Debt? What Debt?

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With the Dail to debate a private members motion from Catherine Murphy, TD calling for support for a European Debt Conference, it is worth looking over Ireland’s debt numbers; especially as we will get a flood of claims from some quarters that our debt level is fine, its’ sustainable, we don’t need debt relief, etc. etc. etc.

The starting point in such debates is the question:  is Irish debt sustainable.  This can, however, descend into a black hole of formulae.  Simply put, just about any debt can be considered ‘sustainable’ if the debtor is willing to starve the kids and live under the railway bridge.  ‘Sustainable?  Sure, but there will be sacrifices’ (which, in Ireland are never inventoried).  If you believe this is an exaggeration, consider the EU elite’s attitude towards Greek debt levels.

Let’s go through some bald numbers.

Debt 1

Irish debt is among the highest in the 19 Eurozone countries.  Officially, it is at 110 percent of GDP; when measured against our fiscal capacity as suggested by the Fiscal Council, it rises to 122 percent.  We’re placed fourth though look out for Cyprus and Belgium in the next few years.

When we turn to what some call an ‘illegitimate’ debt – that private banking debt that we all ended up paying for – Ireland remains league leader.

Debt 2

While banking debt makes up a quarter of our GDP, in the Eurozone the total debt is less than 2 percent.  And for Ireland, this doesn’t count the nearly €20 billion taken from the National Pension Reserve Fund for recapitalisation – since this is categorised ‘investment’ and not debt.   Were it not for the official banking debt, our overall levels would be close to the average Eurozone level.

Of course, this data only goes so far.  There are a number of other factors that determine sustainability – the level of foreign borrowings, exports, current account surplus, high-tech employment and activity.  A high-income country can sustain a high debt level that a low-income country couldn’t.  But at the gross level, we can see that Ireland is a highly indebted country and, within that, carrying the highest level of illegitimate private banking debt.

Next is the issue of interest payments.  Interest payments measure the budgetary impact of the debt level on the economy.

Devt 3

Officially, we are in the top five but, in terms of fiscal capacity, we are third – even ahead of Greece which has benefitted from previous Troika agreements.   In 2014, some €7.4 billion was paid out in interest payments from Ireland.  Or put another way, if our interest payments level were at average Eurozone levels, we’d be paying €2.4 billion less in 2014.

So where does this leave Ireland, apart from being a highly indebted country paying out high levels of interest?

First, some commentators have pointed to the ‘rapidly’ falling levels of debt.  For instance, in 2013 the debt level from 123 percent to 110 percent last year, a significant fall.  So what’s the problem?  The problem is that this was largely a statistical and once-off exercise.    90 percent of this fall was due to a reclassification of IBRC debt and the raiding of our cash balances (cash in hand).  Without this, the debt would have exceeded 120 percent in 2013 and would still be above 100 percent by 2018.

Debt 4

Second, the Government is planning to balance the budget by 2018.  This will entail a primary surplus of nearly €9 billion.  This is the amount by which revenue exceeds expenditure.  Almost all of this will go on interest payments, with a small amount leftover to start paying down debt.  In these stakes, Ireland is once more at the higher end of the league.

We are up there with Italy, Greece and Cyprus in running up excess revenue in order to meet interest payments and reduce debt.

So let’s bottom-line this. We are highly indebted with high levels of interest payments.  The Government intends to run substantial surpluses to meet those interest payments.  At the same time, we are facing into a slew of problems – not least of which is a chronic investment crisis and a massive repair job to a social infrastructure which was pretty anaemic prior to the recession, never mind now.  A growing elderly demographic, household debt, continuing high levels of emigration and a deprivation rate of 30 percent:  and we intend to run up a surplus of nearly €9 billion in a few years; money that from an economic and social perspective is meaningless.

Or put another way – what could we didn’t run up that surplus, if we had some deal on debt and/or interest payments?  I suspect everyone could come up with a few good ideas.

So, yes, our debt is sustainable if we want to tolerate this situation.  We can starve the kids and live under the railway bridge.  This can be our ‘new normal’ where everything is just fine, just a little ‘tight’.

Or we can join with progressive forces (and at least one government but hopefully more by the middle of next year) throughout Europe in calling for a Debt Conference to see if we can all find a way out of what is a Eurozone crisis – but a crisis which impacts more on a handful of countries.  Of which we are one.


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