Tom McDonnell: It was pointed out on this blog a few weeks ago that Ireland would be able to obtain access to new funding from the EFSF provided the Government applied for that funding before 1 July 2013. Ireland would also need to negotiate a new Memorandum of Understanding.
It is the position here that Ireland will need to access further official lending beyond the current 'bailout' programme and that the Government should make an application in the first half of 2013.
The Minister for Finance appeared to acknowledge last Tuesday in the Dáil that Ireland would indeed have access to further EFSF funding in the event the Government applied before 1 July 2013. The discontinuation of the original Greek programme, and its replacement with a new programme, suggests that countries in existing programmes do not have to wait until their current programme finishes before beginning a second programme.
Showing posts with label EFSF. Show all posts
Showing posts with label EFSF. Show all posts
Monday, 21 May 2012
Tuesday, 24 April 2012
Ireland's financing alternatives - the EFSF
Tom McDonnell and Michael Taft: In our first post, we outlined some of Ireland’s financing alternatives; namely through the IMF and the European Stability Mechanism. There is, however, a more compelling source of institutional funding in the eventuality of a No vote: the European Financial Stability Facility (EFSF).
The EFSF is one of four external sources of funding for the current Irish bail-out (along with the IMF, the European Financial Stabilisation Mechanism, and bi-lateral loan agreements with the UK, Sweden and Denmark). The EFSF remains a source of funding for all Eurozone countries until the middle of next year.
The EFSF stands apart from the ESM and the Fiscal Treaty. Ireland, and all countries who are members of the EFSF, has access to this fund as of right, depending on the following conditions:
• They cannot access funding at reasonable rates on the international markets
• They have negotiated a Memorandum of Understanding with the EU and the IMF
A further stipulation is unanimous consent from the Finance Ministers of the Eurozone (Eurogroup), which would follow on from an agreement with the EU/IMF. Applications for this funding can be made up to the end of June 2013. After that the EFSF will only administer funding that has already been agreed.
According to the recent Eurogroup statement (the Finance Ministers of Eurozone countries):
‘For a transitional period until mid-2013, it (the EFSF) may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion (for the ESM).’
This is confirmed by the EFSF itself which states:
‘ . . . following the Eurogroup meeting held on 30 March, it was decided that the EFSF would remain active until July 2013 . . . For a transitional period until 2013, EFSF may engage in new programmes in order to ensure a full fresh lending capacity of €500 billion . . . after June 2013, EFSF [will] not enter into any new programmes.’
Therefore, were Ireland to apply for a second bail-out prior to July 1st 2013, it would be granted if such an application were accompanied by a Memorandum of Understanding negotiated between Ireland, the EU and the IMF – similar to the first bail-out. This funding is not contingent upon the ratification of the Fiscal Treaty.
In all probability, funding for Ireland’s second bail-out – whether it approves the Fiscal Treaty or not – will be routed through the EFSF. The EFSF (the temporary bailout fund in place up to July 2013) and the ESM (permanent bailout mechanism) are different companies. The EFSF has €440 billion (see page 1 of the EFSF document) of which €192 billion already committed to Ireland, Portugal and Greece (see the diagram on page 20 of the EFSF document). The remaining lending capacity of the EFSF for programmes initiated before July 2013 is therefore €248 billion. The EFSF will remain in place to manage its existing programmes (see diagram on page 20 of the EFSF document) and any other new programmes approved prior to July 2013, until such time as all these programmes are all wound down.
The ESM itself has €500 billion and is scheduled to enter force on 1 July 2012. As stated above, the intention would be to ensure the ESM retains its full lending capacity of €500 billion. This no doubt refers to the prospect of larger countries, in particular Spain, needing a bail-out. The ESM would require full capacity to accommodate new countries’ need for a bail-out.
Ireland’s continuing access to institutional funding beyond the current bail-out programme has been guaranteed not once, but twice, by the Heads of States and Government; first, on July 21st of last year when the establishment of the European Stability Mechanism was agreed, and most recently on January 30th of this year – after the Fiscal Treaty was signed:
‘We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.’
This is an important and helpful guarantee. There is no condition set on continued support until we return to the markets – except that we implement agreed programmes. If continued support were contingent upon acceptance of the Treaty, we should have expected it to be highlighted in this statement.
This helps explain another issue we highlighted in the first post. The drafters of the European Stability Mechanism Treaty inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty. In particular, they inserted references to ‘new programmes under the European Stability Mechanism’, a clause which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote. They have seemingly factored in a situation whereby a second bail-out for Ireland (and potentially Portugal and Greece) would constitute ‘rolled-over’ financing, rather than ‘new’ financing. This buttresses the guarantee given by the Heads of States and Governments – namely that Ireland will continue to be supported until we return to the markets.
This is an important debate as there is a high probability that Ireland will require a second bail-out. We are expected to return to the markets in late 2013 and fully by 2014. However, the IMF is cautious:
‘Debt sustainability remains fragile, especially with respect to medium-term growth prospects . . . In this context, the prospects for regaining the substantial access to market funding that is assumed in 2013 remain uncertain.’
Were a second bail-out required, we estimate that it could be as large as €45 billion and possibly more for the years 2014 and 2015, taking into account the Exchequer balance and bond redemptions. This does not include bank payments. While this is less than the current bail-out provision it is clear that Ireland, without access to either market or institutional funding, would not be able to cope with this fiscally. We would be heading into a default – quite possibly on both sovereign and banking debt. This would have negative spillover effects for other Eurozone countries.
We reiterate the point from our first post: there is no reason to resort to counter-posing ‘appalling scenarios’. Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario. Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.
This is not a satisfactory way to debate this issue. This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete alternative funding scenarios for Ireland. Whether these would become available is a subject for legitimate debate. However, those who claim that Ireland would be denied access to EFSF funding – or any other funding sources – should provide concrete evidence to this effect. Evidence one way or the other would be a valuable contribution.
The debate over the Fiscal Treaty should be just that – a debate about the provisions of the Treaty. In this respect, it is helpful to note wider European developments. Spain has, unsurprisingly, officially re-entered recession putting at risk their deficit targets; the prospect of a Socialist Party victory in the French second-round Presidential vote raises the prospect of some renegotiation of the Fiscal Treaty; the fall of the Dutch government over failure to agree budget cuts highlights the problems posed by the Fiscal Compact in a major core country.
As Ireland prepares for the referendum vote, the ground under the Fiscal Treaty may already be shifting. Resort to ‘appalling scenarios’ will only confuse the issue when the debate should be focused on whether the provisions of the Fiscal Treaty are good, or even sustainable, for Ireland and the Eurozone.
The EFSF is one of four external sources of funding for the current Irish bail-out (along with the IMF, the European Financial Stabilisation Mechanism, and bi-lateral loan agreements with the UK, Sweden and Denmark). The EFSF remains a source of funding for all Eurozone countries until the middle of next year.
The EFSF stands apart from the ESM and the Fiscal Treaty. Ireland, and all countries who are members of the EFSF, has access to this fund as of right, depending on the following conditions:
• They cannot access funding at reasonable rates on the international markets
• They have negotiated a Memorandum of Understanding with the EU and the IMF
A further stipulation is unanimous consent from the Finance Ministers of the Eurozone (Eurogroup), which would follow on from an agreement with the EU/IMF. Applications for this funding can be made up to the end of June 2013. After that the EFSF will only administer funding that has already been agreed.
According to the recent Eurogroup statement (the Finance Ministers of Eurozone countries):
‘For a transitional period until mid-2013, it (the EFSF) may engage in new programmes in order to ensure a full fresh lending capacity of EUR 500 billion (for the ESM).’
This is confirmed by the EFSF itself which states:
‘ . . . following the Eurogroup meeting held on 30 March, it was decided that the EFSF would remain active until July 2013 . . . For a transitional period until 2013, EFSF may engage in new programmes in order to ensure a full fresh lending capacity of €500 billion . . . after June 2013, EFSF [will] not enter into any new programmes.’
Therefore, were Ireland to apply for a second bail-out prior to July 1st 2013, it would be granted if such an application were accompanied by a Memorandum of Understanding negotiated between Ireland, the EU and the IMF – similar to the first bail-out. This funding is not contingent upon the ratification of the Fiscal Treaty.
In all probability, funding for Ireland’s second bail-out – whether it approves the Fiscal Treaty or not – will be routed through the EFSF. The EFSF (the temporary bailout fund in place up to July 2013) and the ESM (permanent bailout mechanism) are different companies. The EFSF has €440 billion (see page 1 of the EFSF document) of which €192 billion already committed to Ireland, Portugal and Greece (see the diagram on page 20 of the EFSF document). The remaining lending capacity of the EFSF for programmes initiated before July 2013 is therefore €248 billion. The EFSF will remain in place to manage its existing programmes (see diagram on page 20 of the EFSF document) and any other new programmes approved prior to July 2013, until such time as all these programmes are all wound down.
The ESM itself has €500 billion and is scheduled to enter force on 1 July 2012. As stated above, the intention would be to ensure the ESM retains its full lending capacity of €500 billion. This no doubt refers to the prospect of larger countries, in particular Spain, needing a bail-out. The ESM would require full capacity to accommodate new countries’ need for a bail-out.
Ireland’s continuing access to institutional funding beyond the current bail-out programme has been guaranteed not once, but twice, by the Heads of States and Government; first, on July 21st of last year when the establishment of the European Stability Mechanism was agreed, and most recently on January 30th of this year – after the Fiscal Treaty was signed:
‘We welcome the latest positive reviews of the Irish and Portuguese programmes which concluded that quantitative performance criteria and structural benchmarks have been met. We will continue to provide support to countries under a programme until they have regained market access, provided they successfully implement their programmes.’
This is an important and helpful guarantee. There is no condition set on continued support until we return to the markets – except that we implement agreed programmes. If continued support were contingent upon acceptance of the Treaty, we should have expected it to be highlighted in this statement.
This helps explain another issue we highlighted in the first post. The drafters of the European Stability Mechanism Treaty inserted clauses that provide manoeuvrability in negotiations with any Eurozone country in need of financing, regardless of the Fiscal Treaty. In particular, they inserted references to ‘new programmes under the European Stability Mechanism’, a clause which would have been unnecessary if all financing under the ESM were strictly conditional on a yes vote. They have seemingly factored in a situation whereby a second bail-out for Ireland (and potentially Portugal and Greece) would constitute ‘rolled-over’ financing, rather than ‘new’ financing. This buttresses the guarantee given by the Heads of States and Governments – namely that Ireland will continue to be supported until we return to the markets.
This is an important debate as there is a high probability that Ireland will require a second bail-out. We are expected to return to the markets in late 2013 and fully by 2014. However, the IMF is cautious:
‘Debt sustainability remains fragile, especially with respect to medium-term growth prospects . . . In this context, the prospects for regaining the substantial access to market funding that is assumed in 2013 remain uncertain.’
Were a second bail-out required, we estimate that it could be as large as €45 billion and possibly more for the years 2014 and 2015, taking into account the Exchequer balance and bond redemptions. This does not include bank payments. While this is less than the current bail-out provision it is clear that Ireland, without access to either market or institutional funding, would not be able to cope with this fiscally. We would be heading into a default – quite possibly on both sovereign and banking debt. This would have negative spillover effects for other Eurozone countries.
We reiterate the point from our first post: there is no reason to resort to counter-posing ‘appalling scenarios’. Some argue that Ireland will be frozen out of both market and institutional funding if we vote No. Clearly, this would be an appalling scenario. Others argue that it would never come to this because of the impact on the Eurozone (defaults, contagion) – another appalling scenario.
This is not a satisfactory way to debate this issue. This will trap us in a ‘race-to-disaster’ debate which will be particularly uninformative. We have attempted to outline concrete alternative funding scenarios for Ireland. Whether these would become available is a subject for legitimate debate. However, those who claim that Ireland would be denied access to EFSF funding – or any other funding sources – should provide concrete evidence to this effect. Evidence one way or the other would be a valuable contribution.
The debate over the Fiscal Treaty should be just that – a debate about the provisions of the Treaty. In this respect, it is helpful to note wider European developments. Spain has, unsurprisingly, officially re-entered recession putting at risk their deficit targets; the prospect of a Socialist Party victory in the French second-round Presidential vote raises the prospect of some renegotiation of the Fiscal Treaty; the fall of the Dutch government over failure to agree budget cuts highlights the problems posed by the Fiscal Compact in a major core country.
As Ireland prepares for the referendum vote, the ground under the Fiscal Treaty may already be shifting. Resort to ‘appalling scenarios’ will only confuse the issue when the debate should be focused on whether the provisions of the Fiscal Treaty are good, or even sustainable, for Ireland and the Eurozone.
Wednesday, 19 October 2011
Lender of Last Resort
Tom McDonnell: Bernard Delbecque proposes using the EFSF as a lender of last resort here. The ECB is the other plausible candidate. The lack of a lender of last resort for the Euro zone has been one of the most significant design flaws in the make-up of monetary union and has contributed greatly to the explosion in bond spreads in the last two years.
Wednesday, 1 December 2010
Ireland's 'Inability to Pay' 5.8 Percent
Nat O'Connor: The interest rate on the EFSF loan is to be 5.8 per cent (on average). Can Ireland afford this?
Professor Morgan Kelly of UCD wrote an opinion piece on 8 November 2010, where he spelled out his analysis that the Irish economy has passed the point of no return. His analysis hinged on the fact that the cost of the bank bailout in Ireland has been too expensive. He concluded his article by saying he could think of “no solutions”.
When it comes to the banking situation, Professor Kelly may indeed be right. The burden of servicing the bank bailout may be possible on a year-on-year basis, and even this is not sure, but the real task is to pay back that debt. Faced with this stark reality, there may be no option but to consider the renegotiation and partial write-down of that debt – which emanates from private sector decisions. Lenders should fully face the consequences that bad investments are meant to face in a capitalist, free market economy (as they are not shy about taking all the rewards in good times). In this case, that means a major write-down for the bank bondholders, as an alternative to several generations of Irish people struggling to pay back billions.
Professor Kelly’s prognosis must also cause us to consider – in an empirical and analytical way – the even more daunting political possibility of further default, of sovereign debt.
In terms of this kind of analysis, however pessimistic he may have felt, Professor Kelly did remind us of a “simple rule” that economists use to gauge whether national debt levels are sustainable or not: “If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time.”
The ratio in question is that nominal growth plus the 'primary budget balance' (as a percentage of GDP) must be higher than the rate of interest. Nominal growth is real GDP growth plus the GDP deflator - i.e. the effect of inflation. And the primary budget balance is the Government's balance.
Put more simply, nominal growth plus the Government's balance (surplus or deficit) must exceed debt interest payments. This is a long-term trend indicator. Obviously, if the Government has a surplus (more revenue than spending), it can absorb a couple of years of low growth. But as we have a deficit, a couple of years of low growth mean that we have to tax more or cut spending just to pay the debt interest and in addition to other taxes and cuts, which are to close the deficit. In the long-term we can't tax or cut forever, so we need to ensure our debt levels are sustainable. 'Manageable' if you prefer. And if our debt payments are not sustainable, we are just sinking further and have no hope of paying off the debt itself.
As a 'thought experiment', we can do a simple analysis using this formula, to see whether it is in fact possible for Ireland to overcome the debt mountain, if the right economic policies are pursued.
Note: to avoid confusion, debt interest is now being examined in two different ways. There is the rate charged on a particular bond or loan (such as the 5.8 per cent on the €85 billion loan) But we are also expressing debt interest for the year in question, which is the interest payments as a percentage of the total national debt.
We have nominal GDP figures from the Department of Finance and CSO for the past (e.g. CSO National Accounts), and we can use these to illustrate whether Ireland's debt was on a sustainable path.
It looks like 2007 was the last year where nominal growth exceeded debt servicing costs. In that year, real GDP grew by 5.6 per cent and the GDP deflator was 1.1 per cent; total 6.7. The interest cost of paying back our debt in 2007 was relatively. The debt was only €38 billion then, so debt repayments at were clearly smaller than 6.7 per cent of GDP. We had a surplus that could be used to pay off part of the national debt (shown here). That is, Ireland was in a sustainable position to pay the national debt.
Then came the recession. 2008's real GDP growth was -3.5, with a deflator of -1.5; total -5 per cent. Ireland's annual cost of paying debt interest was relatively low at this point. National debt was still low (at €38 billion) and repayments were €2.1 billion. But any level of payments obviously exceeded the negative nominal growth. The debt is never unsustainable during a year of negative growth, and so adds to the deficit.
2009 was worse. It was another year of negative nominal growth (-11.6). The debt was unsustainable in that year too. Similarly, the continued decline in 2010 (-2.9) makes it the third year in a row where servicing the interest on the national debt is significantly higher than nominal GDP growth. So debt servicing is adding to the deficit in these years.
If this is sounds too complex, David McWilliams also explains growth versus debt payments about halfway down this article.
Looking forward, the four-year plan gives a table of numbers we need to make the same calculations for 2011-2014. Table A.3.1: Debt-Deficit Dynamics – The Baseline Scenario (p.107).
But the European Economic Forecast (29 Nov 2010) gives less optimistic forecasts of Irish growth than the Government's four-year plan.
The following table puts these figures together:
In 2011, Ireland will begin to draw down funds from the €85 billion loan. Our national debt interest rates will not suddenly shoot up to 5.8 per cent, because only a part of our national debt will come from this source. The larger part will be existing debts, which are at a total average fixed interest rate of considerably less. As we draw down more and more of the €85 billion, the annual interest rate will rise towards 5 per cent or more.
Not only has the interest rate risen, but it is 5 per cent of a larger debt, estimated at 102 per cent of GDP in 2011 (in the Government's four-year plan, p.108). 5 per cent of c. €160 billion (GDP in 2011) is €8 billion in debt servicing costs.
To cut a long story short, Ireland's debt is not viable in 2011. We will continue to have to tax and cut to find the money to pay the debt interest.
As the table shows, the situation in 2012 and 2013 is also poor, with debt interest payments adding to the deficit and national debt, even as we try to bring tax revenue and other spending into line with one another.
The four-year plan's growth figures show Ireland's debt becoming sustainable in 2014. On the face of it, this makes sense. Taxation and spending will (in theory) be brought into line with one another. However, debt interest will take up a large part of the spending - squeezing out health, education, welfare, capital and other spending.
The numbers add up, but are the numbers sound?
The EU's growth predictions for 2011 and 2012 are more sobre. If they represent a trendline of more modest growth, than the debt will still be unsustainable in 2014, and possibly for years to come. And every year that the debt interest is too much, it adds to the national debt and future years (higher) debt interest payments.
Over the same years, the fixation on the deficit, without serious investment in growth, will lead to a weakened economy.
To add insult to injury, the ECB's central mission is to keep inflation low. A dose of inflation would do no harm to Ireland right now, as long as that included wage inflation across the board. If the cost of living and wages both rose by 10 per cent, there would be no major change for most people - except that our debts would have shrunk relative to our earnings. Unfortunately, the monetary policy lever to bring about inflation is quantitative easing (printing money), which the ECB controls. There is a downside of course, savings would also decline relative to prices and incomes.
Alternatively, another bubble in the economy is not a good idea; slower, steadier growth is what's needed. And a high inflation component isn't likely, because the ECB won't let it happen.
The Government is holding out the possibility of a return to the bond markets to borrow money at less than 5.8 per cent, as soon as we can. But the financial institutions who lend to states can do a more sophisticated analysis than I have just done. They see the unsustainability of the level of debt; and so bond yields are likely to remain stubbornly high.
As TASC has continued to point out, there is a sympathetic relationship between economic growth and the bond markets. If the Government can lay out a credible strategy to restore the Irish economy to a growth trajectory, then the bond markets in turn will have more confidence that Ireland will be able to pay back its debts and yields will lower accordingly. The Government's strategy of austerity has not, to date, included a growth plan. They have simply focused on the deficit, without enough attention to the wider economy – which at the end of the day is the 'engine' that provides both tax revenue and overall GDP.
So, measures to boost growth would seem to be an obvious requirement. Except that the terms of the €85 billion loan limit our options by sacrificing most of the pension reserve fund.
In the absence of pan-European co-ordination on emergency monetary policy measures, which may be ultimately required to save the euro, Ireland has to take major decisions on its own. Only a combination of radically restructuring our national debt (i.e. defaulting on the banks' debt) and a jobs strategy with serious money invested in it (e.g. the NPRF) will generate the growth that is required to have the ability to pay our already high national debt (not including the bank debt).
The €85 billion deal, at 5.8 per cent, is too expensive. Didn't the Government put new 'inability to pay' clauses into the four-year plan?
Professor Morgan Kelly of UCD wrote an opinion piece on 8 November 2010, where he spelled out his analysis that the Irish economy has passed the point of no return. His analysis hinged on the fact that the cost of the bank bailout in Ireland has been too expensive. He concluded his article by saying he could think of “no solutions”.
When it comes to the banking situation, Professor Kelly may indeed be right. The burden of servicing the bank bailout may be possible on a year-on-year basis, and even this is not sure, but the real task is to pay back that debt. Faced with this stark reality, there may be no option but to consider the renegotiation and partial write-down of that debt – which emanates from private sector decisions. Lenders should fully face the consequences that bad investments are meant to face in a capitalist, free market economy (as they are not shy about taking all the rewards in good times). In this case, that means a major write-down for the bank bondholders, as an alternative to several generations of Irish people struggling to pay back billions.
Professor Kelly’s prognosis must also cause us to consider – in an empirical and analytical way – the even more daunting political possibility of further default, of sovereign debt.
In terms of this kind of analysis, however pessimistic he may have felt, Professor Kelly did remind us of a “simple rule” that economists use to gauge whether national debt levels are sustainable or not: “If the interest rate on a country’s debt is lower than the sum of its growth rate and inflation rate, the ratio of debt to national income will shrink through time.”
The ratio in question is that nominal growth plus the 'primary budget balance' (as a percentage of GDP) must be higher than the rate of interest. Nominal growth is real GDP growth plus the GDP deflator - i.e. the effect of inflation. And the primary budget balance is the Government's balance.
Put more simply, nominal growth plus the Government's balance (surplus or deficit) must exceed debt interest payments. This is a long-term trend indicator. Obviously, if the Government has a surplus (more revenue than spending), it can absorb a couple of years of low growth. But as we have a deficit, a couple of years of low growth mean that we have to tax more or cut spending just to pay the debt interest and in addition to other taxes and cuts, which are to close the deficit. In the long-term we can't tax or cut forever, so we need to ensure our debt levels are sustainable. 'Manageable' if you prefer. And if our debt payments are not sustainable, we are just sinking further and have no hope of paying off the debt itself.
As a 'thought experiment', we can do a simple analysis using this formula, to see whether it is in fact possible for Ireland to overcome the debt mountain, if the right economic policies are pursued.
Note: to avoid confusion, debt interest is now being examined in two different ways. There is the rate charged on a particular bond or loan (such as the 5.8 per cent on the €85 billion loan) But we are also expressing debt interest for the year in question, which is the interest payments as a percentage of the total national debt.
We have nominal GDP figures from the Department of Finance and CSO for the past (e.g. CSO National Accounts), and we can use these to illustrate whether Ireland's debt was on a sustainable path.
It looks like 2007 was the last year where nominal growth exceeded debt servicing costs. In that year, real GDP grew by 5.6 per cent and the GDP deflator was 1.1 per cent; total 6.7. The interest cost of paying back our debt in 2007 was relatively. The debt was only €38 billion then, so debt repayments at were clearly smaller than 6.7 per cent of GDP. We had a surplus that could be used to pay off part of the national debt (shown here). That is, Ireland was in a sustainable position to pay the national debt.
Then came the recession. 2008's real GDP growth was -3.5, with a deflator of -1.5; total -5 per cent. Ireland's annual cost of paying debt interest was relatively low at this point. National debt was still low (at €38 billion) and repayments were €2.1 billion. But any level of payments obviously exceeded the negative nominal growth. The debt is never unsustainable during a year of negative growth, and so adds to the deficit.
2009 was worse. It was another year of negative nominal growth (-11.6). The debt was unsustainable in that year too. Similarly, the continued decline in 2010 (-2.9) makes it the third year in a row where servicing the interest on the national debt is significantly higher than nominal GDP growth. So debt servicing is adding to the deficit in these years.
If this is sounds too complex, David McWilliams also explains growth versus debt payments about halfway down this article.
Looking forward, the four-year plan gives a table of numbers we need to make the same calculations for 2011-2014. Table A.3.1: Debt-Deficit Dynamics – The Baseline Scenario (p.107).
But the European Economic Forecast (29 Nov 2010) gives less optimistic forecasts of Irish growth than the Government's four-year plan.
The following table puts these figures together:
In 2011, Ireland will begin to draw down funds from the €85 billion loan. Our national debt interest rates will not suddenly shoot up to 5.8 per cent, because only a part of our national debt will come from this source. The larger part will be existing debts, which are at a total average fixed interest rate of considerably less. As we draw down more and more of the €85 billion, the annual interest rate will rise towards 5 per cent or more.
Not only has the interest rate risen, but it is 5 per cent of a larger debt, estimated at 102 per cent of GDP in 2011 (in the Government's four-year plan, p.108). 5 per cent of c. €160 billion (GDP in 2011) is €8 billion in debt servicing costs.
To cut a long story short, Ireland's debt is not viable in 2011. We will continue to have to tax and cut to find the money to pay the debt interest.
As the table shows, the situation in 2012 and 2013 is also poor, with debt interest payments adding to the deficit and national debt, even as we try to bring tax revenue and other spending into line with one another.
The four-year plan's growth figures show Ireland's debt becoming sustainable in 2014. On the face of it, this makes sense. Taxation and spending will (in theory) be brought into line with one another. However, debt interest will take up a large part of the spending - squeezing out health, education, welfare, capital and other spending.
The numbers add up, but are the numbers sound?
The EU's growth predictions for 2011 and 2012 are more sobre. If they represent a trendline of more modest growth, than the debt will still be unsustainable in 2014, and possibly for years to come. And every year that the debt interest is too much, it adds to the national debt and future years (higher) debt interest payments.
Over the same years, the fixation on the deficit, without serious investment in growth, will lead to a weakened economy.
To add insult to injury, the ECB's central mission is to keep inflation low. A dose of inflation would do no harm to Ireland right now, as long as that included wage inflation across the board. If the cost of living and wages both rose by 10 per cent, there would be no major change for most people - except that our debts would have shrunk relative to our earnings. Unfortunately, the monetary policy lever to bring about inflation is quantitative easing (printing money), which the ECB controls. There is a downside of course, savings would also decline relative to prices and incomes.
Alternatively, another bubble in the economy is not a good idea; slower, steadier growth is what's needed. And a high inflation component isn't likely, because the ECB won't let it happen.
The Government is holding out the possibility of a return to the bond markets to borrow money at less than 5.8 per cent, as soon as we can. But the financial institutions who lend to states can do a more sophisticated analysis than I have just done. They see the unsustainability of the level of debt; and so bond yields are likely to remain stubbornly high.
As TASC has continued to point out, there is a sympathetic relationship between economic growth and the bond markets. If the Government can lay out a credible strategy to restore the Irish economy to a growth trajectory, then the bond markets in turn will have more confidence that Ireland will be able to pay back its debts and yields will lower accordingly. The Government's strategy of austerity has not, to date, included a growth plan. They have simply focused on the deficit, without enough attention to the wider economy – which at the end of the day is the 'engine' that provides both tax revenue and overall GDP.
So, measures to boost growth would seem to be an obvious requirement. Except that the terms of the €85 billion loan limit our options by sacrificing most of the pension reserve fund.
In the absence of pan-European co-ordination on emergency monetary policy measures, which may be ultimately required to save the euro, Ireland has to take major decisions on its own. Only a combination of radically restructuring our national debt (i.e. defaulting on the banks' debt) and a jobs strategy with serious money invested in it (e.g. the NPRF) will generate the growth that is required to have the ability to pay our already high national debt (not including the bank debt).
The €85 billion deal, at 5.8 per cent, is too expensive. Didn't the Government put new 'inability to pay' clauses into the four-year plan?
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