Debt deal doesn't change the need for budget cutbacks, warns Davy
Stockbroker says next move for Government is to extend terms of bailout loans
THE Government will stick to its programme of planned budgetary cuts, despite the deal on the controversial promissory notes, stockbroker Davy has forecast.
It also claimed that the State would save on average €800m a year on interest costs as the deal sees the extension of cheap ECB funding at 0.75pc.
The Government announced last week that the promissory notes used to help bail out the now-defunct Anglo Irish Bank and Irish Nationwide would be replaced with long-term government bonds.
But the stockbroker said that while the savings were significant, they would not be "transformative for the budgetary arithmetic".
Conall MacCoille, Davy's chief economist, told the Irish Independent: "We're not going to be changing our forecasts widely on the back of this.
"Perhaps there is some positive impacts on confidence that could help in the margin, but in terms of the fiscal consolidation, we don't expect it to be a big impact and we've still got quite a big one (Budget) this year and a substantial one next year."
Davy said the decision by Europe's finance ministers last month to look at extending the terms of some of Ireland's bailout loans could be more significant than the promissory notes agreement.
The stockbroker said the underlying benefit of the deal was small for the years up to 2015, with little impact this year because of the cost to the Government of the Eligible Liabilities Guarantee scheme (ELG), under which depositors at the now-liquidated Irish Bank Resolution Corporation (IBRC) can claim.
The Government expects this could cost the Exchequer up to €1.1bn this year.
Davy's central view is that the Government will stick to its programme of planned budgetary cuts amounting to 2.5pc of economic output this year and 1.8pc next year.
"With the growth outlook uncertain and the Government locked in negotiations to secure savings on overshooting current expenditure, there is little room for manoeuvre," Davy said.
Announcing the deal last week, both Taoiseach Enda Kenny and Finance Minister Michael Noonan said the State would have to borrow €20bn less over the next decade as a result.
It also claimed that spending cuts and tax increases would be €1bn less up to 2015.
Davy said the next step for the Government would be to extend the terms of the EU/IMF bailout loans.
It claimed that the proposal agreed by Europe's finance ministers last month to consider extending the terms of some of the loans could be more significant than the promissory note deal.
"Extending EU/IMF funding could reduce funding needs by €43bn – more than twice the €20bn reduction in the NTMA's funding requirement – out to 2023, due to the agreed extension of ECB funding," Mr MacCoille said.