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Can interest on the State's debts be cut even further?

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MAN ON A MISSION: Minister for Finance Michael Noonan, right, and Frank Daly, Chairman of Nama. Mr Noonan flies out to Brussels tomorrow to plead Ireland’s case
before the monthly meeting of EU finance ministers this week

MAN ON A MISSION: Minister for Finance Michael Noonan, right, and Frank Daly, Chairman of Nama. Mr Noonan flies out to Brussels tomorrow to plead Ireland’s case before the monthly meeting of EU finance ministers this week

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MAN ON A MISSION: Minister for Finance Michael Noonan, right, and Frank Daly, Chairman of Nama. Mr Noonan flies out to Brussels tomorrow to plead Ireland’s case before the monthly meeting of EU finance ministers this week

Last year one in every five euro raised in taxes went on paying interest on the national debt. That is up from just one euro in 15 in 2007. By 2018 the government is budgeting on spending almost €10bn on debt servicing. But with interest rates at historic lows, and troubled countries, such as Spain and Portugal, issuing very long-term bonds to lock in low borrowing costs, is enough being done to minimise debt-servicing?

First, some background. As the top chart shows, the resources devoted to servicing the national debt soared when the crash happened. Although not as high now as in the 1980s, when one in three pounds raised in tax went on interest, the burden is still huge. And such is its size, everything possible must be done to cut and contain it.

The NTMA (National Treasury Management Agency) is the much older, but lower profile sister organisation of Nama. It was set up in 1990 to professionalise the way the then enormous national debt was managed. Among State agencies it has been on the better end of the performance spectrum over the years, and remains the central player in the technical and market aspects of funding the State.

But management of the national debt has become much more politicised since Ireland borrowed €67.5bn from the Troika of international lenders in November 2010 (the second chart shows the breakdown of who the Irish State owes money to).

After the bailout, finance ministry officials, diplomats and ministers joined the bond market specialists at the NTMA in managing the debt. Their main focus has been on improving the terms of the bailout loans, which originally came with an average interest rate of 5.83pc. Although not penal, and far below the yield on the Irish 10-year bond around that time, the bailout money was no soft loan.

The EU chunk of loans was the most expensive, not least because politicians in other Eurozone countries needed to be able to tell their voters plausibly that they were not subsiding profligate peripherals. But after Portugal joined Ireland in the bailout club in the spring of 2011 and the euro crisis threatened total meltdown, the creditor countries changed their view. They came to believe that it was in their own best interests to do everything possible to ensure that Ireland and Portugal did not go the defaulting way of Greece.

To achieve this they cut the rate of interest in half (interest on Ireland's two tranches of EU debt currently stands at 2.31pc and 3.06pc) and extended the repayment period. In addition, the €30bn promissory note, which had been issued largely to pay off the huge deposit base in Anglo Irish Bank, was reluctantly given a restructuring green light by the European Central Bank. It now effectively costs the taxpayer nothing.

These developments are well reflected in the first chart. Although total debt continues to soar, the increase in the interest burden has hardly increased at all since 2011.

With a huge softening of the EU loans, the IMF slice of the debt pie has now become the most expensive, carrying a rate of 4.99pc. Government attention is now firmly on this debt, and the objective is simple: pay it all back early.

Doing so by selling new bonds to private investors would be just the ticket as it would save taxpayers, according to the Government's own figures, a whopping €670m per year.

In an effort to achieve this end, the finance minister Michael Noonan flies to Brussels tomorrow and is scheduled to shuttle around Europe making his case before the monthly gathering of EU finance ministers at the end of the week. Although some of his counterparts from the creditor countries could demand that any early repayment applies to the money they contributed to the bailout, Noonan's ducks appear to be in a row to get the thumbs up on Friday. The question then arises: what sort of loan should the NTMA issue to repay the IMF? The answer points strongly to emulating last week's issuance of longer dated bonds by the two Iberian states.

Given how low interests are now, the strong likelihood that they will rise considerably over the medium to long term and the many years it will take to reduce the State's debt mountain, the case for locking in current very low rates for as long as possible is very strong.

The case for doing so is bolstered by the existing repayment schedules. Around €40bn of non-Troika debt is to be paid back over the next five years. If market conditions deteriorated, it might not be possible to "roll over" this debt.

To lock in current low interest rates and reduce the rollover risk in the medium term, the NTMA could follow Portugal's lead and issue 15-year bonds, rather than the usual 10-year paper. It could also offer maturity extensions to investors who currently hold Irish debt, an operation known as "switching" in the jargon.

A third slice of the debt pie is the €25bn of floating rate notes that were issued to the Central Bank of Ireland to replace the promissory notes. These floating rate notes do not start to mature until 2038, with the final repayment due in 2053. These, on the face of it, look like the ideal instrument because the cost to the State of servicing them is 0pc (the holder - the Irish Central Bank - remits income its makes on the notes back to the Department of Finance, and so far this year it has paid €1.2bn to the Irish exchequer).

If this sounds too good to be true, it certainly is for the ECB, because it breaks the spirit, if not the letter, of EU rules on central banks' financing of governments. As such, pressure will inevitably come on Ireland to offload the notes to private investors long before 2038.

Given how bond prices have soared recently, a large profit of billions of euro would be made by the central bank if it were to sell them now. There will probably never be a better time.

Sunday Indo Business