What’s at Stake

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The Dail Technical Group is putting forward a private members’ motion calling on the Government to re-enter negotiations with the ECB with a view to writing off the Anglo-Irish bank debt.  Yes, the bank debt is still with us despite the binning of the Promissory Note; it is a debt held by the Central Bank in what can now be called Anglo-Irish bonds.  Same debt, different repayment schedule, same drain on the productive economy and same burden on the Irish people.

I don’t intend to repeat the arguments regarding the political illegitimacy of this debt, nor the means by which we can expunge this debt.  I want to focus on the level of debt – of which the Anglo-Irish bonds are a significant contributor.  For the Government is having to take steps to drive down the debt by raiding its savings – because economic growth is still too sluggish to reduce the debt burden.

Remember the claims earlier in the crisis – that when Government debt reaches 90 percent of GDP we would be a in real danger zone?  As debt mounted, the new danger zone threshold became 100 percent.  Then it became 120 percent, after even more debt was accumulated.  In Ireland all these thresholds have been crashed.

GGD1

The debt rose to 117 percent last year (rising nearly five-fold in nearly five years).  The Government’s projections (in grey) show the debt peaking at 124 percent this year and falling to a little under 115 percent in 2016.  We crashed by 120 percent danger zone but, fortunately, the debt is starting to fall as the economy recovers and the austerity succeeds in getting our deficit under control.  Correct?  Not quite.  But before we discuss this  let’s look at two other measurements which show that the debt is actually much higher and the burden much heavier.

The ESRI Measurement

In their last quarterly review the ESRI put much emphasis on GNP as the defining statistic for the Irish economy.

 ‘The best indicator of what is currently happening in the economy is the growth rate of GNP . . .  it provides a much clearer picture of the change in the economic welfare of people living in Ireland.’

Ok, let’s assume this is true.  So what does the debt look like when measured against this ‘clearer picture’ of people’s economic welfare?

GGD2

When measured against GNP, our debt is through the roof.  Interestingly, the debt still has yet to stabilise completely even by 2016.  Even more interesting, Greek debt is projected to be 173 percent of GNI (a similar measurement to GNP) in 2015 – so were’ not that far off from the worst performing EU country.

I am sure that most commentators would agree that 150 percent debt is at, or beyond, the unsustainability benchmark.  And that’s where Ireland is if we use GNP.

The Fiscal Council

The Fiscal Council attempted to define a new measurement for the economy’s capacity – an adjusted GDP figure, a hybrid of GNP and GDP.  This is a useful measurement and, despite problems, is probably closer to the reality.  So what does the debt look like when this benchmark is used?

GGD3

While not as bad as the GNP measurement, we find that debt is phenomenally high – peaking this year at 140 percent of the Fiscal Council’s adjusted GDP before starting to decline.  But even in 2016 we’re still above 130 percent.

Is this sustainable?

The Government’s Raid on Savings

The debt levels, when measured against benchmarks that try to assess the real capacity of the economy, is extra-ordinarily high – much higher than when we use GDP.  But GDP is the measurement we will be judged by, even if the economy groans under a debt burden that is much higher.

The Government is understandably keen to show everyone that the economy is generating sufficient growth to bring debt levels down.  However, is this the case?  In the first chart, we saw debt peaking this year and starting to fall next year.  But there is a bit of massaging here.

The Government is using a large portion of its cash balances to pay down the debt (cash balances , when borrowed, are counted as part of gross debt).  The economy itself is still not generating enough income to bring down debt levels.  We can see this by removing the cash balance element from the debt figures (essentially, this measures our debt by the actual amount we borrow in a year – the Exchequer Borrowing Requirement).

GGD4

When we measure the economy’s growth as a means of reducing the debt, it will still rise in 2014 and the fall is significantly less than the official figures.  Why the difference?  Because the Government is using its ‘savings’ (cash balance) to drive down the debt to make up for sluggish economic growth.

This is particularly relevant as the Government is claiming that they don’t need a precautionary credit line because they have €20 billion in the kitty.  However, the Government intends to use nearly €11 billion next year to pay down the debt – so that money is not available to it if things go pear shape and we can’t borrow at sustainable rates in the market.

All this might seem a bit wonkish and stat-picking.  However, there are some real considerations:

  • Our debt levels are high and the burden is masked by using GDP as the benchmark
  • When measurements of economic capacity (GNP or the Fiscal Council’s adjusted GDP) are used, our debt levels are much much higher
  • Projected economic growth is still so sluggish that the Government is having to dip into its savings to drive down the headline debt levels
  • What happens if economic growth is even lower?

One can argue that all this is sustainable.  I suspect it is.  Sustainability is a political choice.  If you hollow out your productive economy, drive down incomes, wreck public services – all to ensure that you pay off your debt, it will be sustainable; all the more so if you convince people there is no alternative.

But if the Anglo-Irish debt was expunged we would be in a better place.  Our debt levels, while still high, would be less of a burden on the economy.  We would be giving ourselves a better chance of extricating ourselves from high debt levels.  We wouldn’t need more doses of austerity.  Our economy would be better.  All of us would be better.

That’s what’s at stake with the Private Members motion on Anglo-Irish debt.  Not a panacea, just an opportunity to give ourselves a break.

Boy, do we need it.

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