Wednesday, November 24, 2010


Some sums by Brian Lucey on last night’s Tonight with Vincent Browne seemed designed to spook people.  You can watch the show here.  But don’t.  The question Prof Lucey was asked was “put together the total state debt after this EU bailout”.  This table summarises his answer.

Lucey Sums

During this segment I heard the word “trillion” used in the Irish context for the first time. (How big is a trillion?).  Further scaremongering ensued when the calculators hummed into life and suggested that the annual interest bill on this debt would be somewhere of the order of €14 billion.  That is more than we collect in Income Tax in a year.  How do the sums stack up?

The first item is correct. Per the NTMA we have €89.7 billion in outstanding government bonds.

The way I see it, the second item is incorrect.  This €20 billion is money the NTMA has borrowed therefore should be part of the €90 billion in the first item.  Thus it should be not added in this calculation.  In fact this €20 billion is an asset we have on deposit somewhere.  Not only should it not be added, it is possible it should be subtracted! Anyway even if this €20 billion is in addition to the €90 billion national debt figure, it must be netted against the asset of the €20 billion on deposit somewhere. 

Of course, this isn’t the first time Prof. Lucey has struggled with the difference between assets and liabilities.  See here.  “Anglo can be wound up cheaply -- here's how. Sell the €28bn deposit book.”  Discussion here.

The third item is also incorrect.  First of all, we have  €16 billion in bonds maturing in the period 2011-2013 so I cannot see where the €23 billion number comes from.  See the document from the NTMA linked above.  But redeeming bonds does not add to our debt.  We have to borrow the money, but we use it to pay back the maturing bonds.  The net debt position at the end of the process is exactly the same.

Item four on the ongoing funds required to recapitalise the banks is still a shot in the dark and it is difficult to argue with any quoted figure.  This may or may not be true.

Item number five looks ok.  We have a €19 billion annual fiscal deficit.  Assuming an average of €15 billion per annum for the next three years seems plausible and will add €45 billion to the national debt.  Some of this will also be funded by the  €20 billion on deposit we have because of item two above.

Items six and seven are debt but it is a bit of a stretch to include them in the same category in a question on “state debt”.  These funds (and it is difficult to verify the actual amounts) are being provided to Irish banks by the ECB and ICB to keep the banks open.  In “normal” times this money would be sourced from inter-bank markets.  The problem is that Irish banks do not have access to these funds in current circumstances. 

This money is not going into a black hole to fund the recapitalisation of the banks.  This money is used to finance the assets the bank have – interest earning loans to borrowers.  The interest cost of this ECB and ICB money will be subtracted from the profits of the banks.  Remember on a day-to-day or operating basis Irish banks are hugely profitable.   The huge hole is in their balance sheets and this money is not going to fill that hole.

Also, this money is just replacing debt that was already on the banks books.  Previously the banks had received the money from the inter-bank market and large corporate deposits.  They had to pay interest on this money.  Now the inter-bank funds and withdrawn deposits have been replaced by funds from the ECB and ICB on which the banks again have to pay interest.  These liabilities have been on the bank’s books the whole time.  Why is Brian Lucey getting so excited about this money now just because they owe it to the ECB and not the inter-bank market and corporate deposit holders as was previously the case?

Finally, while we do own the banks, we also own Bord Gais, the ESB, the DAA and a raft of other state companies.  Why didn’t our hero include the substantial debts of all these companies in his measure of state debt?  Not enough time?  He had guessed on lots of other things why not guess on this.

We are in a very serious position, but this ridiculous scaremongering helps no one.  The numbers are immense but makey-uppy sums to get to €343 billion are offside, €200 billion is scary enough.

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