European Commission warns of high risk posed by national debt

Ireland faces a “high” level of medium-term risk due to the elevated national debt, a new European Commission report warns.

Although the commission finds Ireland does not face debt sustainability risks within the next year, it says public debt remains a major source of vulnerability for the Irish economy.

Despite increased costs associated with the ageing population, the report also says Ireland’s relatively favourable budgetary position means there is “no significant sustainability risk” over the long run.

The commission’s “fiscal sustainability report” places Ireland alongside Britain, Belgium, Spain, France, Croatia, Italy, Portugal, Romania, Slovenia and Finland in a group of member states that face potential high medium-term risks.

The assessment, based on the last commission economic forecast for Ireland, assumes real gross domestic product growth of 6 per cent for 2015 and 4.5 per cent for 2016.

Public debt decline

Such figures, lower than latest Government estimates, would see Ireland’s public debt fall to 93.7 per cent of GDP in 2017 from 99.8 per cent in 2015.

This data, however, takes no account of plans for a stock market flotation of around 25 per cent of the nationalised AIB, the proceeds of which would be used to pay down debt.

“Overall, for Ireland no significant short-term risks of fiscal stress appear at the horizon, though some macro-financial variables (such as private sector credit flow, the share of non- performing loans and the nominal house price index) point to possible short-term challenges,” the report says.

“Risks appear to be high in the medium term from a debt sustainability analysis perspective due to the still high debt at the end of projections (2026) and the high sensitivity to possible shocks to nominal growth and interest rates.

“Jointly simulated shocks to growth, interest rates and the primary balance point to a probability close to 30 per cent of a debt ratio in 2020 greater than in 2015, which entails risks, given the high starting debt level.

“High medium-term risks emerge also from the analysis of the sustainability gap indicator . . . again due to the high initial debt-to-GDP ratio and the projected costs of ageing.”