Irish Government Debt and Implied Debt Dynamics: 2011-2015

This detailed analysis of Ireland’s public finances by John Fitzgerald and Ide Kearney is available here.

Summary:

This article examines the debt dynamics facing the Irish State over the period 2011 to 2015. Using medium-term official forecasts on the growth rate and assuming that the official target primary surplus will be achieved, it examines the likely path of the debt out to 2015. It takes account of the reduction in interest rates on EU borrowing agreed at the EU Council meeting on 21st July. However, it makes very conservative assumptions on the interest rate available after 2013, which could well be significantly lower than we have assumed, with consequential beneficial effects on debt sustainability. In addition, the analysis uses the official projections for holdings of liquid assets, which seem very high.

Using these assumptions, 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.

There are no easy options in tackling the current levels of debt facing the Irish government. The current programme of austerity, with an agreed package of cuts totalling €30 billion over the period 2008-2014, will, on these assumptions, be sufficient to all but eliminate the primary deficit by 2013. However, the very high current levels of debt mean that if growth were to prove less than assumed in the Department of Finance estimates, it would not be sufficient to stabilise the debt to GDP ratio before 2015. On the other hand, a more robust recovery would both improve the primary balance more rapidly than in the base case and it would also ensure that the debt to GDP ratio would begin to fall at an earlier date.

In planning for recovery a critical additional strategic hurdle faces Irish policy makers – the need to return to the financial markets in 2013 in order to fund substantial debt repayments in 2014. If this can be satisfactorily accomplished then the position of the government will be facilitated by the prospective lower funding needs in 2015. To prepare for this return it will be important to implement fully the prospective adjustment in the public finances agreed with the Troika. If this is successfully accomplished and growth picks up in 2013 it will be clear that most of the new borrowing from 2013 onwards will be to fund debt repayments, not to pay for an unsustainable gap between public expenditure and revenue.

33 replies on “Irish Government Debt and Implied Debt Dynamics: 2011-2015”

@desmond
Spot on, I think debt to GDP is very misleading for Ireland.

The debt/GDP ratio is meant to measure the “affordability” of the debt compared to government revenues and potential future government revenues.

GDP is not a good measure in the Irish context as much of the gap between GDP and GNP is multinational profits. The capacity to raise additional revenues on this segment of the economy is limited.

“if growth were to prove less than assumed in the Department of Finance estimates”
It all seems therefore to hinge on us getting 1.8%/0.7% real/nominal GDP in 2011, 2.3/2.5 in 2012, 3/4 in 2013, 3/4.3 in 2014 and 3/4.6% in 2015.
FWIW these seem…optimistic. And, perhaps i missed it, but where is the scenario analysis (there is something like same in section 4.3 of the document) showing the sensitivity of the debt to downside growth. What if we get 75% of the assumed growth? 50%?

It is now becoming clear that I was correct when I repeatedly posted here last year that all the ills of the Irish economy were being greatly exaggerated by the politically-driven Dublin 4 media and commentariat. In their anti-FF frenzy, all regard for intelligent statistical analysis was swept aside and every effort was put into portraying the Irish economy as an unparallelled disaster area that faced total ruin and depopulation.

Now that the election is over and a government more to Dublin 4’s liking is in place, the truth is starting to emerge. This was the case with the migration figures where the reality turned out to be nothing like the Dublin 4 media and commentariat perception this time last year. Something very similar appears to be now happening to the debt projections. If this ESRI forecast is correct, Ireland’s net debt will peak at a level that is broadly in line with the OECD average, and proably below that in the US and a host of European countries. A completely different to what we were being told this time last year. That is why, even during a period of severe global turmoil, interest rates on Irish bonds have fallen from 14.5 per cent to 8.5 per cent. If the markets had been given accurate information this time last year on Ireland’s population and debt trends, they would never have risen to anything like 14.5 per cent in the first place. The whole thing was a stitch-up.

The big losers in all this are those who swallowed all the propaganda at the time, concluded that Ireland was going bust, and in a panic transferred all their savings to the UK, where inflation is 5 per cent and the Bank of England lending rate is 0.5 per cent. They are now in deep doodah. I am happy to say that I was not among them and am making a handsome return on my savings.

Once again – we are given central scenario with no stochastic analysis of potential upsides/downsides.

Must have consulted Irish Life Investment Managers who once told me with a straight face “We are not expecting any shocks”

@JTO

“anti-FF frenzy” in Irish media? Are you feeling OK?

The Irish Press appears to have been reincarnated as the S/Indo & just last week RTE gave the leader of a party with a mere 19 seats in the Dail 20 minutes of air time to explain why they would not field a presidential election candidate

If you find any such evidence of an anti FF bias in the media I’d be delighted to see it

This is a welcome addition to the literature – and, potentially, to the public discourse. But we don’t seem to have one here anymore. Having had occasion to review some threads from early and mid 2009 I was struck by the willingness of the principal contributors to engage in debate and disputation. It was healthy, useful and productive. That has now become extremely rare. The few who do are the exceptions that prove the rule. The policy now seems to be to keep churning out a supply of red meat and to let the ‘commenting contingent’ – which is increasingly dominated by the bearers of pseudonyms – at it.

And yes, I know that maintaining a blog of this nature is a time-consuming, hassle-filled, unrewarded and, potentially, risky endeavour. The opportunity cost is huge. And I remain immensely grateful to Philip and his colleagues. But the declining engagement contributes to a sense that the public debate on these crucial economic policy issues is closing down – and being closed down.

The volleys from the op-ed perches continue unabated and there is much high quality policy analysis – such as this paper – conducted and presented, but the ability to secure direct engagement with the authors or posters has evaporated.

This is perfectly understandable – it was always too much to expect sustained engagement and debate – and there was probably some naivety and unjustified expectations on all sides when this initiative was kicked off. We now seem to have returned to the ‘status quo ante’ – the dialogue of the deaf. And meanwhile the government machine chunters on without sufficient scrutiny, investigation or being required to explain or engage – not to mind any hint of being held to account.

It is a pity, but it was entirely predictable and inevitable.

@Paul Hunt
Yes, it is a great pity that some of the original contributors seem to have withdrawn…perhaps some of the personalized attacks from time to time did not help.

On a general note, I see that some commentators are querying the assumptions on growth projections. It seems that growth has stalled worldwide and must impact on us a little further down the line. So is this latest piece of analysis just more of the bullshit we are exposed to every day.

This site is prejudiced towards non academics and pseudo elitist, anyone can contribute but there is little engagement, for most non economists this should be a learning experience. The analysis is pedantic and reflects micro implementation issues when clearly the macro issues remain to be optimised and in my opinion are not measured or understood especially for Ireland

Many of the named economists are immature and incapable of defending their positions being mindedful to be seen to remain aloof from such petty discourse, a fact that has probably degraded their influence and reflects the weakening position of the quality of Irish academics

@ JTO
John I have to agree that the news that Ireland was going to be able to borrow at 3-4% was brilliant news for prospects of avoiding default. Although it was not heralded that much in the media it does not take away from the huge sighs of relief that would have come from the Dept of finance on this potential default avoiding news.
The caveats I would make include the GNP v GDP argument as a fair measurement outlined above. The non counting of certain sovereign debts (the off balance sheet stuff) and the general levels of growing private wealth destruction due to the collapse in property values.

However on one point you are just plain misleading.
“That is why, even during a period of severe global turmoil, interest rates on Irish bonds have fallen from 14.5 per cent to 8.5 per cent. If the markets had been given accurate information this time last year on Ireland’s population and debt trends, they would never have risen to anything like 14.5 per cent in the first place. The whole thing was a stitch-up.”
In the last few weeks the ECB has purchased 130billion in government bonds of Italy Spain Ireland and Portugal.
This is the primary (almost sole) reason that the yields have come in as quickly as they have.

@Eamon
You forgot the Irish Banks bond buying with all that cash the Government gave them…didn’t we give AIB 6billion and didn’t get anything in return. They have to do something with it. And of course Wilbur and his buddies may have bought a few…should cover some ofthe losses on BOI shares of about 200m since they bought.

@ Rich
+1

@ all

I am increasingly in favour of an accelerated adjustment schedule. An adjustment of 6 billion euros this year will rid us of outside control and restore our ability to make policy.

I believe the economic impact of an accelerated process is exaggerated -firstly, we have to make these adjustments anyway over the next 2 years; secondly, the irish economy is much less dependent on state largesse than previously, having endured protracted austerity.

But the main reason i believe in an accelerated adjustment is not economic -it is political.

Current discussions in Europe around common debt, a much more invasive economic policy, two-speed europe are extremely dramatic developments. Ireland is currently unable to assert itself in these discussions which will have long term implications for us. It is vital that we regain our ability to stand up for ourselves this year -it cannot wait another 18 months.

Personally, I would suggest we bide our time and leave the single currency at the first opportunity, but whatever we decide to do, it is vital that we regain control over our destiny right now.

I agree that a sensitivity analysis of the impact of lower than forecast growth would be useful. I’m sure the DoF has its own internal analysis done but they are unlikely to make it public as it would probably get a lot of media attention which may hurt consumer confidence.

In the absence of a detailed sensitivity analysis, I think it is reasonable to say that the offical forecasts do not leave a huge margin for error. If real GNP growth averages less than 2% CAGR in the years 2012-2015 then we would be struggling to hit the 3% deficit target; below 1% and we are in big trouble. In that eventuality, we would like need an extension of official financing from the ESM as market interest rates would remain penal.

I think it is that kind of scenario the DoF would like to keep out of the headlines – unemployment remaining high out to 2015, the deficit remaining at distressed levels despite repeated tough budgets and a 2nd bailout on the cards. Not a pleasant scenario, but one that remains a real possibility.

@cet.par.,

I fear you may be correct about the personalised attacks. But there is also the opportunity cost of the time and effort involved in engaging – not to mention the sheer closed-mindedness of many commenters.

However, I also suspect that the extent to which so many of the contributors either were in, or have been absorbed into, the government machine – and the possibility that some others might be aching to be so absorbed – has had an impact.

In addition, I occasionally get indications that quite a few of the great standing army of functionaries in the government machine – as well as some analysts and researchers in the FODAR’s super-industry – do pay some attention to what goes on here. But their positions and employment prevent them from engaging – though I expect a few appear under pseudonyms.

This creates a huge deficiency in the public policy debate and seriously damages the effectiveness and legitimacy of governance. Almost all the resources, skills and competence are monopolised by the government machine – and by the FODAR who have inveigled themselves so successfully. Any internal debates that might take place are completely hidden from public view. And it is, oh so, easy, to dismiss, villify or ignore any dissenting voices on the outside.

The fundamental conflicts that arise in any society and economy between, for example, owners/managers and workers and between producers and suppliers of goods and services and those who pay for and consume these goods and services – the overwhelming majority of us – are completely smoothed over and suppressed.

The result is that final consumers are left almost totally disenfranchised, isolated, atomised, defenceless and unrepresented. This is neither healthy nor wise – But the whole thrust of modern economics is predicated on ignoring it.

The final sentence appears to have dropped off my last comment:

And that is where I fear the sanguine projections in this paper may come to grief.

Please allow me disagree with the introduction to the article.

The Irish economy has seen a dramatic growth in government indebtedness over
the last four years. Having been one of the EU economies with the lowest
government debt burden in 2007, Ireland has moved to being one of the more heavily indebted economies. This turnaround has occurred as a result of the collapse in the property market bubble, the resulting implosion of the domestic banking system and the associated huge fall in domestic output. These related events have together added 70 percentage points to the debt/GDP ratio between the beginning of 2008 and the end of 2010.

The explosion of public debt was not a result of the ‘implosion of the domestic banking system’. It was a direct result of a government decision to take on the debt of an imploded banking system. And to subsequently be bullied by the EU and ECB in particular to keep the burden of that private banking debt firmly on the shoulders of Irish citizens.

@Dreaded Estates
I’m not happy with either GDP or GNP, as both contain stuff that is little to do with our economy. Given we are a ‘small open economy’, I think research is needed, and a lot of (micro) effort to produce useful information.

I suspect that taxes may be the best data source, and that by mining such, we could figure out a ‘GDP equivalent’. Absent this…I’m very skeptical of international comparators

the lack of any credible scenario analysis , even the most basic, really is scandalous. Perhaps some TD or senator will ask a question of this or can we seek to see under FOI if any were communicated to DoFinance?
Its the dog that didnt bark…

@sophont

+100

Somebody better tell John Fitzgerald never to go to Vegas or he would lose all his money betting on a die coming up on exactly 3.5

@Seamus Coffey

2 problems:

(i) No discussion about how realistic/likely the scenarios are (are the 0.5 standard deviation events , 1 standard deviation event, 2 standard deviation events)

(ii) No real shock scenario testing – how about trying to ensure the country is prepared for a 1 in 20 worst case scenario? or at least outline the impact of a 1 in 20 worst case scenario

What about a scenario analysis for growth rates below the official target rate? If GNP growth is only 1% per annum from 2012 – 2015 for instance, what would be the expected deficit and debt to GDP ratios at the period end?

I think there is a purpose to be served by that kind of analysis in terms of government planning. For instance, would the ESM step in and provide Ireland with new funding if that were to occur?

@ Eamonn

Re ECB bond buying and lower yields

1. Total ECB bond buying now at 130bn, but only (!) 55bn or so has been in the last month or so, the rest mainly dates from last year

2. ECB has not been a major buyer of Irish bonds, has only been buying around the margins. Real money from the US and domestic Irish buying the primary flows and the main catalyst for lower yields.

@Bond Eoin Bond
By domestic Irish do you mean banks and punters alone. Cliff Taylor believes it is Irish banks.

In respect of NAMA, the article says

“However, the size of the initial haircut suggests that there is a reasonable prospect that the State may eventually avoid significant losses on this portfolio”

There is no further analysis or information provided in support of the above.

What sort of codology is this?

The initial haircut was 58% on average, that is, NAMA paid 42c in the euro to acquire the loans. It’s looking increasingly likely that NAMA will have underestimated the costs of annually servicing distressed loans and properties. The short term outlook for NAMA’s primary market is choppy to say the least. It is incredible that Bank of Ireland’s lending attracted such a low haircut. It does not require dramatic catastrophisation to project a stonking big loss for NAMA.

Just because you pay 42c in the euro for something, that doesn’t mean that by the time you come to sell the something that it’s not worth 30c and you’ve incurred another 10c in carrying costs.

It’s not that I disagree that NAMA’s eventual scorecard might be a minor loss or even a profit, it’s just the notion that saying you’ve applied a discount to something means that what you’re left with can’t result in significant losses.

Utter codology from the ESRI on this point. The sort of logic on which some low-rent shops in high-rent parts of London are sometimes seen to trade. “Carpets – 80% off”, how do you know you’re getting value?

Seamus
Scenario analysis would show , as noted, good and bad deviations from each central plan k – what if the growth rates are higher or lower, what if the interest rates are igher or lower etc. With some confidence intervals if you wanted to get fancy. Wht 4.3 is is “look, if growth is BETTER sure were grand”… wow…

OK. Now to improve things how about the ECB writing off at least €50 billion of the vichy_banking debt that is grinding Joe and Joan Citizen into the ground – and sending dynamic human capital to Australia ….

I’m still trying to figure out the significance of Johnny Fitz appearing on the telly with a brand new ‘HairCut’ !!!! Must be new CB_Code – and why was Matrix Revolutions broadcast to coincide with the end of PrimeTime on NamaLand? And the Labour Party taking the blue pill; the strange inverse relationship between An Taoiseach’s public utterances and his popularity rating – Minister Bruton’s conversion to the Efficient Markets Hypothesis in an area, Irish Labour Market, where it unquestionably does not work – and the Russians could not score … Strange Times.

The Upper_Echelons are doin OK. Blind Biddy knows who and where they are ….

Another day another dollar down at the ESRI quango, nothing to report as such as it is all predicated on “growth”. Listening to an audio of PH’s response to Morgan Kelly. “Of course we haven’t had any growth for three years. No one can deny it”. Don’t know about that? Seems we have some of the best deniers in the country.

Any plan “B” down at the ‘think tank’ for when we are have to leave the Euro and bring our primary deficit to zero…. fast?

I don’t think there is the huge difference between the ESRI’s and say the IMF’d debt projections that many are claiming.

Last May the IMF projected that the general government debt in 2014 would be €208.6 billion. Yesterday the ESRI forecast it would be €191.1 billion – a substantial difference of €17.5 billion that some have dismissed sa been based on unrealistic assumptions.

However, if we look at the primary deficit figures we see the following:

YEAR IMF ESRI
2011 -10.4 -9.7
2012 -6.8 -6.3
2013 -2.4 -1.9
2014 +2.2 +2.9

Cumulatively, across the four years, the ESRI is more “optimistic” than the IMF by €2.4 billion when it comes to the primary balance. Most of the difference is explained by factors other than growth.

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