ESRI says debt crisis to be less severe


Ireland's public debt crisis will be less severe than previously estimated by the Government, and gross debt will peak one year earlier than expected, according to a new article by economists at the Economic and Social Research Institute (ESRI).

The current programme of cuts will be sufficient to almost eliminate the primary deficit – Ireland’s borrowing requirement minus its debt interest repayments – by 2013, according to John FitzGerald and Ide Kearney of the ESRI.

In their article they set out how the combination of the downward revision of interest rates on Ireland’s bailout debt and a repayment of €3 billion of “excess” capital from the banks to the State by 2014 will ease the debt burden, resulting in Ireland’s borrowing requirement in 2015 winding up “significantly lower” than the previous official estimates.

The article sets out the numbers on Ireland’s path out of its debt, rejecting the suggestion that it is an unsustainable burden.

Gross debt as a percentage of gross domestic product (GDP) will peak in 2012 at 113 per cent and will fall back to 106 per cent by the end of 2015, the article estimates.

This contrasts with estimates earlier in the year by the Department of Finance, the EU and the IMF that this ratio would peak in 2013 at between 118 per cent and 121 per cent of GDP.

Meanwhile, the net debt to GDP ratio will peak at around 102 per cent in 2013. This is lower than the peak net debt/GDP ratio experienced during Ireland’s last major fiscal crisis in 1987.

According to the authors, Ireland’s primary balance will move into surplus in 2014, after reducing sharply in 2013, and this will be enough to render the debt “stable”.

However, they also add that the sensitivity of its forecasts to higher interest rates or lower growth rates “points to the importance of reducing the primary deficit as planned over the coming years” via the agreed package of cuts.

The article assumes that some €3 billion of the €5.3 billion in contingent capital injected into the banks this year will be returned to the State by 2014. It uses the Department of Finance’s economic growth assumptions, and also takes a weighted average interest rate on EU and IMF borrowing of 4.2 per cent and makes a “conservative” assumption that the rate on new borrowing after 2014 will be 6 per cent.

The ESRI authors highlight the need for the National Treasury Management Agency to plan a return to financial markets in 2013 to fund substantial debt repayments in 2014. “But once the markets see that really all the money Ireland needs from 2014 onwards is just to roll-over debt, confidence in Ireland will improve,” Prof FitzGerald said.

“There may well be further good news for the banks,” he added, citing recent comments by Anglo Irish Bank chief executive Mike Aynsley that the final cost of bailing out the lender would be lower than expected earlier in the year. “If it had been the other way round it would have been the headline in the Financial Times and the Wall Street Journal .”

The article, Irish Government Debt and Implied Debt Dynamics: 2011-2015, is published on the ESRI’s website today.