AS Greece totters on the edge with a sovereign debt default now viewed as imminent as it is inevitable the relative prospects for Ireland seem somewhat brighter.
However, it could be that Ireland looks better only when compared to the abject failure of the international assistance programme to deal with the Greek problem – too much debt.
Can a programme that has failed so miserably in Greece work in Ireland? A quick run through our debt figures shows that it can.
At the end of 2006, Ireland’s General Government Debt was €44 billion. This debt was largely the overhang of the fiscal crisis of the 1980s but because of rapid economic growth the debt burden had decreased from almost 100pc of GDP in 1990 to just 25% of GDP by 2006. We did not repay the debt accumulated during the 1980s but saw economic growth reduce its burden hugely.
Since 2006, Irish government debt has increased at an astonishing rate and more than trebled in just four years to reach €148 billion and 96pc of GDP by the end of 2010. There are three factors than contributed to this €104 billion increase in debt.
First, the cash balances in the Exchequer and other accounts increased from just under €4 billion to almost €16 billion. During 2008 and 2009 the National Treasury Management Agency had the foresight to borrow funds on international markets to build up these cash balances. This cash buffer accounts for about €12 billion of the increase in the debt.
Second, financing the services provided by government in the last four years has required €52 billion of borrowing to meet the deficit that has emerged between government revenue and government expenditure which ensured that the government could meet its pay, pensions and social welfare outgoings.
Third, there was the money that has been used for the bailout of our delinquent banking system. The Exchequer contributed around €9 billion directly to the banks and €31 billion of Promissory Notes were given to Anglo, INBS and EBS in 2010. Other money was provided to the banks, particularly AIB and Bank of Ireland but that came from the decimation of the National Pension Reserve Fund rather than increased borrowing.
The €104 billion increase in the GGD from 2006 to 2010 can be broken down as follows: €12 billion to build up cash balances; €52 billion to fund government services, and €40 billion for the bank bailout. Although it attracts the most attention, the banking disaster has actually contributed just over one-third of the increase in government debt over the past four years.
The next issue is where the debt level is going to go over the next four years. The March stress test announcements revealed that four of the covered banks needed a further €24 billion of capitalisation funds. Haircuts to junior bondholders and other actions by the banks provided €6 billion of this sum. That left an €18 billion hole to be filled by the State of which €10 billion came from the further destruction of the savings built up in the NPRF over the past decade. The remaining €8 billion was borrowed as part of the EU/IMF deal.
There are other issues related to the banking collapse that are not included, most notably the final outcome of the NAMA process and how to unwind the €125 billion of liquidity the banks have taken from the European and Irish Central Banks. There is also the long-term hope that we will be able to sell off our stakes in the two ‘pillar’ banks to recoup some of the money swallowed by the bailout. There is a great deal of uncertainty about these.
There is no uncertainty about the ongoing need to fund the annual budget deficit. Some steps have been taken to try and control the deficit but it remains at huge levels. The recent announcements of interest rate reductions will help but there still remains a significant gap between government revenue from taxation and government expenditure on services.
Even with planned tax increases and expenditure cuts for the next three budgets it is estimated that a further €45 billion will be required to finance the annual deficits across all areas of government between 2011 and 2014 .
By taking the end-2010 debt of €148 billion, and adding the €45 billion needed for the deficits and the €8 billion to be borrowed for the banks, means that by the end of 2014 the General Government Debt will be in the region of €200 billion.
If we fully exhaust our cash reserves the debt would be around €185 billion, but such an action would not be prudent. The debt will also be lower once a sale for the banks can be undertaken. The key at this stage is that the rate of debt accumulation in 2014 has to be much lower than it is now, and to achieve that we must bring the budget into balance.
If nominal GDP gets to €175 billion by 2014 then the debt ratio will be around 115% of GDP. This is below the oft-cited threshold of 120% beyond which debt sustainability is deemed unlikely. In contrast, Greece’s official government debt was 140% of GDP at the end of 2010 and is heading for 150% of GDP by the end of this year. Greek government debt needs to be reduced.
If we had avoided assuming any of the bad debt losses our delinquent banking sector, the government debt would be €50 billion lower but would still be 86% of GDP, which is still in the danger zone of above 80% and would not completely eliminate the fear of default because of the ongoing annual deficits. Of course, without the bank bailout we would also have an intact €20 billion sovereign wealth fund. We will get something in return when the banks are eventually sold but it is difficult to forecast what this will be.
Irish debt levels can be contained and the arguments that default is an inevitability that has be endured grow ever quieter. Ireland will not default and we can work our way out of this crisis. If the necessary steps are taken we can carry a debt-to-GDP ratio of 115pc from 2014 and, in time, the debt ratio will fall. It will be painful but it can be done. The pain of a sovereign default would be even worse.
Seamus Coffey is a lecturer in economics at UCC and a blogger at http://economic-incentives.blogspot.com