Thursday, November 10, 2011

The deficit and “the banks”

The Medium Term Fiscal Statement released last Friday projects that the general government deficit in 2012 will be €13.6 billion or 8.6% of GDP.  This is the number we have to reduce to less than 3% of GDP by 2015, which is what measures to be introduced over the next few Budgets will be targeting.

The simple question here is: how much of the €13.6 billion deficit is due to the banks?

So far we have poured about €62.5 billion into AIB, BOI, EBS, PTSB, Anglo and INBS and all of this has been accounted for in the general government deficits of the last three years.  No further payments are planned so there are no direct payments to the banks in the €13.6 billion deficit for 2012.

What about providing this €62.5 billion?  Surely there are huge interest costs associated with providing this money to the banks.

Of this money €17 billion came from the destruction of the savings we had built up in the National Pension Reserve Fund.  This money was not borrowed so there are no interest costs.  There is the loss of income that this money could have earned but this loss has no bearing on the general government balance.

Of the remaining €45.5 billion almost two-thirds is accounted for by the Promissory Notes given to Anglo and INBS in 2010.  This €30.6 billion was included in full in the €49 billion general government deficit in 2010 and due to some complications in their construction there will be no interest paid on these notes in 2012. 

In 2011, a cash payment of €3.1 billion was made on the Promissory Notes.  This will not affect the debt as the €3.1 billion simply changes from being a Promissory Note debt to a cash debt.  There is now around €28 billion of Promissory Notes outstanding but this will have no impact on the €13.6 billion general government deficit for 2012.

That means we are down to the final €18 billion.  This is split between €11 billion paid from the Exchequer and €7 billion taken as part of the EU/IMF programme.  The money from the Exchequer includes €4 billion given to Anglo in 2009 and €3 billion paid into the NPRF in the same year to help fund the initial recapitalisation of AIB and BOI.  It also includes the €3 billion payment made on the Promissory Notes this year.  It is safe to assume that all of this money was borrowed (or at least increased our borrowing by the same total which amounts to the same thing).

The €7 billion from the EU/IMF was used to fund the State’s  €17 billion contribution to the  €24 billion recapitalisation of the banks this year.  The other €7 billion came from haircuts to subordinated bondholders, some minor asset disposals and some private sector investment in BOI.

We will assume that the average interest rate on this €18 billion is around 4.5%.  At this interest rate, borrowings of €18 billion would require an annual interest payment of around €800 million.  This interest cost does form part of the general government balance for 2012.

If we do a simple counterfactual and magic away the €62.5 billion we have pumped into the banks, the projected deficit for 2012 would fall from €13.6 billion to €12.8 billion or 8.0% of GDP.  Eliminating the effect of the bank payments would knock 5% off the deficit; 95% of next year’s deficit is not related to the bank payments.

There are many claims that the expenditure cuts and tax increases are being introduced to “bail out the banks”, “repay bondholders” and the like.  The changes are being introduced to bring about the necessary reduction in the budget deficit.  There may be disagreements about the make-up of the changes but 95% of the problem there are trying to address is not as a result of the money we have handed over to the banks.


  1. The 'bank' €62.5 billion will eventually have to be serviced, correct not this year as we are on a payment holiday until 2013... Rolling up interest! TINSTAFFL
    At this point we will have an effectual interest of circa 10% on the €31 billion in promissory notes money and unless we can refinance in 2014 it won’t be pretty.
    The current strategy being followed is for EFSF fund to advance us this €31 billion over say 20 or 30 years at 3/4% to clear the promissory notes in cash.
    While technically the banks are not a drain on us fiscally this year but just because we can’t see the cost doesn’t mean it’s not there.
    We are just being whipped into shape so we can shoulder the huge burden that’s coming.

  2. Hi Anonymous,

    Yes, this is just an analysis of the 2012 deficit and from 2014 there will be substantial interest payable on the Promissory Notes.

    This will be about 8% on the €22.5 billion of Promissory Notes that will be outstanding at that point. The 2014 interest bill on the Promissory Notes will be €1.8 billion.

    However, it is important to realise what happens to this interest expenditure. It is not paid to a third party. The €1.8 billion of interest is paid to IBRC which is fully state owned. The IBRC then uses this to pay interest to the Central Bank of Ireland for the €45 billion of emergency funding it is accessing.

    The interest becomes a surplus for the CBoI which will return it to the Exchequer in its annual return. I'm not saying that all of the interest will travel the full circle but there will be very little interest payments outside that circle.

    The IBRC has liabilities of around €55 billion and €45 billion of that is to the Central Bank. If the interest does not make it around the circle it will be used to repay the liabilities of the 'bank' which in the main are to the Central Bank of Ireland.

    Restructuring the Promissory Notes is high up on the agenda at the moment but unless the capital amount of €30.6 billion is changed I'm not sure that we can save too much money.

    A lower interest rate means that we pay less interest to Anglo. This means that Anglo has less interest to pass on to the Central Bank and will have less money to return when it is finally wound down. As we are paying the interest to ourselves we cannot really save if the interest rate on the Promissory Notes is reduced. It would reduce the immediate funding requirements of the Exchequer a small bit which would be useful in the current environment. There would also be some minor benefits if the term of the Promissory Notes was extended and the annual payment was reduced.

    The cost of the IBRC is unknown but it is some fixed value. Restructuring the Promissory Notes isn't going to increase or decrease that. I think we should try to lower the interest rate and extend the term but this should not be viewed as saving money. All we will be doing is easing the funding needs of the Promissory Notes in the medium term.

    Being able to get the money at 3% from the EFSF to make the annual payments. This interest will leave the country so we should br trying to get the annual payment made as small as possible - i.e. stretch out the €30.6 billion of capital payments over a much longer term.

    The Promissory Notes are a mess but it is repaying the €30.6 billion of capital that will impose a burden on us, not the interest payments made to ourselves.

  3. Seamus, found you on a link from Boards .ie
    I have been in a vacuum re info on the bank/national debt stuff.
    your reply to Anonymous is clear and readable.

    Thanks for that, Johnny