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.


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.

September 2008: The European Option

In Friday’s testimony before the Oireachtas Committee, Patrick Honohan encapsulated the European option that might have been pursued in September 2008:

Professor Patrick Honohan: I draw the attention of members to the report I prepared in May 2010, which lays out in considerable detail, though perhaps in not in headline grabbing language, the regulatory experience and the policy on regulation and financial stability in the Central Bank and the Financial Regulator’s office in the years running up to the crisis and the night of the guarantee. It lays out what the people thought, what preparatory work they had done, the way in which the banks were supervised, the style and approach adopted then and the quality of the information. Information was not of high quality, which led to the situation in September 2008 when neither the Central Bank nor the Regulator had anything like enough information about the condition of the banks and, furthermore, to a large extent, they did not realise the degree to which they did not have the information. They did not realise, therefore, the risks that were involved and the huge risks being presented by the policy action.

The Senator has put his finger on an important point. The decision taken at that time was to say “We are a triple A rated country; we can take this on our books no problem with everything guaranteed”. The decision could have been to say, “This is quite a big and unknown risk; it may be too big to take on our books. We need to get the European tie in”, which would not have been easy. We know that the message from Europe at that time was that everybody had to solve their own banking issues because each country had problems. However, our problems were much larger proportionately than those in any other eurozone state. If that had been brought to the European table with an acknowledgement and a sharing of the risks involved, we would not be in the position we are today. The information was not there and the decisions taken by the Government at the time were based on a quality of information that should have been better.

Household Debt Restructuring Post Number 4012

The household debt restructuring (I’m not going to use the ‘f’ word) debate rumbles on. From the blanket coverage in the Sunday papers, Colm McCarthy’s Sindo post and Stephen Donnelly’s pieces were, I think, the best. For context, earlier in the week Seamus Coffey looked at the numbers in arrears from the Central Bank. From Colm’s article:

It would be wrong to dismiss the ‘forgiveness’ campaign as just a silly season space-filler revved up by a woolly-minded media. There is a real problem for many people and some mortgage debt will have to be written down. You cannot get blood out of a stone.

The danger is that the campaign will encourage everyone in negative equity to disguise themselves as stones and to lobby politicians for relief from debts that they are able to service. The politicians need to understand that debt relief, beyond the minimum necessary to acknowledge that some people simply cannot pay, comes at the expense of a bankrupt Exchequer. Do they really want to go to the IMF/EU looking for a further loan to recapitalise the banks yet again?

The best way to proceed is for all banks to be treated equally, regardless of ownership, and encouraged to write down mortgage debt that cannot realistically be serviced. The process will not be left entirely to the bankers, in whom public confidence remains weak, and it makes sense to have active oversight from the Financial Regulator to ensure, for example, that there is no preferential treatment for favoured borrowers, such as bank staff.

Debt write-downs should be expedited where these are unavoidable and extra staff assigned to the task. A modernised personal bankruptcy code would help and legislation has been promised.

I agree with Colm’s assessment of the situation. With the date of the expert group’s report hurtling towards us, it might be useful to consider a few worked examples of debt restructuring as and when they become important to us. Here is a google spreadsheet considering those cases.

I chose just one restructuring instrument, a debt/equity swop, although there are many others. See appendix 2 of the MARP report for worked examples internationally. The headings of the spreadsheet should take you through the logic of the examples.

First off, these are archetypal cases made up to make some points about types of mortgages in difficulty, so they are subject to a series of assumptions I detail in the spreadsheet. They are not meant to be anything other than exemplars, though they are driven by real life cases I’m familiar with. Anybody wishing to improve the ‘reality’ of the examples, by including interest and arrears for example, or another debt restructuring mechanism, please have a go on google docs and I’ll link to your examples in the comments.

Second off, it’s pretty clear from the spreadsheet that very few cases actually qualify for some kind of restructuring. Of the 6 cases, only 2 mortgages are deemed ‘sustainable’ when the bank takes a 45% equity stake, and only 1 is sustainable when the bank takes a 35% stake. So, under the present set of arrangements, the rest of these mortgages would most likely end up becoming court cases, with the attendant stresses on household and society, and the possibility of the bank recouping only the secured asset. If, and it’s a big if, these examples are any guide to reality at all, an efficient personal insolvency mechanism is clearly the first step towards resolving the debt crisis, with a subset receiving some form of restructuring.

It’s clear there is a need for an efficient filter to decide, based on individual circumstances, which mortgages aren’t sustainable, which are, and which might be, given other considerations.

In practice, here’s how I see such a filter working.

1. The process is done through the banks but supervised by the regulator. Another quango or NAMA we really don’t need. Banks are best placed to work things out with their borrowers, but they should be supervised–especially the uncovered banks and subprimes but most importantly the ‘pillars’. A metric agreed by both sides on the debt profile of the individual lender and borrower should be constructed.
2. The implementation should be a menu of options available to the bank, one of which *must* be used depending on the outcome of a series of tests for income, etc., applied in stage 1. The penalty for misrepresenting yourself to the bank should be fraud charges. Cute hoors need not apply in other words. This will reduce the moral hazard element enormously.
3. This menu will include: straight out bankruptcy, debt/equity swops, repayment rescheduling, debt writedowns in cases where the banks have clearly acted inappropriately, giving the house back to bank in full and final settlement but renting the same house again, and more.

The principle, I feel, should be means tested income streams plus arrears rather than negative equity. Each menu item (a, b, c, etc.,) will come from an individual pot of money in the banks (e, f, g, etc.), all overseen by the regulator in a monthly report to them.
4. The objective is to be fair to both parties (lender and borrower) while allowing people to get on with their lives. The perspective, in some sense, is social welfare rather than letting banks or borrowers off the hook. Understanding you’ll never get this just right is key.
5. The guidelines should have the force of a directive on the banks from the regulator, eg it should remove a lot of the discretion from the banks and add clarity to the process while differentiating between ‘can’t pay’ and ‘won’t pay’ and ‘might pay’ and ‘will never pay’.

Update: Karl’s Business and Finance piece this month is excellent on this issue.

Oireachtas Committee Transcripts: September 1 and 2

The transcripts from last week’s meetings of the Joint Committee on Finance, Public Expenditure and Reform are now online. The transcript for Michael Noonan’s appearance is here. The Honohan-Elderfield transcript is here. I’m happy to say the website has improved since the last Dail and you can now read the transcript for a full meeting without having to hit lots of arrow buttons.

The best university in all the land

The new QS rankings are out: TCD tops the Irish poll at 65, followed by UCD at 134, UCC at 181, and NUIG at 298. Ireland’s other universities are not ranked in the top 300.

The Examiner (and RTE radio) made much of the fact that UCC got 5 stars. QS now has two rankings. The new one requires more data from the universities. To date, only U Limerick (4 stars) and UCC have provided that information. UCC is thus best of two.

There are disciplinary rankings too. In economics, TCD and UCD are both 51-100. Other universities do not make it into the top 200.

The Independent and Times note that Ireland’s universities have been sliding down the QS rankings. If I’m not mistaken, QS ranks can be compared over time whereas THE ranks cannot. The reasons offered by the various people interviewed are, of course, just speculation. The QS data do not allow for an in-depth analysis of the reasons behind the success, and Ireland’s universities are not particularly good in keeping records.

20% of the QS ranking is citations per faculty. QS does not define this, but the practicable way is to allocate papers to the university at which the research was done (rather than where the researcher is now). Faculty numbers have fallen, so Ireland’s position should have improved on this score, partly offsetting the decline in the faculty-student ratio (another 20%). 50% of the QS ranking is based on “reputation”, and that’s a stock variable that should survive a downturn if properly measured. However, I would think that the drop in ranking is at least partly explained by the brand Ireland turning sour in general.

UPDATE: Brian Lucey offers further thoughts and data.

UPDATE2: Kevin Denny is not impressed.

Planes, Trains and Automobiles II

Philip Lane posted on this topic earlier in the week and it was my subject in this week’s Farmers Journal too:

Without breaking the speed limit, it is now possible to drive from the outskirts of Dublin to Cork’s Dunkettle roundabout in a little over two hours. Similar time savings have been made possible on the other inter-city routes and the country has, for practical purposes, become smaller. The improvement of the national road network is one of the few unambiguous dividends from the bubble. 


On the busiest routes between the capital and the main provincial centres, car journeys are just one option: you can also fly, take the train or catch a bus. The improved road network is good news for bus operators, who can now offer a far better public transport alternative to the car. But it is very bad news for internal air services and for the loss-making Irish Rail. These two options have become markedly less competitive with either car or bus, an outcome which was both predictable and predicted. A rational government would have planned for increased reliance on inter-urban bus services and would have avoided costly, and pointless, subsidies to air and rail services that were bound to lose popularity as motorway development favoured car and bus. There is no absolute need for four different ways of getting to Cork.


Rationality however dawns slowly in the make-believe world of Irish transport policy. The government has presided over a massive investment programme in the railway. No less than €2.5 billion has been spent on mainline rail investment over the last decade. The result is that Irish Rail has provided large increases in frequency and capacity despite the obvious threat to passenger numbers. On Dublin-Cork, fifteen trains per day now operate, compared to half that number a decade ago. They offer journey times that are now quite uncompetitive with the car.


Air services between Dublin and Cork are not provided by a state-subsidised operator and the reaction has been very different. There will shortly be no scheduled service at all between Cork and Dublin. Ryanair have pulled out, following previous exits by Aer Lingus and Aer Arann. At one stage there were up to a dozen flights a day between the two cities. Ryanair cited passenger migration to the new motorway as a principal factor in its withdrawal announcement.


All three airlines which have operated Dublin-Cork services over the years are commercial companies which cannot sustain loss-making routes and their decisions make perfect sense. What precisely is the point though in pouring €2.5 billion into rail investment when a motorway network connecting the same towns and cities is under construction? Did nobody in the Department of Transport foresee what was going to happen?


In addition to enormous chunks of free investment capital, the railway enjoys large operating subsidies and a highly restrictive licensing regime for competing bus services. If you fancy running an express bus from Cork to Dublin, without subsidy, forget it. You will not be granted a license. Irish Rail continue, remarkably, to campaign for yet more capital ‘investment’ in the railway – on the grounds that it has become less competitive on inter-urban routes!


The government has wisely curtailed capital spending and withdrawn operating subsidies at some of the regional airports, of which far too many were built. The same logic now needs to be applied to the railway. The sheer expense of rail-based public transport systems is invisible to the travelling public, who pay only a portion of the operating cost in fares and none of the capital cost. But the bills of course arrive at the door of the Exchequer.


Over the next few weeks, ministers will resume their consideration of the options for cutting expenditure in the years ahead and should assess with a jaundiced eye the rail schemes for Dublin. The most notorious of these is Metro North, a plan for an underground railway through Mr. Ahern’s former Northside constituency serving Dublin Airport. This scheme has been in the plans for many years even though no cost estimate is available. The construction bill would run to several billions, plus the inevitable operating losses. All of this despite the fact that Dublin Airport is easily accessible as things stand, with a road tunnel, built at a cost of €700 million, providing a new link from the city and non-Dublin users able to use the upgraded M50.  


There are also schemes to build a new underground railway in the city centre and plans for more tram lines. Sizeable sums have already been spent on designing and planning these projects. But there has been a noticeable drop in traffic congestion in the city recently and parking is easier. The government is flat broke and all of these fancy rail investment schemes should now be put on the long finger, or just abandoned altogether. It is not clear they ever made sense, even when we thought we could afford them.