John FitzGerald: NTMA actions a lesson in facing economic crises

Borrowing strategy of agency before and after bailout gave Ireland a valuable cushion

 Conor O’Kelly, CEO of the National Treasury Management Agency: Ireland’s success in weathering the storm  owes a significant amount to the successful management of the crisis by the NTMA. Photograph: Sara Freund / The Irish Times

Conor O’Kelly, CEO of the National Treasury Management Agency: Ireland’s success in weathering the storm owes a significant amount to the successful management of the crisis by the NTMA. Photograph: Sara Freund / The Irish Times

 

One of the major legacies of the financial crisis has been a massive build-up of government debt, as well as a crisis in private debt. At the height of the recession, some commentators argued that Ireland’s debt burden would spiral out of control and overwhelm the economy. However, from the vantage point of 2016, it is clear that these fears were, thankfully, unwarranted.

The recovery in GDP has enabled the debt/GDP ratio to come down from a peak of 120 per cent to under 100 per cent last year. The return to growth reflects a payoff for the sacrifices made in the 2009-2013 period, an underlying vibrant real economy, and some lucky breaks.

Ireland’s success in weathering the storm also owes a significant amount to the successful management of the crisis by the National Treasury Management Agency (NTMA). From the beginning of 2008, before the crisis truly erupted, the NTMA borrowed much larger sums of money than were needed to fund even the sky-rocketing government borrowing requirement.

In 2008 the NTMA borrowed an extra 10 per cent of GDP, or around €20 billion more than the government deficit. This borrowing, before the magnitude of the crisis was fully apparent to the financial markets, had the advantage that the NTMA was able to achieve relatively attractive interest rates.

While some of the 2008 borrowing was short-term, the NTMA continued to build up its war chest in 2009, and to convert short-term into long-term debt. By the end of 2009, Ireland held cash amounting to more than 18 per cent of GDP.

At the time, it looked as if this cushion would allow the government to ignore any disturbances in financial markets. However, the scale of the problems in the banking system, which became apparent over the course of 2010, absorbed all of the buffer available to the State. As a consequence, the government was forced to seek the assistance of the troika in the bailout in December 2010.

Large amounts of cash

Even after the bailout, which promised adequate funding for Ireland for the three subsequent years, the NTMA continued to hold large amounts of cash. These holdings probably cost about 0.5 per cent of GDP in additional interest a year. However, having this cushion ensured that the government would have had significant bargaining power if, as in Greece, there had been rows with the troika about the bailout terms. In the event, this precaution proved unnecessary.

The availability of this large cash buffer greatly facilitated the return to normal funding when the bailout ended. The financial markets knew that Ireland did not have to borrow for at least a year after exiting the bailout, which strengthened the government’s position. The result was a very smooth return to normal market funding.

In addition to the availability of funding through the bailout, EU support was, after some renegotiation, supplied on favourable terms. While the IMF funding was expensive, the terms allowed Ireland to repay it early.

Since the exit from the bailout, Ireland has been greatly assisted by the policies of the ECB, which have driven the cost of borrowing to unheard-of lows. This policy change was not anticipated at the height of the crisis, and is very fortunate for countries, such as Ireland, with large debts.

This means that the bonds being repaid this year can be funded through new borrowing at exceptionally low interest rates. The effect of this piece of good fortune will be to reduce interest payments by around €300 million this year, and again next year.

The result of these positive developments is that, while the debt-to-GDP ratio was just under 100 per cent last year, national debt interest accounted for only 3.1 per cent of GDP. In the previous economic crisis in the 1980s, debt interest payments peaked at 9 per cent of GDP.

Thus the burden of the large debt on the standard of living of everyone in Ireland is actually very low, and likely to fall further in the next two years. The low interest rates are also benefiting countries such as Portugal and Spain, making the fallout from this financial crisis and the build-up of debt very different from that of previous crises.

Finally, the successful management by the NTMA offers some lessons for countries facing similar crises: it is better to borrow early, while you still can, and to hold significant reserves of cash. Such a policy strengthens a country’s bargaining power on financial markets.