Peter Connell: Encouraging news from AIB. In its Economic Outlook for 2010 published last month the bank agrees with many of those writing on PE on the issue of Ireland’s sovereign debt.The report points out that ‘Ireland has one of the lowest debt ratios in the EU: 51% at the end of 2009, allowing for cash balances’ – which it states amounts to €22 billion (slide 12 in the presentation linked above). Like many on this blog, the bank argues that this relatively positive picture provides the State with options regarding investment and public spending.
Virtually all mainstream commentators argue that there is no alternative to fiscal consolidation, so this is important information as it is emanating from an unexpected source and certainly one not naturally sympathetic to the kind of analysis you’ll read on this blog. But, it’s there in black and white. AIB says it’s OK for the State to increase public spending. Let me see, how exactly does the report put it? Ah yes, ‘low public debt gives the State the capacity to support the banking sector’ (see slide 12)….
6 comments:
'You should go out and borrow loads of money. It will be an investment in your future.' Now where have we heard that before?
Some other fun factoids in the AIB begging letter, sorry outlook ...
"NAMA will not impact on government debt"
So, we won't have to pay it off then? It'll just sit there in an off-balance-sheet limbo for ever and a day. Regardless of whether the trash assets backing it up ever rebound in value.
"€7 billion recapitalisation of AIB/BOI from national savings (Pension Reserve Fund)"
But that's part of the cash balances taken into account when figuring our net public debt was just a low, low 51% of GDP. So these cash balances are already ear-marked for throwing into a large money-pit. Or is it to be piled up on a massive pyre? Either way, that money is effectively gone, just resting Father Ted stylee in the national account before being reclaimed by its real owners.
"Debt interest payments low at 2.7% of GDP in 2010"
That's low in the sense of more than half what we currently spend on education? Plenty of head-room there so, we should be spending at least as much on debt servicing as we waste on teaching.
Joe:
Some facts. Funds in the National Pension Reserve Fund are not included in cash balances and not included in the 51% debt ratio. The fund has assets of €15.7 billion, excluding €7 billion in preference shares in AIB and BoI. As reported by the NTMA at the end of 2009 the State's net debt was 38% of GDP, low by international standards.
Presenting these facts is not an attempt to defend the government's fundamentally flawed management of our economic crisis. On the contrary. These facts suggest that many of those who are most shrill in proclaiming the primacy of the need to address the national debt, above all other policy prescriptions, have an ideological agenda which includes slashing public expenditure and shrinking the role of the State.
@Peter
There seems to be several different definitions of net public debt floating around, for example Michael Taft defined itto include both NMTA preborrowing and the NPRF in an earlier discussion on this site.
It seems AIB have choosen to use their own self-serving kinda-gross and kinda-net (gret?) defintion of public debt to include cash balances but exclude the NPRF.
I'd guess their private reasoning is that they view our "national savings" as being already theirs in all but name.
Now, one can express our public debt ratio is 25% as claimed by Martin Wolf in the FT, or 38% as per the NTMA figures, or 51% as per AIB's definition, or approaching 80% as forecast by the DoF.
Add in the off-sheet NAMA liabalities and the €108 billion in unfunded public sector pension liabilities and we could get it up to close on 200%.
So any argument based on %-of-GDP is sort of beside the point, the real issues are ability to borrow and more importanly ability to repay. Our children and grandchildren are not going to thank us for the mountain of debt we bequeath to them. And no 'shrill' invocation along the lines of "but Martin Wolf and AIB told us our debt was oh so low!" will cut any ice with them.
Proposition Joe - we are sometimes in a fog re: debt ratio because the data is neither current nor complete. It would be an easy matter for the Government to publish, on a monthly or even quarterly basis, the full details of our debt profile. The numbers are there - in the NTMA, Central Bank and the DoF. Of course, if the Government let it be widely known that they have €20 billion or so in cash in some account, could you imagine the reaction from business, households, the unemployed? No, better to keep it hidden in line x of page y in some long, dense document where no journalist fears to tread.
As far as I can deduce, at the end of 2009 (and this comes from the Stability Programme Update), the gross debt/GDP ratio is 64.5%. The estimate at the end of the year is that there is approximately €20 billion in cash balances in the Exchequer Account. The problem is that this figure can vary widely from month to month, depending on outflows and turnover of short-debt. Still, it appears that over the next year, the NTMA will hold on average €20 billion. This amounts to 12.4% - leaving a net debt of 52.1 percent. This percentage can be slightly different depending on the actual amount in cash balances. But its about the 50% mark. This does not include NPRF. Of course, the Government could help us all out by giving full information - but there you are.
You're also right, Proposition Joe - the issue is repayment and borrowing quality. If we borrow to subsidise rising unemployment, falling consumer spending and investment, and lower economic growth - then we're just burning money and leaving a terrible legacy. But - and Michael Burke has been on the mark on this - if we borrow to raise output, get people back into work, increase productive investment, then we ensure not only the economy's ability to repay that debt, we can reduce the debt burden, raise productivity, increase productivity and grow our way out of this recession. With the recent Exchequer statements, Live Register and Redundancy Notice figures we need to do something fast. Because right now we're sinking in a qucksand of stagnancy and debt.
"if we borrow to raise output... then we ensure not only the economy's ability to repay that debt, we can reduce the debt burden"
Imagine the following (plausible) scenario. The numbers are purely illustrative.
Date: June 2010
An unemployed construction worker pays a mortgage of €1,000 a month. He pays this to a bank that has been recently nationalised (say AIB or BOI). He receives €800 a month dole. The going rate for a construction job is €3200, and take home pay after tax is €2,400. He is about to declare bankruptcy.
If he gets a job building a school, (replacing a prefab), the government (indirectly) employs him. They wage bill is €3,200. However as he is essentially paying his mortgage to the government, pays tax, and no longer gets the dole the marginal cost to the government is just €600.
If the government had decided to build the school three years ago the worker would not have been on the dole, and would have paid his mortgage to a private firm, and taxes were lower so his take home pay was more likely €2,800 and the marginal cost to the government would have been €2,800. So the marginal cost of hiring a worker is now less than a quarter what it was.
At the moment the pension reserve is investing in various stocks, bonds and shares around the world. A 3% real return on a risk free project is a fairly decent return. Suppose in the past the return on building a school versus renting one was 3%, and that labour takes up half the cost of construction, and all other construction costs have remained stable. As the marginal cost of labour has gone down 78%, the marginal cost of the project is down 36%. So the return is now 4.7% to the government. The return is 150% more than what is was
The main 'dodgy' assumption I made in my favour is that the builder was about to go bankrupt and wouldn't have been able to repay his mortgage to a nationalised bank. I also ignored whether pay went down, whether developers pay tax, whether the developer pays a mortgage, knock on effects of creating a job, non-monetary benefits, whether the rental on prefabs has changed and I picked the numbers out of my head.
However this example would be a sound investment for the government to make. It would be worth borrowing money for, and as it has a solid return lenders with loan money for such a project.
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