Paying back Ireland’s outstanding debts: the bad, the ugly and the unexpectedly not so bad

By Susan July 28, 2011 11:11

Paying back Ireland’s outstanding debts: the bad, the ugly and the unexpectedly not so bad

On July 15, the NTMA (National Treasury Management Agency) published an information note about Ireland’s funding needs. They opened the books, in a way, to show how much Ireland needs and where we are going to find the money – and when we need to pay it back!

The document affords a much more realistic view of Ireland’s finances, and, well, it’s slightly less depressing than what we might have feared…

Let’s take a look at it…

First of all, this plan is much more realistic

The previous plan relied heavily on borrowing from private creditors. But this isn’t realistic in current circumstances, as interest rates are very high.

The NTMA, the authority that issues treasury bonds, were expecting 14 billion in bonds in 2013. With a bond yield at around 14%, there was no way this was going to happen: Ireland would have had to promise 14% in interest to holders of these bonds, which is huge. The interest rate on loans from the EU and IMF were around 5,8% (and have since been tentatively cut down to 3.5%): in order to be able to borrow, our bond yield would have to be below that… Needless to say, this is a long way away!

So borrowing from the private market is out of the question. What do we do? Up until now I felt that there were only two ways to get out of this: ask for a second bailout or default on our bonds. Neither option was palatable, to say the least. Now, with this document, the NTMA is unveiling a far more realistic plan. We could see the light at the end of the tunnel.

Basically, what this note is saying is: we have enough money to last us until the end of 2013. By the end of 2013, we hope to have found a way to go back to borrowing from the private sector. Until then, we’re ok. Under previous plans, there was only enough money to last us until mid-2013, so this means we have six more months to work on the country’s financial situation and come up with a solution.

There is still a lot to worry about, though

€11,882 million: this is the amount of maturing debt that we need to pay back in January 2014. This is a big stumbling block. We have two years to find that amount of money – and to pay it off, Ireland can’t use its remaining assets at that stage, which would only amount to 10 billion euros. Besides, using them would mean we’d be left with nothing at all.

€67.5 billion: this is the amount we owe the EU and IMF, and it’s only part of Ireland’s huge outstanding debt, which is close to 200 billion euros. The problem is that, for a long time (as long as there was enough money to go around), European governments racked up debt instead of trying to balance their budgets.

There was no political will to balance budgets: as long as debt remained at or under 60% of GDP, everything was fine, or so went the accepted wisdom. But there wasn’t a plan B, and when the recession came and money dried up, well, the only solution was to secure a bailout. Not good at all. I strongly think our aim should not be to scramble towards a 2.8% deficit in the medium term, but to balance our budget and be independent of the bond market in the long term.

€10 billion: this is the amount of money that will be left in liquid assets (€5 billion) and in the National Pensions Reserve Fund (€5 bil. as well) at the end of 2013. With the €5 billion in liquid assets, we’re back where we started before the crisis. But the economic situation has changed a lot in the meantime, so 5 billion euros in a thriving economy isn’t worth the same as 5 billion euros in a recession. We are doing well to project to have €10 billion by 2013. Remember, in May, we were not able to see as far as the end of 2013 at all, never mind to have some significant change left over. Still, these assets are fragile and dwarfed by our debts.

But – wait for it – there’s a bonus mini-bailout in there!

A surprise turn of events is that we actually have €17 billion more at our disposal. How is that possible? Well, the programme provided €85 billion to cover Ireland’s financing needs (most of it provided by the EU and the IMF, and some by the Irish State). Of this, it was thought €35 billion would be needed to recapitalise the banks. It turns out that “only” €24 billion will be needed for that purpose, some of which won’t have to be covered by the State. Even better, there has been intervention on the part of private investors for Bank of Ireland, which further reduced the amount of money to be ploughed into the banks. The total amount of State funds now required for capitalisation is €18 billion – a far cry from the original €35 billion earmarked. And there you have it: €17 billion can be spent somewhere else, where it’s also needed.

Also, the staggering amount of debt that we’ve amassed doesn’t need to be paid back all at once. This will be spread out over several years. So, yes, we have a period of austerity ahead of us, but provided the amount of debt to be paid back in a given year is small, it will be manageable. And there is money coming in: market funding amounts to 6.8 billion for the period 2010-2013.

Then there is the matter of the 11.882 billion euros to be paid back in January 2014. This cloud has a silver lining: once we’re over that hump, we have nothing to pay back for two years after that. In that period, we could really get back on our feet. We need to start paying back EU and IMF loans in 2015, but there is room for negotiation, as we have seen with the interest rate being cut down to 3.5%. More than that, if we keep working our way through our debts, we could have a balanced budget around 2020.

The big picture: don’t confuse the macro level with the micro level

So what does this mean for you? Is this just another piece of depressing news you need to add to your List of Things to Worry About? Or is there anything you can do?

Actually, there’s one thing you can do right now, and this one action will improve both your mood and Ireland’s finances (in the somewhat longer term for the latter…): stop worrying.

No really, stop worrying. What is going on at the national level is macro economics. This is something for ministers to lose sleep over, but you, as an individual can’t change it dramatically on your own. Get busy improving the micro level of you own finances instead. This will put you firmly in the driver’s seat, it will stop you worrying passively and, even better, it will restore your confidence.

And Ireland needs all the confidence it can get at the moment, to get out of the mire. How are people feeling? Are they likely to spend more; are they likely to manage their money with aplomb? This is something to which markets pay a lot of attention. Yes, they’re watching you (not to put pressure on you or anything!) and taking their cue from you.

Also, educate yourself about macro economics (by reading this blog for example!). This allows you to monitor the actions of political leaders, and to hold them accountable. As a citizen you should not relinquish all your power of decision to politicians. They will only get away with what we let them get away with. So educate yourself and hold political leaders accountable. Show our leaders you’re watching them (who’s under pressure now, eh?). Read articles about finance and spread the articles you’ve read through social media. Write to your local paper to speak your mind. Vote. There are many things you can do, you are far from powerless.

So, what do you do now? First, get your own finances in order, make sure you and your loved ones are out of the rain and restore your confidence. The only thing you need to focus on is to make sure you are going to be alright.


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By Susan July 28, 2011 11:11