Boom banishes the spectre of debt

Not long ago many commentators believed that the overall debt burden could pull the whole economy down. But next year Ireland will be one of the least indebted member-states in the EU with a sharply declining debt ratio.

On top of that, with interest rates set to fall as we enter the single currency, savings of up to £500 million a year are set to be made on interest repayments.

One issue certain to dominate many agendas is how these savings will be spent. The National Treasury Management Agency and the Department of Finance are likely to prefer them to be used to reduce the underlying debt capital or on capital infrastructural projects such as roads which will contribute to economic growth. But undoubtedly to the relief of the social partners, the Minister for Finance, Mr McCreevy, appears to have earmarked the savings for "social inclusion and taxation" measures.

However, it is important to remember that the actual level of debt here is still very high. The declining ratios have been achieved without actually paying off debt. Instead as the economy has grown strongly the proportion of debt relative to the size of the economy has fallen.

At the end of 1997 the national debt stood at £32.3 billion compared with a figure of £32.1 billion at the end of 1996. Much of the increase was due to the weakening of the pound which made it more expensive to borrow foreign currency.

This factor will become more marginal in future years as the NTMA re-denominates most foreign currency debt into euro debt. But the only way to make significant inroads into the amount owed is to start paying off some capital rather than simply the interest on it.

Mr McCreevy is insisting that he will do just that this year and that the Government's entire surplus - which could be as high as £1 billion - will go to paying off some of the debt. The State would have to do so for more than 30 years to clear the whole amount.

And interest bills are set to increase; this year the amount to be repaid is about £1.9 billion but it grows to £2.7 billion in 1999 and to £3.3 billion in 2000 as different loans come up for repayment.

To be able to meet these repayments as they fall due, the NTMA needs to be able to attract people to buy Irish-issued debt. Many domestic institutions have already indicated, according to Mr Somers, that they intend to diversify into more EU debt after next year.

This means that the agency will have a challenge to sell more debt to overseas fund managers, who will be attracted by the slightly higher levels of interest rates here.

According to Mr Somers the agency would like to see a 0.1 percentage point difference between our rates and those in Germany. But this is a very small margin and investors will want to be very sure of three things to be persuaded to buy our bonds rather than their German equivalents.

We will need to maintain our good credit ratings, make sure there is enough liquidity in the system and market Irish debt to overseas institutions, according to NTMA director Mr Paul Sullivan.

If this does not happen interest rates on government bonds would have to rise again to attract borrowers and the cost of funding the national debt would rise.

In May, Moody's upgraded Irish debt to an AAA, a move long sought by the NTMA. And the other international agency Standard and Poor's upgraded our foreign currency rating to AA+.

However, both these ratings are conditional on the general economic performance of the economy and crucially on how the agencies perceive we are running our fiscal, or tax and spending policy.

If there are any signs of the growth story unravelling or of persistent higher inflation then the agencies may look at a re-rating. That is something the NTMA will wish to avoid at all costs.

There is little it can do about liquidity and the Irish market will simply never be as big as the German market. However significant inroads have been made in simplifying trading mechanisms. And Mr Somers said he is optimistic that when interest rates fall - some time before the end of the year - activity in the market will pick up again.

The third factor will have to be a major marketing exercise abroad. Many of the larger US and Japanese institutions do not automatically consider buying Irish debt. Until recently many of the Irish stockbroking firms did a lot of this work, in a bid to win clients, but this is likely to fall off in future years as the returns fall and the NTMA itself may have to set out its own stall more often.