Is Ireland Inc. out of the woods?

[DerKaiser]

I think the answer to this question depends on many factors that have been extensively investigated on these forums - mainly thanks to Brendan for provoking debate and providing objective and accurate data.

I have thought through a number of questions to help us answer the title question.

Is our current level of national debt sustainable?
This generates three further questions.

1. Can we pay down the debt?
From events this week it is clear that paying off debt is not on the agenda, servicing the interest is the issue.

2 Can we afford the interest rate?
Again, this week's events appear to have made it possible to get a good interest rate on our debt, so the question reduces to whether we can balance our budget at these rates of interest on our debt.

3 Can we stop the debt from rising further?
This is slightly trickier and dependent on whether the banks will need further capitalisations from the state and again, whether we can eliminate the current budget deficit (interest repayments included)

This leads us to a second key question

Will we avoid further bank recapitalisations
There are a few key issues here:

1. Are recapitalisations needed?
2. If so, will the state have to stump up or will some EU mechanism be put in place to recapitalise banks for future losses?

There has been much debate on this, mainly around the possible tsunami of mortgage debt and whether NAMA will realistically break even.

Is it possible to reach an agreed central estimate on what's likely?

If this could be resolved, I think we the could focus solely on the third and, in my opinion, the most important factor all along:

Can we balance our budget deficit?
Our current budget deficit stands at €10bn. Extensive measure have been taken over the last 3/4 years to get this down.

In spite the "success" of revenue raising measures such as the USC, progress on spending cuts has been largely thwarted by rising national debt (and interest rates), increased social welfare costs, continued lack of progress on getting value for money from health and the limited benefits of the Croke park deal to date.

In a stretched economy that raises €40bn in revenues and spends €50bn per annum, are there realistic means by which this €10bn gap can be brought to manageable levels? If so, what are they?

In my mind this leaves us with two key questions.
1. How to plug the €10bn deficit?
2. How to get off the hook for any further potential bank losses?

Any thoughts?

 

[Duke of Marmalade]

I read in this morning's papers that interest rates are at record lows and that Fianna Fail are topping the polls. The nightmare is over

 

[Sunny]

The reaction to this has been completely irrational especially from people who should know better. We got a better deal but its not a game changer. When you see 5 year yields back to 2005 levels, I find it hard to disagree with David McWilliams when he says there is a bubble forming in the bond markets. And I rarely agree with McWilliams. The problem is that people will look at the yields and think the crisis is over. It's far from over.

 

[mercman]

I read in this morning's papers that interest rates are at record lows and that Fianna Fail are topping the polls. The nightmare is over

Otherwise known as 'DEJA VU' from a past lifetime.

 

[leroy67]

Agree with Sunny and I wouldn't be a fan of McWilliams either. This is far from over and our debt is still totally unsustainable. Our economy and banking system is bust and in receipt of palliative care prolonging the life of the patient.

 

[Spear]

There was always the assumption that growth would lead to higher income and thus reduce the deficit.

One thing that has struck me is that most of the tactical planning has related to reducing the debt, but there has only ever been just the hope for growth.

 

[Chris]

First of all two corrections:
1) the deficit for 2012 was €14.891 bn according to the department of finance
2) government spending has not gone down

Add to that the fact that the current account deficit for January 2013 was €678 mil compared to €513 mil in January 2012 it looks like things are deteriorating more, not getting better.

By the end of 2015 the NTMA predicts total debt will stand at €212 bn. I think it is delusional to believe that that amount if debt can be refinanced over a medium to long term at low interst rates.

I would agree with Sunny that there is a giant bubble in all government debt which includes junk bonds like Ireland's.

 

[DerKaiser]

First of all two corrections:
1) the deficit for 2012 was €14.891 bn according to the department of finance
2) government spending has not gone down
.

Just for clarity:
1) I did say current budget deficit (it stands at €10.1bn for 2012)
2) I did not say spending was down - there have been cuts, but these have scarcely succeeded in offsetting rising social welfare and interest costs.

I think we are in agreement in terms of wondering how on earth is the current budget deficit going to be plugged.

I'm not sure if I share your view on whether a debt of the order of €200bn can be supported, but I do believe only one of two things can happen:
1) We manage to close off the current budget deficit, prove our ability to service the national debt and regain our economic independence
2) We cannot close the deficit, we are unable to service our debt, no one will lend to us and we end up back in a vicious circle, unable to regain any economic independence

 

[dub_nerd]

I'm not sure if I share your view on whether a debt of the order of €200bn can be supported, but I do believe only one of two things can happen:
1) We manage to close off the current budget deficit, prove our ability to service the national debt and regain our economic independence
2) We cannot close the deficit, we are unable to service our debt, no one will lend to us and we end up back in a vicious circle, unable to regain any economic independence

I don't believe 1) can be done. The required growth estimates are far too optimistic. And no Irish government is going to be able to cut public pay or welfare rates sufficiently without getting kicked out of power. The public just don't seem to get that you eventually have to spend within your means.

But I don't see how 2) can be done either. Are the troika going to keep lending more and more money to us forever?

There is only one realistic option. We are going to default on our debts. The only question is whether we do that within some agreed EU framework (where it will be classed as "restructuring") or we leave the eurozone and the EU. Currently I would think the former but I wouldn't rule out the latter. The Irish public may opt to shoot itself in the foot rather than have the EU directly determine our pay and spending rates.

 

[Chris]

Just for clarity:
1) I did say current budget deficit (it stands at €10.1bn for 2012)
2) I did not say spending was down - there have been cuts, but these have scarcely succeeded in offsetting rising social welfare and interest costs.

Sorry Kaiser, I must have missed the "current" in your post.
Regarding the second point, I know I harp on about this, but I think it is important to point out that while there have been cuts in certain areas these have been more than negatively offset in other areas resulting in no net decrease and therefore we cannot say that we have austerity.

I think we are in agreement in terms of wondering how on earth is the current budget deficit going to be plugged.

I'm not sure if I share your view on whether a debt of the order of €200bn can be supported, but I do believe only one of two things can happen:
1) We manage to close off the current budget deficit, prove our ability to service the national debt and regain our economic independence
2) We cannot close the deficit, we are unable to service our debt, no one will lend to us and we end up back in a vicious circle, unable to regain any economic independence

I agree with you, and don't believe that this government or the next one will make the necessary decisions to plug the deficit. Some form of default will have to occur and I hope that it will not be a chaotic one.

Dub_nerd, you point out that a default would result in the government not being able to borrow, but in my opinion that would be a good thing. Nevertheless, history has proven the opposite, most recently Iceland.

 

[dub_nerd]

I agree with you, and don't believe that this government or the next one will make the necessary decisions to plug the deficit. Some form of default will have to occur and I hope that it will not be a chaotic one.

Dub_nerd, you point out that a default would result in the government not being able to borrow, but in my opinion that would be a good thing. Nevertheless, history has proven the opposite, most recently Iceland.

I think a chaotic default would be catastrophic... at least temporarily (is there such a thing as a temporary catastrophe?)

You would have an instant 30% cut in public sector pay, a 30% reduction in all welfare payments, and in all services. Our mortgage arrears problem would worsen significantly, and with nobody to bail out the banks any more, they would be bust. (Ok, they're bust already, but there would be no more emergency liquidity).

The saving grace is that the EU can't afford to let this happen. However, they won't bail us out forever, so it's something of an irresistible force versus an immovable object.

 

[DerKaiser]

I think a chaotic default would be catastrophic... at least temporarily (is there such a thing as a temporary catastrophe?)

You would have an instant 30% cut in public sector pay, a 30% reduction in all welfare payments, and in all services. Our mortgage arrears problem would worsen significantly, and with nobody to bail out the banks any more, they would be bust. (Ok, they're bust already, but there would be no more emergency liquidity).

I think all of what you've described would have been applicable in 2010.

We had a €12.5bn current deficit that year and only €4bn of it was interest. If we had gone rogue and defaulted on all debt, current spending on public sector wages, welfare, health, etc would have had to immediately fall by 20%.

Roll on to 2012 and our current deficit was €10bn, about €6bn of which was interest. The same scenario as above would result in a 10% fall in current spending.

If the economy doesn't fall off a cliff and the budget adjustments in the next couple of years are somewhat effective, we will be much better placed to default.

That's been my cynical view all along - if we do ultimately need to take the nuclear option of default, why not opportunely wait until we have readied ourselves for the consequences by getting our finances in order?

 

[Duke of Marmalade]

That's been my cynical view all along - if we do ultimately need to take the nuclear option of default, why not opportunely wait until we have readied ourselves for the consequences by getting our finances in order?

I agree with that cynical calculus - though I don't agree we should default when we ostensibly have a balance in our primary budget as it is an illusion that we could live in splendid isolation with no retaliation from our foreign creditors.

But even on the cynical calculus it is only if our creditors were forcing us into a significant primary surplus to pay them off that there would be any point in defaulting. Whilst we can continue to borrow to pay the interest and roll-over the maturing debt there is no pain.

This is what the anti austerity caucus misses. We are not really suffering any austerity until the primary surplus is positive, meanwhile we continue to borrow and live beyond our means.

As to OP question I am becoming more pessimistic even though everybody is talking up our escape from the crisis. The Croke Park discussions look really bleak, I see industrial unrest big time. I think the PN deal will be a pyrrhic victory. There will be no more slack cut for Ireland and it is just a matter of time before we are forced to give up our CT rate.

 

[DerKaiser]

This is what the anti austerity caucus misses. We are not really suffering any austerity until the primary surplus is positive, meanwhile we continue to borrow and live beyond our means.

Couldn't agree more

 

[dub_nerd]

I agree with that cynical calculus - though I don't agree we should default when we ostensibly have a balance in our primary budget as it is an illusion that we could live in splendid isolation with no retaliation from our foreign creditors.

But even on the cynical calculus it is only if our creditors were forcing us into a significant primary surplus to pay them off that there would be any point in defaulting. Whilst we can continue to borrow to pay the interest and roll-over the maturing debt there is no pain.

I agree with that. That's why defaults get messy -- the people who really have to do them are the ones that are least ready for them, and therefore suffer most.