Saturday, August 6, 2011

Ireland’s Public Debt – Again!

Yesterday’s statement from S&P outlining why they were maintaining Irish government bond’s BBB+ investment grade contained the following paragraph.

We expect Ireland's net general government debt burden will peak at about 110% of GDP in 2013, including NAMA's debt obligations, before falling to about 103% of GDP in 2015. Excluding NAMA obligations, we expect net debt to peak at around 97% of GDP in 2014.

How does this fit with other forecasts of Ireland’s public debt?

The first thing to note is that it is important to define what measure of public debt is being forecasted.  This site has focussed on forecasts of Ireland’s General Government Debt (GGD).

At the end of 2010 Ireland’s GGD was €148 billion.   I have previously forecast that this will be around €208 billion at the end of 2014.  The €60 billion increase comprised €50 billion for the cumulative deficits and borrowings of €10 billion to fund the €20 billion recapitalisation of the banks.  We now have two reasons to revise this estimate down.

  1. Reduced interest rate on EU loans from 6% to 4.5%
  2. Reduced bill from recapitalisation from €20 billion to €18 billion.

Although the full interest cost reductions have yet to be determined there will definitely be a cumulative gain of around €1 billion to the end of 2014.  If the reduced interest rate is applied to all EU loans the benefit could approach €3 billion. 

With a €2 billion saving on the bank recapitalisation, it is not unreasonable to now forecast that Ireland’s General Government Debt in 2014 will be around €205 billion. 

To calculate the debt/GDP ratio we need a forecast of Ireland 2014 nominal GDP.  In 2010 this was €156 billion.  The IMF projection is that Ireland’s nominal GDP will be €174 billion in 2014.  We do not know what figure S&P used in the denominator.

That would leave the ratio of GGD to GDP at 118%.  How does this compare with the S&P projection that, excluding NAMA, Ireland will have a “net debt” of 97% of GDP in 2014?

Although S&P do not detail how they reach a net debt figure there are a number of things we can subtract from the GGD to get a measure of net debt.  These include:

  1. Cash balances, of c. €16 billion at the end of 2010
  2. Remaining assets in the NPRF after recapitalisation, c. €5 billion
  3. Resale value of nationalised banks,  €unknown

If we subtract the known assets of €21 billion held by the state we get a net debt of €184 billion and a net debt ratio of 106%, still some way above the 97% forecast offered by S&P.

Our cash balances and NPRF assets will hopefully generate a positive return which would have increased the above values by the end of 2014.  There is also the possibility that S&P are subtracting the €3 billion of “contingent capital” that is being provided to the banks now but which is due to be returned to the State in 2014.   Including these, as well as guesstimating some value for the banks, it is not difficult to imagine that a net debt calculation showing 97% could be produced.

The problem with using net debt calculations is the differences that arise in choosing what elements to subtract to reach the appropriate net debt figure.  S&P may have been a little generous in the elements they included but suggesting a 97% net debt figure is not completely unrealistic.  In this context a net debt figure, including NAMA obligations, of 110% is not without some merit either.

Personally, I’d prefer to stick with a debt forecast of a measure that is clearly defined.  In that light a forecast of a 2014 GGD of €205 billion works best.  This would edge towards €200 billion if the expected interest savings on the full €45 billion of EU loans materialises.  Further details of this forecast can be found in this note which was written around the start of May. 

Calculations subtracting €16 billion of cash, €5 billion of NPRF assets, resale values of banks and €3 billion of contingent capital can be undertaken, but in the absence of a common net debt definition comparing across them is difficult.

Even with this forecast reduction in our GGD to around €205 billion we are still facing into a headwind, but at least now the wind speed has started to drop a knot or two.

1 comment:

  1. Do we ever resolve that debate as whether we should be using GDP or GNP as the denominator? :)