Author: Philip Lane

The NCC has released its new study – available here.

Barry Eichengreen, Peter Allan and Gary Evans explain in this FT article.

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.

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.

You read the FT op-ed here.