.

Questionable? It is flippin’ madness! High domestic wage inflation in response to high domestic inflation is what has suppressed growth in the export sector for some time. We priced ourselves out of loads of business sectors. We have some way still to go to price ourselves back in. Wishing that other people charged more for what they do ain’t going to make it so.

Any figure of inflation projected over 2% is a nonsense. This is what the ECB have committed to. This is what will happen, roughly speaking. At least, you’d better bake it in to your best assumptions.


The bank related bank losses recognised so far are all in the starting debt to GDP ratio (end-year 2010). The last of the simulations allows for additional losses equal to 10 percent of GDP (together with 2 percent nominal growth out to 2014 and an additional percentage point reduction in the deficit as a share of GDP relative to the government’s target starting in 2011). The reason I included the spreadsheet link is so that people can run additional combinations.

Hope you are having a good trip.


I’m sorry to say that I don’t have enough information to give a defensible estimate of how much extra nominal deficit reduciton would be required at the lower growth rates. Others might be better informed on this.

On the GNP question, a simple level effect (with equal GDP and GNP growth rates going forward) would raise the ratio (debt to GNP) at which stabilisation occurs, but the date would be the same. If we allow for the fact that the GNP growth rate is expected to be lower than the GDP growth rate, the stabilisation date — to the extent that stabilisation occurs at all — would be later.

Sorrry for going slightly off topic.

(Then again everything is revolving around the banking situation this week so I am sure I will be forgiven)

Somehow it would not surprise me if the following developments are all connected:

1) France backed Ireland at the EuroZone meeting.

2) The UK stepped in with statements of support “for itś closest neighbour”depite the fact that it is not a EuroZone member even positing the possibilility of a loan.

3) The Irish Times posted a poll asking whether the Euro was under threat with very interesting results and comments from home and abroad.

4) Sweden (not a EuroZone member) stated it was willing to consider a Bi-lateral loan to Ireland. Sweden, because of its geographical location. may have found it easier to say what Denmark feels but (for obvious reasons) cannot say and what Norway, not being a member of either club, must not say.

5)Nicholas Sarkozy is reported as saying that changes in fiscal policy would not be a condition for any rescue package and Irish fiscal sovereignty was not an issue. This only days after the French Finance Minister assured the French Media that (The EU”) would not break up. It is interesting why she said “the EU” rather than “The Euro”.

It would not surprise me if Ireland played “hardball” at the EuroZone meeting before getting into more comfortable territory in the larger EU meeting and returning back to home turf to host and “negotiate” with (did our Tanaiste say more than she should have in the Dail ?) our international visitors including those who travelled from the US and Asia.

(How bad was “the fog” in Brussel which delayed a landing by Minister Lenihan and hence a late arrival at the EuroZone meeting?)

IMHO, (and with respect to those of you who are still brave enough to stretch their “flexible friend”), anyone who believes the guff about Ireland being a “peripheral state”may benefit from more travelling beyond the annual sun/ski holiday or the occasional “bender” in Prague and Budapest. The temptation to claim that Irish diplomacy is somehow second best to (the very effective) Israeli diplomacy should also, from my modest perspective, be resisted.

It would also not surprise me if “The silence of the two Brians” last weekend may have been caused by intensive phone calls to London, Oslo, Washington, Stockholm, Paris, Copenhagen, and other more exotic places around outside Europe. I do however find it hard to believe that any long phone calls were made to Helsinki. Interesting murmurs from the northern Baltics suggest that Ireland may not have been the ones who felt “left out in the cold”.

Once again apologies for straying slightly”off topic. It is interesting what ones mind can ponder when “indulging” in a spot of sober saturday night baby sitting “sans” madam.

@ Livonian

Lets hope our boys are that good. It would be some turn around from the guys that brought us bench marking and ‘the gaurantee’.

Though I will say the odds of probability are with them, over a long enough time horizon the probability of competence surely tends towards 1.

@David O`Donnell

“….. it is neo-liberal feudalism”

perhaps I could be more optimistic and say “it is an ATTEMPT at neo -liberal feudalism”.

I have a very strong sense that an awful lot of alarm bells are sounding off around the ears of educated and sophisticated “peasants” irrespective of their personal wealth.

@Celtic Phoenix

I have a feeling that “our Boys” are only part of an organised response/effort which stretches beyond our shores but not necessarily beyond our nation.

Howevever in defense of “our boys” (one of whom will probably soon just be “one of the boys”) I believe experience and a brush with mortality or meditations on ones professional legacy will do wonders for moral fibre and determination.

All above IMHO (I hasten to add of course)

David O’Donnell

“The critical ASSUMPTION – that the Irish Citizenry will wear the DEBT SOCIALIZATION jersey.

Albeit late in the process, this assumption needs to be continuously challenged.

Possible that EU policy is .. er.. the wrong policy. The BIG BIG BLACK HOLES are not in Ireland … Daniel Gross appears to think so.

This isn’t Capitalism – it is Neo-Liberal Feudalism – and far closer to the indentured slavery that still exists in parts of the less-developed world.”

“The critical ASSUMPTION – that the Irish Citizenry will wear the DEBT SOCIALIZATION GREEN jersey”

Fixed that for ya.

@John McHale

The Economic and Budgetary Outlook contains projections for the levels of nominal GDP up to 2014. You can see them in this table which I used as the starting point for a comparison of the growth forecasts from last December’s Stability Programme Upate with the “revised” growth forecasts from the EBO a few weeks ago. It seems that the nominal growth forecasts are identical! In real terms our short term growth forecasts have actually increased.

The 2014 nominal growth rate I calculated from the forecast GDP levels in the EBO was 4.6%, which is some way distant from your implied rate of 7.1%. This appears to be yet another inconsistency in the DoF figures. It is difficult to see how a credible four-year plan will emerge early next week.

This is an example of analysis of what is happening now and how the Irish decision makers need to be very aware of the background. This is not so much about Ireland as others. Negotiations can only be strengthened by analyses of this sort?

Debt Dynamics
Well John, that is surely your answer? As debt crushes current activity: with more taxes and cuts in government spending, except for scrappage! schemes; debts will increase as borrowing makes up for declining revenue; the ratio will increase as GNP falls! Debt deflationary spiral, anyone?

Should be the name of an ice cream??

Agreed! I have a healthy respect for our middle ranking public servants. For those that ascend …. not so much. Principles are sent packing for very short term gain. That is essentially what the Irish are good at: talking and “doing nothing”. Not a criticism as that sort of behaviour is very appropriate to a small country. The EU has been very generous, but lost control of EZ banks and EU banks. That has to be addressed and it is illuminating that the emphasis has shifted from Greece. They cannot be trusted. Timeo Danaos quia dona ferentes and all that? The Irish have striven to be upfront internationally, but clever about it. That sort of dialogue partner may be helpful for the EU as the inevitable melding of sovereignty continues. But back to the banking insolvencies! If interest rates start to rise, the game is over. If they remain low in the EZ, then Die Herren und Frauen will rescue us and the rest as their banks will lend again. But only if they still have customers who want loans.

Confidence, gentlemen! Debt and banking are intertwined. With dialogue comes confidence even as bad news increases. Paradox or good communication? All of this could have been sped up and placed Ireland in a better position had NAMA etc not happened, but that train has left the station. We still need more taxes. Only those with the moolah can transfer it to the government. Socialization of debt = Progressive taxation!

Debt ratios will stabilize, but 2050? Maybe, but I am optimistic that growth in Asia and elsewhere will mean that our resources will finally, be tapped and bring about stabilization sooner. Direct negotiation with China about oil? Why not?

It should be kept in mind that we are dealing with an unbalanced economy.

The indigenous export sector is largely dependent on a UK market that has yet to feel the full impact of austerity measures. The indigenous sector also has the greater linkages with the domestic economy.

In the dominant FDI sector, the latest export data shows most of the rise is from pharmaceutical/medical device products, which have risen by 11% on 2009 while sales of computer equipment declined by a third over 2009, and exports in electrical machinery decreased by 18%.

My own guess is that electronics would have greater local value added than batch chemical production.

So Ireland is largely dependent on growth of a sector which accounts for over 50% of goods exports and 45,000 direct jobs from a workforce of over 2m.

It would be helpful to have information on the change in the multiplier effect from say 2000 when employment peaked in the internationaly tradeable goods and services sectors, with the interval period when exports rose in current money terms by 50% but no direct jobs.

With some more years of austerity ahead, anyone without exposure to the tradeable goods and services sectors, cannot appreciate the pressure on small firms selling domestically and internationally with the ever present fear among staff of losing their jobs.

The problem for the economy is that in the past decade, as more than 400,000 were added to the workforce, ALL the net jobs were in construction, the public sector, domestic market services, retail and distribution.

John –

As you are aware – but this issue puzzles me – the trouble with these models is that they imply enormous debt/GDP levels are sustainable. They rarely predict unsustainable paths since you can always make adjustments to the deficit (like bring it to zero) which stabilize debt ratios. The other condition for sustainability is that there is a (reasonable) interest rate where investors will be willing to roll over the debt. This is where sustainability breaks down – if investors don’t think you will stick to a tight fiscal programme through tough and good times over a long long period, then they worry about haircuts and restructuring. That leads to a default risk premiums which can be huge. With the Germans claiming they will force a regime with the possibility of restructuring in 2013, will markets buy Irish debt knowing the levels are around 100-120% GDP, or 130-150% GNP + possibly more with the bank capital needs? Clearly they might, and that has to be the hope here. But for now the debt will be rolled into the ECB/EU/IMF. That official debt is generally senior to the private sector debt, so the private sector expects less and less recovery in default as we get more official loans. This should make the default risk premium go up on private debt, however, the official bailout is good for ability to roll over and hence tends to lower risk premiums. Looking at Greece it seems the net effect of these two has been to raise, not lower, interest rates post the bailout. The failure for rates to fall in Greece is worriesome as it means private sector credit costs remain high and the recession will be larger. Other IMF programmes have been very successful at lowering rates and ensuring long term roll over. Would you have any thoughts on this – is Ireland closer to Greece (Argentina may be a better example as Greece might still succeed)? or to one of the many successful IMF programmes?

“Recognising the bulk of the bank debt, making a genuine assessment of the potential stabilisation costs, then bringing those costs on to the state’s balance sheet caused Ireland’s projected budget deficit to balloon to an unprecedented 32pc of GDP. This figure has been widely remarked upon. Less well-known is that if several other and much larger European economies included their bank bail-out costs in their national accounts, rather than burying them off-balance-sheet, their projected deficits would be similar.”

“Ireland, almost uniquely in the Western world, has made a start in terms of confronting the ghastly prospect of an inevitable string of bank failures and restructurings. At the same time, wages are adjusting downwards, exports are booming and investment is still flooding in.”

From today’s Sunday Telegraph


You make very important points. As you say, any debt-GDP ratio will be stabilised at a zero deficit. Of course, this highlights the drawback of my simpliified analysis, which says nothing about the interest rate and thus the split between the primary balance and interest costs.

Your comparison to Greece gets to the crux of whether we can make it or not. The bond markets do not believe that Greece will avoid default, even with their EU/IMF programme. The reason is that their debt ratio will at best stabilise at a high level, and also, becasue of the large amount of debt they had to finance prior to the programme, they face a high interest cost on that debt. The markets look at the required primary surplus, and do not believe, rightly or wrongly, that Greece can make it.

Although missing much of the action, my simple simulations do show (even with pessimistic assumptions about nominal growth) that Ireland can stabilise its debt to GDP ratio at a manageable level. Moreover, the average interst rate on the outstanding debt is relatively ow given that a limited amout of debt had to be rolled over when bond markets were demanding high interest rates. To take round numbers, with a debt to GDP ratio of 100 percent, a two percent nominal growth rate and a 5 percent interest rate, we would require a primary surplus of 3 percent of GDP. (The EU/IMF programme puts a ceiling on the average rate we will face.) This primary surplus is without doubt achievable for a country as rich as Ireland if we have the will. It is also important that our net debt — which is really what matters — is some 28 percent of GDP below our gross debt.

Moroever, this basic requirement of plausible solvency does not change drastically even with quite considerable additional bad news on the bank bailout cost. For example, the 10 percent of GDP additional cost I consider in the note adds 0.3 percent of GDP to the required primary surplus under the growth and intererst rates assumptions above. This is why I have emphasiised that it is really the lack of political capactiy to do what we can do as a rich country that will sink us — and not the impossibility of the stabilisation task we face. The conditionality that will come with the programme will substitute to some extent for our own domestic capacity by providing a mecahism for making credible commitmnts, although some of the hysterical reaction about IMF involvement we heard during the week makes me worry just a bit whether we have the capacity to follow through on the agreements we make in return for the funding support that clears the path back to solvency.

@John McHale,

Again, I can only applaud your persistent optimism – and I really, really want to share it. Ireland will come through this; there are many sectors that are resilient and vibrant. But the objective must be to minimise the economic pain. You end with one proviso: political capacity. I could add two more, but first the political one.

Colm Toibin, in the UK Guardian on Sat,. observed that the four of the current most influential politicians, the Taoiseach, the Tanaiste, the MoF and the leader of the main opposition party have all inherited their political positions. This leads to a sense of entitlement bordering on arrogance – and it has infected the entire political, public sector and business elite. The stables must be cleaned.

Secondly, the scale of the problem is too large and the Irish economy is too small to bear the burden of the stupid bond investment decisions made by French and German banks and pension funds. The most effective action on this front would be a mass petition by the Irish people to Pres. Sarkozy and Chancellor Merkel pointing this out.

Finally, the non-tradable sectors continue to behave – and impose burdens on the tradable sectors – as if nothing has happened. For example, the semi-states have been almost entirely untouched. On Friday last – a good day for burying bad news – the CER decided to up the already excessively high distribution network revenues awarded to the ESB over the next five years by more than €200 million. A similar additional increase is expected shortly for the transmission network. The decision to gouge the guts of an additional half billion out of hard-pressed consumers – facing probably the most severe fiscal adjustment imposed on any developed economy in modern times – suggests that these people are living on another planet. When will people wake up?

@John McHale

Thanks for countering the hysterical reaction and crunching some numbers that show we can stabilize the debt. I particularly like your comment above:

“I have emphasiised that it is really the lack of political capactiy to do what we can do as a rich country that will sink us — and not the impossibility of the stabilisation task we face. The conditionality that will come with the programme will substitute to some extent for our own domestic capacity by providing a mecahism for making credible commitmnts, although some of the hysterical reaction about IMF involvement we heard during the week makes me worry just a bit whether we have the capacity to follow through on the agreements we make in return for the funding support that clears the path back to solvency.”

The Telegraph writted:
“Less well-known is that if several other and much larger European economies included their bank bail-out costs in their national accounts, rather than burying them off-balance-sheet, their projected deficits would be similar.”
I wonder what our debt to GDP would be if we included our off-balance-sheet costs…

@ Paul Hunt

Aspects of ‘political capacity’ could be improved through say reform of the electoral system but it doesn’t get away from the national problem of an electorate with unrealistic expectations/ wanting to have their cake and eat it, similar to the situation in the US.

A new NBC News/Wall Street Journal poll shows two-thirds of the US public said support for spending cuts was a major reason they decided to back the Congressional candidates they chose in this year’s elections. Yet a 40% plurality called the proposals recently offered by the co-chairs of a presidential deficit reduction panel a “bad idea.”

In Ireland, we have seen the not an inch attitude from most of the vested interests from across the political spectrum, despite the economic woes.

It’s simply not just the politicians who are the problem.


(I had a longer comment on this which seems to have disappeared, despite having no hyperlinks …)

Isn’t there something of a conflict, though, between being jaded (fairly enough) about Irish political realities and supporting a policy (Euro entry) which meant that prudent political behaviour was needed to avoid disaster? Mightn’t it be reasonable to say that Euro entry was a bad idea because, while good policy would have handled the risks, good policy could not have been expected? (Especially since a credit boom predictably makes bad policies appear good.) Though of course, that’s far from being a (full) case for Euro exit.

@John McHale,
Your analysis is impressive and persuasive and once again you raise the great imponderable: political capacity. I haven’t read the SBP/ Red C poll as yet, but I’m far more interested in what the ‘public confidence’ ratings are for government and opposition than headline figures of party support, which don’t appear to have changed much since the last tracking poll. If, as previous Red C polls have indicated, this latest poll shows public confidence in either the government’s or the main opposition parties’ capacity to manage a way out of our crisis has slipped even further, regenerating public confidence will be as much a priority for the next government as pushing through the austerity programme. The new government can’t do one without the other. They will carry a further disadvantage in that they may be generally perceived as in office, but not in power; which now resides elsewhere. The general public are pretty clear on one thing: our political system has failed us; it is a shambles at every level and the deficit of leadership is frightening.

Putting it crudely, if JC came down from heaven and was installed as a replacement for Brian Cowen in the morning, it wouldn’t save Fianna Fail. Hence, it’s possible to conceive of a general election in which Fianna Fail first preferences fall below 10% and that party returns about 10-15 TDs to the next Dail, whilst their partners in government, the Greens, may be reduced to one or two representatives if they are not wiped out altogether. That lost support has to go somewhere. In a scenario that might have appeared extreme even a few weeks ago, it’s reasonable to suggest that the most likely beneficiaries of such an electoral meltdown for Fianna Fail are independent candidates, in rural areas in particular, Labour and Sinn Fein. Fine Gael continue to struggle, especially in Dublin, since they failed to remove their current leader last summer. Without ‘new era’ leadership in Fine Gael, it’s possible they could miss out on the greatest opportunity of a generation to secure an overall parliamentary majority and instead return as the largest opposition party.

This outcome is not as far-fetched as it may seem. Previously, I viewed the Donegal by-election as a distraction, but with the current turn of events it has, I believe, acquired fresh significance. A Red C poll last week suggests Pearse Doherty will easily win the seat for Sinn Fein and Fianna Fail’s candidate may be pushed into third place behind Labour. Between them, Sinn Fein and Labour may secure well over 50% of the first preference vote in what was previously regarded as a Fianna Fail political fortress. If Fine Gael come in fourth place there are, or should be, implications for Kenny’s continued leadership of that party.

Once the ink is dry on the IMF/EU deal, the government faces the daunting task of putting the budget through, much harder now than it even appeared last week since there is open revolt amongst their own backbenchers over a manifest failure of both policy and leadership. Unlike Fine Gael though, Fianna Fail cannot dump their current leader without causing an immediate general election; something which even they might be loathe to do in the context of current negotiations on a survival package for the country.

If this government then falls on the budget would the incoming ‘Eamon and Gerry Show’ implement that same budget if they emerged as the only viable candidates for the offices of Taoiseach and Tanaiste respectively in the next Dail?


Indeed. Bonnie Prince Gerry has made his landing, and the rest of us had better pay attention. Going beyond just the next election, if SF becomes the only important party advocating sovereign debt renegotiation in a country with >150% debt-to-GDP, then its share of the vote can only be expected to grow.

How does the picture look if you take GNP and not GDP? From a quick glance it seems that the ratios get quite a bit scarier, particularly since the ratios are inclined to have tipping points.

Aren’t we getting up towards the 130% ratios if we take GNP as being about 82% of GDP?


Although missing much of the action, my simple simulations do show (even with pessimistic assumptions about nominal growth) that Ireland can stabilise its debt to GDP ratio at a manageable level.

The additional adjustment on top of the current €15bn needed to handle the 2% nominal growth rate is not stated – it would help to have an estimate/range for this before drawing conclusions, even if only to a rough level of granularity.

I believe the current primary balance is about -9%. With the low growth case and a stabilizing primary balance of +3% as discussed above, this would require an overall adjustment of about 12%. The following article contains some interesting details about large fiscal adjustments in Europe. Some highlights are

82-86 Denmark PB adjustment=10%
89-94 Greece PB adjustment=10.8%
89-97 Italy PB adjustment=10.4%

The Danish consolidation took place at a time of much higher inflation which would have helped. The Italian consolidation took place over a much longer period of time. The biggest adjustment of all was achieved by Greece, though clearly it didn’t last.

If Ireland were to achieve deficit stabilization by 2014, it would surpass any of the efforts described in the article, based on the size of the adjustment, the timeframe and the overall environment. It looks like the ECB will continue to resist boosting inflation or doing QE, particularly if Mr. Weber takes over next year. Trying to preserve the Croke Park agreement means that the cuts will be less growth-friendly than otherwise, since the inefficiencies in the public sector/semi-states won’t be tackled properly. The proposed new 2013 bond rules cast a shadow over everything. Given the size of the adjustment needed the negative feedback loop of debt-deflation could kick in.

In short the deficit reduction target is trying to achieve more and in a more unfavourable environment than has ever been done before in Europe. This never seems to be mentioned and needs to be recognized and taken on board. Is it possible to achieve the target? Perhaps. Is it likely? At this point I would say no.

“I’m sorry to say that I don’t have enough information to give a defensible estimate of how much extra nominal deficit reduciton would be required at the lower growth rates.”

But isn’t this the crucial point John.

Any debt level is sustainable if we can introduce cuts/taxes to bring the deficit including interest payments in line with the target.

I see debt/GNP stabilizing at over 140% of GNP assuming €15bn additional banking costs. Assuming our average interest rate is just 5% this would imply interest payments of over €10bn pa from 2012 onwards.

To me that isn’t sustainable despite what the model says.

Greece post bailout has seen growth contract and the deficit expand. There must come a point mathematically where an implosion occurs. What would that be for Ireland?


Ta for that – the “Green” stood up reasonably well yesterday to superior forces. But I tend to go for the Red of Munster at the mo, as at some stage, at some time, perhaps not too distant, Citizenry will STAND UP and FIGHT with the ‘political capacity’ to emancipate the serfs.

THis should be of concern to the incoming Fine Gael/Rump Fianna Fail administration! Seven_of_9 is on a weekend break – sussing out the Merrion Hotel …

@John McHale

Nothing is impossible.

@ anonym

Trust in the Irish political system with its poor standard politicains, cronyism, senior public service putting position and money above principal and scrounging vested interests, was certainly naive.

But like Julius Caesar, we crossed the Rubicon and the die is cast.

How people at a personal level would like to rewind the tape and ditto for a country.

Alea iacta est!

It’s nice that the Telegraph feels sorry for us over reporting the 32% deficit upfront, but that 32 percent includes only the unrequited transfers to the dead banks of Anglo and INBS. It does not include the NPRF transactions with B of I and AIB, several of which had immediate capital losses (since the government was injecting capital at below the ordinary share market price) and it does not include NAMA, which is all SPV’d.

It also doesn’t include NAMA or PPP ‘losses’…

If you rolled all the semi-state debt and PPP obligations in to one figure with the GGD, how big would it be? Taramasalata?

Is John McHale to be our new hero? Is he our last, best, hope? Ok, i’m going a bit OTT there, but it IS important to see the other side of what is becoming a dangerously self-fulfilling negative sentiment loop. Having read through Lucey’s twitter page this morning (i consider it my own personal form of self-flaggelation), i was seriously close to walking out on to the balcony and ending it all, but then i remembered just why i had a very severe rugby-induced hangover. Anyone out in town last night? The place was jammers, bars and restaurants full (Friday too), and everyone full of a wonderful IMF-related black humour that only the Irish can do (lads, put on an accent and pretend to be IMF consultants – the ladies view them as quasi rock stars!). There is a ton of real wealth out there in the country, there’s just zero confidence. At a State level, it is NOT a solvency issue, its a liquidity and confidence issue, partly due to our banks, and partly due to the deficit. But while we haven’t yet “fixed” the banks, we have been incredibly upfront and honest (as a nation, not by the banks themselves obviously) about the losses that are in them. Read Michael Somers article in the Irish Times – bit too much “oh i could see it all coming!” about it (why didn’t you mention it a lit more vigourously chief??), and some marvellous irony at the whole subject of pay increases from a man on a million quid per year, but its a good piece on the overall problem.

Restaurants & pubs full?

They are and the people spending is probably quite confident in their economic status. Therefore it might be seen that confidence isn’t quite so low or?

Maybe the problem is not only lack of confidence it is actually something more? Possibly that the unemployed lacking in spending power & nobody is increasing their spending by borrowing more on their homes?

As for solvency, it seems Ireland either reforms or waves the magic wand & puts 400,000 people into gainful employment. Which is more likely? Magic wand or reforms?

Remember the debt rule: owe $100 to the bank and they owen you. Owe 100,000,000,000 euro to the banks and you own them!

Damaging the creditors, reckless enough to stuff the Irish banks in the first place, may be the best way out. If the derivatives come home to roost soon and the PIGS suffer and the whole scheme comes undone, what harm to borrow as much as possible as it will never be repaid?

This is more pertinent the more we get bad news about more black holes in the banks. We do not know anything except that they are a $$%^^&&* mess that could well turn out to be far worse. Perhaps that was known at an early date and that since then, fabian tactics are the only option?

@ Veronica.

It would not surprise me if FF tries to opt for a budget deal with the Kenny wing of FG. : EK and MN help the Government pass the budget and B.C. calls a general election for January 20th in a desperate bid to hold on to 38 seats.

FF would prefer to see Mr Kenny (rather than a “Young Turk” ) leading FG and the next Government as it would give them a better chance to get back up off the floor in the long run. EK needs an early election if he is to survive and avoid another “heave”.

An early indication of this thinking would be by-elections ear-marked for 20th January this coming Friday.

If FF goes into “meltdown” after a general election (i.e 30 or less seats) it would, however, also not be surprising if a centre-right coalition is formed between F.G. and FF.

Also watch out for the current government hammering the Public Service ( ie. Mary Harneyś reference last Friday to “Benchmarking” with other countries instead of with the private sector) in a bid to salvage a core vote .

Pay “adustments” of 15 % to 20% (possibly even up to 25% for high earners if FF decides to go gentle on low paid public servants with a careful eye on stategic co-operation with SF in future elections) may well be in the Christmas stocking.

I also appreciate that officially we still have a Green/FF coalition with a few independent “decorations” (no offence) but I am not sure any of them are even “in the game ” any more.

Of couse all above is IMHO and speculation. It would not be the first time I got it wrong having predicted a November 4th election before Jim McDaidś resignation. A prediction which, I believe, was a defeat of “logic” by “reality”and serves to demonstrate that while Politics power and national pride are comparatively simple concepts to grasp “Democracy” is extremely volatile, complex and hard work.

As a mere plebeian, however, I prefer the “lunacy” and volatility of Democracy than the “certainty” which is offered by alternative Political Governance and the memories of which are very fresh throughout most of Europe.

I also agree with you that there is potential for a lot independent candidates, especially in rural areas, in the next General election. However with one caveat!

Does every constituency have people who are prepared to get into the thankless job of representing the welfare of the “Parish Pump”? Ninety grand a year (before “adjustments”) may appear like an enticing dream until it actually becomes a serious consideration.

@John : apologies once again for straying away from the topic of your informative and excellent article.

“At a State level, it is NOT a solvency issue, its a liquidity and confidence issue, partly due to our banks, and partly due to the deficit. But while we haven’t yet “fixed” the banks, we have been incredibly upfront and honest (as a nation, not by the banks themselves obviously) about the losses that are in them.”
As @Jesper points out, it is not a crisis of confidence. There is plenty of personal confidence among those who have secured their position. There is also plenty of despair among those who have been listening to the “carry on as normal, nothing to see here” as they realise they have not prepared.

It is most certainly a solvency issue. Runs on banks don’t happen because of fears about liquidity. They happen because of fears about solvency. The same is true for runs on countries. The current government is unable to convince that it can sustain solvency. That is the root of the issue.

The whole blow-up started, IMO, with garglegate. A light was shone on not just the Taoiseach, but on the rest of the cabinet standing around him guffawing while he gave his lunchtime ‘defense’ of his congestion. It was ridiculous, not just of him, but of the rest of them. It appears that more than one thought they were still in the bar with a friendly Tuam Herald reporter and not facing internationally syndicated cameras.

@Yoga: Then there was the classic line about Ireland being an island…at some stage the markets realised that these guys were a bunch of spoofers.

I was talking to a distinguished US financial historian the other day who was saying that, in the vast majority of cases, when historians have examined famous crises thought (or claimed) at the time to have been liquidity crises, they turned out on closer inspection to have been solvency crises.

@Kevin O’R
Exactly. The crisis of confidence is an external one in the management of the economy. Nothing else matters. It doesn’t matter if we all go out and spend like drunken sailors. Indeed, if the trade surplus is reduced by that action, it will signal more poor policy choices. We are borrowed up and we are spent out. Now there is debt.

@Bryan G, Dreaded_Estate and Seamus Coffey

Warning: Wonkish Comment

Byran and D_E you are both absolutely correct. The analysis is incomplete without knowing what additional discretionary deficit reduction is required to maintain the target deficit as a share of GDP after an exogenous fall in growth.

It is clearly a complicated question, which is why I shied away from it before. The lower growth will affect the actual deficit through an automatic stabiliser effect; moreover, any additional discretionary adjustment will also affect growth through a multiplier effect. We then have the third complication that both the numerator and the denominator of the deficit as a share of GDP are affected.

It is easy to throw up one’s hands. However, the simple model I linked to a couple of weeks ago can help get a handle on things. The purpose of the model was to show that a change in the discretionary deficit would change the actual deficit, contrary to claims being made at the time.

Extended version here:

I have extended the analysis to derive an expression for the size of the discretionary adjustment that is needed to keep the deficit as a share of GDP constant when there is an exogenous reduction in GDP. (Exogenous here means the part of GDP that is independent of the size of the deficit.)

The size of the needed adjustment is equal to proportionate (exogenous) change in GDP multipled by the sum of the automatic stabiliser coefficient and the target deficit as a share of GDP multiplied by the starting level of GDP. I know this is a mouthful, but hopefully the note will makes it reasonably clear what is involved.

In my note linked to in the original post, I wrongly claimed that the DoF’s Information Note does not contain information on the growth rate of nominal GDP. Although it doesn’t record the growth rates for 2012 to 2014, it does give the levels of nominal GDP. (I had mistakenly thought these numbers were for real GDP since they appear directly under a line giving the real growth rates.) My thanks to Seamus Coffey for pointing this out in comments above. Seamus also notes that the DoF’s growth projections are different from what is implied by their debt dynamic calculations. See Seamus’s comment above for more detail. Maybe someone can reconcile the two.

The question I now ask is how much additional deficit reduction would be required to hit the three percent target for the deficit as a share of GDP in 2014 if nominal growth is just 2 percent of GDP instead of the DoF’s projections of 2.5, 4.3, 4.3 and 4.6 from 2011 to 2014. The cumulative shortfall is 7.2 percent. The DoF’s forecast for nominal GDP for 2014 in the Information Note is €183 400 billion.

The remaining parameter to be specified is the automatic stabiliser coefficient — that is, the amount by which the deficit declines when when nominal GDP rises by one euro. For the sake of illustrating the calculation, I put a value of 0.25 on this parameter, but others may have a better idea on how to quantify it.

Overall, this approach puts the additional deficit reduction required to make up for the assumed nominal growth shortfall at €3.7 billion.

I hasten to emphasise that this is all just meant to be illustrative. Moreover, the 2 percent nominal growth out to 2014 is not meant as a forecast, just an exercise in sensitivity analysis. However, the analysis does suggest that substantial additional deficit reduction is required to make up for the effects of slower growth on the deficit itself.

I hope others might be able to improve on the calculation — that is if there is anyone left reading this thread.

“Maybe someone can reconcile the two.”
Do you want a mathematical answer or a philosophical one?

(They don’t know what they are doing, there you go, one answer… I’ll leave irrational number theory to someone else).

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