The NTMA’s New Pitch: The Recession Diaries – October 21st

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Such is the success of the National Treasury Management Agency, it has created a new economic and fiscal pitch for us – one that progressives should now seriously consider playing on. I won’t go over the tedious and ill-founded arguments – that Ireland’s fiscal plight is such that the international markets won’t continue lending to us. I don’t have to. The NTMA has settled that argument, if not once and for all, then certainly for the foreseeable future.

In the first week of October the NTMA successfully launched a 15-year bond which raised €7 billion. There are a number of noteworthy things about this:

First, they received €14 billion in bids. This showed considerable interest market appetite for Government debt. In fact, this was the largest bid for any bond in the Eurozone this year.

Second, over 90 percent of the investors were foreign – so this wasn’t a case of domestic banks returning the Government a favour.

Third, no one can question (at least in the international markets) Ireland’s ability to repay its debt. If there was any doubt, no one would invest in a 15-year bond.

So on the specific issue of Ireland’s ‘capacity to borrow’, which is different from the issue of how much we should borrow, there is no question: we have that capacity. Everytime the NTMA throws its net into the bond pond, it pulls out a lot of fish.

So what does this mean in fiscal terms going forward? It changes the situation substantially. Such is the scale of the NTMA’s pre-borrowing (borrowing, not for current, but for future needs) that by year’s end, they will have around €30 billion in ‘free cash balances’ – that is, the Irish Government will have access to €30 billion already borrowed.

What’s the purpose of having all this money sloshing about in a Central Bank account? When this strategy was published – just after the April Budget projections – the NTMA expected that its cash balances would be €20 billion (or 12 percent of GDP) in 2010. In the subsequent three years, part of the borrowing requirement would be funded, not by going to the international markets, but by drawing down on the reserve. This was the projected amount of ‘draw-down’:

  • 2011: 2 percent (€3.5 billion) leaving a cash balance of 10 percent
  • 2012: 3 percent (€5.5 billion) leaving a cash balance of 7 percent
  • 2013: 3 percent (nearly €6 billion) leaving a cash balance of 4 percent

In these three years, nearly €15 billion would be drawn down – reducing the NTMA’s cash balance of €20 billion in 2010 to approximately €8 billion by 2013 (this would involve some topping up of the cash balance during those three years).

This, of course, was based on April projections. Already, under Fianna Fail’s woeful fiscal mismanagement, this has gone awry. Instead of annual deficits of 10.75 percent this year and next, we are looking at deficit of 13 percent for both years – with the risk for next year being on the downside. Therefore, we may need that extra padding the NTMA has provided. However, let’s just keep to the April projections for illustrative purposes.

Now, instead of having a cash balance of 12 percent of GDP, we have a cash balance of over 18 percent. If the drawdown schedule remains the same as above, by 2013 we’d still have a cash balance of 10 percent (not as the current strategy has it– at 4 percent).

In other words we’d have €10 billion more than planned for.

This is the new €10 billion pitch for us to play on.

This is the pitch from which a new fiscal policy could be launched – a policy that seeks to drive growth, not deflation; that seeks to invest in the economy to grow it, not depress it. This fiscal policy, in turn, would drive up tax revenue (through increased employment, aggregate wages, consumption, and investment) and, as a consequence, reduce demand on social welfare payments and social services – thus driving down the deficit.

And all this would be financed – not by deflationary spending cuts or new borrowing; it would be financed by money we have already borrowed. We’d be putting that additional cash that the NTMA has sourced to work.

It’s too early to say how much of that €10 billion we could prudently access – much will depend on the Government’s new projections in the upcoming budget (will they continue to hold to the 2013 target date for Maastricht compliance? Will they accept reality and adopt David Begg’s suggestion?).

But the NTMA has given us considerable fiscal flexibility. It would be a shame to squander that opportunity by continuing failed fiscal policies.

The NTMA has built a new pitch for us to play on. Let’s put on our jerseys and go have fun.

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