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Government must not blow it with the national debt beast still looming large


Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin

Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin

Minister for Finance Michael Noonan and Minister for Public Expenditure Brendan Howlin

Credit rating agency upgrades on Irish sovereign debt don't exactly make big headlines these days. They are seen as a bit of a "yawnfest"

It wasn't like that when they were heading south. Every taxi driver in Dublin could tell you how far down the toilet Moody's had flushed Ireland's creditworthiness.

During the week Standard & Poor raised our rating to A+. Every little upward notch won from a credit rating agency today is worth money to the Irish exchequer - a lot of money over time.

It opens up our debt sales to new investors around the world such as in China, who might only buy assets with a certain rating attached. It also helps to push down the coupon or interest rate we pay on our debt.

Relative to the crisis of just a few years ago, everything might seem fine, or even fixed, when it comes to the national debt. There is a view that with bond yields at record lows, we can raise money incredibly cheaply and we are fine.

The reality is quite different. We won't always be able to raise money this cheaply and at €200bn, our national debt is a big beast.

For every €10 you pay in income tax, around €4 goes to pay the interest on our national debt. That is a rather depressing prospect, especially when you think that the national debt stood at just €36bn, less than ten years ago.

Our interest bill in 2007 was €1.6bn. Last year it was €7.5bn. We really blew it. If we hadn't, we could be paying close to €6bn less per year in interest - money that could have gone into services, investment or directly into people's pockets.

It didn't play out that way. And now, with such an enormous debt, every little tweak in our favour through careful management of the debt can translate into very substantial savings.

To put it in perspective, when the NTMA bought back €18bn of expensive debt owed to the IMF early, using cheaper funds raised on the market, the saving came in at around €1.5bn.

Borrowing money is not just about credit, it is about "credibility". Our credibility story is pretty good now. Rating agency letters such as 'A' or 'B' reflect that. It is like a single letter summation of a nation's financial credibility. The NTMA has to carefully manage how much money it borrows and when, in order to hold up its end of the credibility bargain.

They do the mechanics and timing of borrowing money but the Government has the biggest part to play in maintaining credibility. Government decides how much we need, the NTMA have to go and get it.

Looking back at how the bond markets have performed, you can see that the NTMA usually gets it right but sometimes they appear to get it wrong.

If they borrow a huge amount of money at certain rates, and then just a few months later the rate falls, you might conclude they should have waited. For example, they borrowed most of the €18bn to replace the IMF money in the second half of 2014 and early 2015.

Then from March to May of this year the cost of funds dropped sharply. Now they are heading back up again. Back in 2013 they raised billions for cash reserves at rates of around 4pc to 4.25pc - well above where the rate went afterwards.

But this is hindsight gone mad. The first thing is the NTMA cannot try to pick the bottom of the market, as if it were punting on stocks. It is far too risky an approach when it comes to raising such large sums.

Secondly, if it tries to wait for yields to go even lower, the market will see it coming. Investors will know it has waited and it really needs the money, and it will simply be charged even more.

Some would argue that the agency should fill up its boots with borrowed cash right now while it could raise ten-year debt at just over 1pc. However, the more it raises now, the more money it is borrowing, which in turn pushes up our total national debt figure.

Incredibly, many investors look at the gross debt of a country when deciding to lend rather than net debt - the amount it owes minus the value of its cash and assets.

This week's upgrade from Standard & Poor was partially driven by the fact that Nama has paid back about €20bn of the €30bn it owes.

This debt doesn't even sit directly on the exchequer balance sheet, but everybody knows it is owed by the state.

The quicker Nama pays back its debt, the lower the risk is to the Irish state and the country becomes more creditworthy.

The NTMA has several big years ahead. Between 2016 and 2020 some €65bn of debt falls due, which means it is effectively re-financed.

With so much uncertainty out there, it would take a brave man to place a bet on what the cost of borrowing for Irish sovereign debt will be in 2020.

I remember being told in economics class in school in 1984 that our national debt was so big, every single man, woman and child owed about £5,000 (€6,350). Coming from a family of seven children, I was a bit spooked by how much the Currans appeared to owe.

In 1995 the figure per person was about €10,666. In 2005 it was €9,300. Today it is €39,500. Not only that, but general government debt is projected to stay at its current level of €208bn until 2020.

The plan is that growth in the economy will make it more affordable by then so we will actually be in a better position.

Imagine you owe €5,000 on a credit card and you get a pay rise. Instead of using the extra money to pay down the bill you decide it is now more affordable because your income is higher and you leave it alone.

We may be paying national debt interest equal to 40pc of our income tax take, but if you take all government income into account, the picture is a little better.

Our interest bill is 11.6pc of general government revenue or all the money the state takes in each year, including taxes, PRSI, dividends on state companies, investment income etc. This is lower than it was back in 1995 when it stood at 13.3pc.

However, it would be utterly foolhardy of the Government to think the management and affordability of the national debt is sorted. Every opportunity it has to pay down debt should be taken.

For example we owe about 105pc of our GDP. If you add in the value of other state assets like the stakes in the banks, the debt to GDP is closer to 80pc - better than Belgium for example.

This is only a meaningful figure if the proceeds from the sale of the bank stakes goes to pay down the debt. Otherwise we are like a boom time developer borrowing more money on the back of assets we hold which we will never use to pay down debt.

The bond markets are at artificial levels. They won't always be. The NTMA can only do so much. Government contributes most to the credibility story. We can't afford to blow it again.

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