Over the past week, there have been repeated references during the Fianna Fail heave\confidence vote to the government’s achievement in securing funding for the state for a number of years.
The plan was originally presented as funding the state for three years. However, yesterday on Morning Ireland, Brian Cowen claimed that “funding for the state for the next four years had been organised” while on the Vincent Browne show on Monday night, junior minister Tony Killeen swung for the stars and claimed that we had secured “financing for the state for the next ten years or so”. (15.40 in).
Given the hyperbole\confusion on this matter, I thought it might be worth pointing out a few figures that suggest that the maximum length of time that the deal allows the state to stay out of the bond market is three years and that a more realistic assessment would suggest about two and a half years.
Here’s a link to a spreadsheet with projections for the budget deficit over the next three years. The spreadsheet also contains other estimates of cash funding requirements for the government over that period.
The calculations based on the government’s estimates of the budget deficits over this period suggest that the state will require €61.5 billion to cover the deficit and other funding demands. This calculation was arrived at as follows.
1. The government’s budget estimates point to cumulated deficits of €37.6 billion over 2011-2013.
2. Via the NTMA website, long-term bond redemptions will total €16.4 billion over this period.
3. There will be €9.3 billion in principal payments on promissory notes, which will not be included in the general government deficit projections (i.e in the €37.6 billion).
4. However, in 2013, the general government deficit will include a charge of €1.8 billion related to interest on the promissory note which will, in fact, be rolled up rather than paid, so I have deducted this to arrive at the final cash requirement for that year. (In 2011 and 2012, we have negotiated with ourselves to have a two year break from interest payments that we would not be paying anyway—such is the magical world of promissory note accounting.)
I have also included the IMF’s deficit projections for 2011-2013. These cumulate to €43.5 billion, €6 billion higher than the Irish government’s projections. This would point to a total funding requirement over the three years of €67.5 billion.
The EU-IMF program provides €50 billion over the period 2011-2013 to fund budget deficits and other cash payments. As I understand it, the additional €17.5 billion pledged by the EU and IMF towards the bank rescue plan is not interchangeable, i.e. this funding cannot be transferred to financing deficits or bond redemptions if the bank plan proves to cost less than the full €35 billion provided for.
This means that, by the government’s calculations, the state needs to come up with an additional €11.5 billion over and above the EU-IMF money to fund deficits and avoid default over the next three years, with this amount rising to €17.5 billion if one uses the IMF’s deficit estimates.
Remembering now that we’re asking the question “how long can the state survive without raising new external financing?” this additional €11.5 billion (or €17.5 billion if you prefer the IMF’s figures) would have to come from current cash balances, in the exchequer accounts and the National Pension Reserve Fund, if it does not come from external financing.
From the NTMA’s recent business review, we know that the Pension Reserve Fund is contributing €10 billion to the bank recapitalisation and that “After an NPRF contribution of €10 billion, the value of the assets remaining in its Discretionary Portfolio would be approximately €4.9 billion.” Thus, an additional €7.5 billion must be pledged from other cash resources for the government to meet their commitment of €17.5 billion towards the EU-IMF banking package.
The NTMA’s statement on the funding of the Exchequer balance tells us that €15.7 billion remained in the Exchequer account at the end of 2011. Deduct the €7.5 billion for the banking package from this amount and we are left with cash balances of €8.2 billion.
These calculations suggest that the state will have €13.1 billion remaining in cash or liquid assets after the banking rescue. This would be just enough to get the government through three years without further borrowing according to the government’s calculations but it would not be enough if the IMF’s deficit projections turn out to be correct.
One additional complication, however, is the role of short-term debt. The government started up a Treasury bill program in recent years. Bills issued on 10th June, 8th July, and 22nd July last year with combined principals of €1.85 billion matured last Friday, January 14th. As far as I can tell, no new issuance was undertaken to roll over these amounts. According the information provided by the NTMA an additional €4.2 billion in Treasury bills will mature during February and March. If NTMA does not raise replacement funding, then the state’s combined cash balances will be €7.1 billion in a few months time.
This is not to say that the state will be completely unable to launch a new Treasury bill program at some point in the coming months. With the EU-IMF funding behind us, one would imagine that participants in the market for short-term debt would feel confident that they can get their money back. However, as the EU-IMF money is spent and state cash resources dwindle, it would not be possible to continue rolling over such Treasury bill funding, so on net this source of financing doesn’t really change the figures.
My conclusions on this are that even an optimistic scenario sees the state requiring additional funding of €11.7 billion over and above the EU-IMF money to finance the state for the next few years. With cash balances apparently dwindling to about €7 billion in a couple of months time, it seems that we may soon be faced with the prospect of either an intensification of fiscal adjustment in an attempt to reduce deficits to fit the size of our funding or else a return to the markets some time during 2013 with no margin for error. An alternative prospect would be to attempt to negotiate a new EU-IMF deal next year that would allow the state to defer a return to the markets.
One other factor worth noting is that if one goes just beyond the narrow three-year window discussed here, one finds that the state has a bond worth €11.86 billion maturing on January 15th 2014, so even if budget deficits have been reduced dramatically by that time, there will still be a significant cash funding requirement.
Finally, before people go jumping all over me saying I’m projecting a default in 2013, I’d note that I’m focusing here on the specific question of just how far can we go with the EU-IMF funding and current liquid assets. It is, of course, the case that if the NTMA returns to the market later this year or next and manages to obtain new funding for the state, then the cash crunch envisaged here would not come about. I’m not making any projections here about the likelihood of such long-term funding being raised.