Thursday, February 12, 2015

National Debt Interest: What do we spend €7.5 billion on?

The December Exchequer Returns showed that €7,466 million of interest expenditure was incurred by the Exchequer in 2014.

2014 Non-Voted Current Expenditure

This is only what happens above the water.  Here is a breakdown of the interest costs by type of debt from a recent PQ (HT: Kevin).  The outstanding amounts for the end of the year are also shown on the right but it should be noted that the interest paid reflects the amounts owed throughout the year rather than just at the end.

National Debt Interest

The €7,466 million is actually €7,590 million of interest paid with €124 million of interest received set against it.

The largest individual item is the €4.1 billion paid out on Treasury Bonds.  Some of this goes to the nationalised banks (AIB and PTSB) so does not leave the State sector (broadly defined).  Some goes to the ECB and NCBs of the euro area as they purchased Irish  government bonds as part of the Securities Market Programme (SMP).  However, unlike with Greece this interest is not recycled back to Ireland.

It can be seen that €755 million was paid on the Floating Rate Bonds.  All of this is paid to the Central Bank of Ireland which will return most of it to the Exchequer as part of its surplus income.

The State-Savings Schemes run by the NTMA resulted in €394 million of interest expenditure.  This is an intra-country transfer as it is likely almost all of the money in these schemes comes from Irish households.

Just under €2.2 billion of interest was paid out on the €67.5 billion of loans taken out as part of the EU/IMF rescue programme.  Almost half of this interest was paid to the IMF.  It should be noted that the €13.5 billion outstanding amount of IMF loans at the end of the year reflects the repayment of €9 billion to the IMF in the middle of December.  Another €9 billion is due to be repaid in 2015 which will further reduce interest expenditure.

Around €0.4 billion in interest was paid on €18.5 billion of loans from the EFSF (the euro area rescue fund) at an interest rate of just over 2 per cent.  Greece has €140 billion of loans at a similar interest rate from the EFSF but doesn’t begin paying interest until 2023.  The interest due is rolled up into the overall capital amount.

[UPATE: A separate PQ shows the current interest rate applicable to the different loans drawn down under the EU/IMF programme. Again HT to Kevin.]

The interest burden has increased in recent years but is not unique in a historical context.

National Debt Interest 2

Interest exceeded 10 per cent on GNP in 1985 and the current peak (2013) was roughly at half that level, though double-digit inflation did aid the reduction in the 1980s as lower interest rates and rapid growth did in the 1990s. 

[It should also be noted that the above is based on two different GNP series as GNP was measured differently prior to 1995 and does not reflect current national accounts methodology (such as FISIM and the capitalisation of R&D).  Still the overall pattern will be pretty much as shown.]

The current level of debt interest is high but it was expected to be higher.  Here is a figure from the National Recovery Plan published in November 2010.

NRP Interest

I’m not sure that drawing a figure for two numbers was entirely necessary  but we get the picture.  National debt interest expenditure was expected to be €8.4 billion in 2014 and that was under some rather benign assumptions in the four-year plan.  As we have seen it turned out be almost a billion less.  Of course, the interest savings weren’t banked; they were used to run larger primary deficits.

[Yes, this is not a like-for-like comparison – the Promissory Notes and all that.  Let’s not go there.  If we got into it we’d probably find that interest was about €1.5 billion lower than projected.  The PNs didn’t generate an interest charge on the Exchequer while the FRNs that replaced them do yadda, yadda, yadda.]

The reason for the lower interest cost is straightforward - lower interest rates rather than less debt.  Can the interest bill be reduced further? Probably.  A cessation of borrowing would help but that is another two or three years away at best (is that an election I see in the distance?).  Debt transactions by the NTMA will help such as the early repayment of more of the IMF loans (it could be viewed as 7-year debt at four per cent being replaced by 30-year debt at two per cent).

Towards the end of the EU/IMF programme the NTMA did a lot of work to buy back debt and extend maturities away from the immediate post-programme period.  This made for a relatively smooth exit from the programme but means we are not in a position to make use of the extremely low interest rate environment that exists now.  Bonds maturing over the next few years are:

  • 2015: €2,261m
  • 2016: €8,157m
  • 2017: €6,416m
  • 2018: €9,284m
  • 2019: €14,542m
  • 2020: €20,892m

There is “only” €10 billion between this year and next.  Redemptions do ramp up in 2018 and the NTMA will be advance planning for that but it would actually be better if interest rates started to rise as that would be indicative of some sort of economic recovery and, heaven forbid, even a bit of inflation.  This would mean they may be no significant increase in real interest rates.  There are also banking assets to be sold but most of that money comes under the remit of the NPRF (now ISIF) though whether the proceeds will actually go there remains to be seen.

We could look to earn more interest from the cash reserves that the NTMA are holding.  This should be possible as the interest received is pitiful compared to the amounts held but it is likely there are rules on what can be done with this money – at least one presumes there are such rules!

The forthcoming QE programme from the ECB will likely see the Central Bank of Ireland hold even more Irish government bonds but it is not clear whether that will result in much of a surplus to recycle back to the Exchequer. This is because the CB will purchase the bonds in secondary markets at the current abnormally low yields.  Still even the current 1.25 per cent on ten-year bonds will help.

Overall it looks like debt expenditure in the Exchequer Account will be stable at around €7 billion over the next few years (with a portion of that going to state-owned or state-controlled entities).  This is a massive increase from the  €1.9 billion of debt interest expenditure incurred in 2006 but it looks like it can fall a proportion on national income over the coming years.

2 comments:

  1. Hi Seamus, thanks for the informative post, just a couple of minor points on the National Debt table.

    The figures in bold don’t quite add up to €197,060 million, and the reason is the €530 million EFSF prepaid margin. This has yet to be received by the exchequer, so while it is listed in the Maturity Profile, the actual balance for the National Debt is €17,881 million. See the footnote on the Debt Profile page:

    https://www.ntma.ie/business-areas/funding-and-debt-management/debt-profile/

    In the assets section, the €3,656 million is comprised of HFA Guaranteed Notes and CSA Collateral Funding (rather than Non-Irish Treasury Bills, which are included in the €7,014 million figure). The breakdown of assets is shown in the Funding of Exchequer Balance:

    https://www.ntma.ie/news/funding-of-exchequer-balance-january-2015/

    Cheers,
    -Kevin (not HT Kevin!)

    ReplyDelete
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