Fall in cost of borrowing a testament to NTMA's success

ANALYSIS:Substantial prefunding and the smaller size of the deficit have greatly eased NTMA's task, writes PAT McARDLE

WHEN THE National Treasury Management Agency was established in December 1990, Ireland’s debt was one of the highest in Europe, at about 90 per cent of GDP, and debt service interest absorbed more than a quarter of tax revenue.

By 2007, the gross debt/GDP ratio was 20 per cent, one of the lowest in the EU, and interest was only 3 per cent of the tax take.

The change since then has been equally dramatic. In 2009, debt interest accounted for 8 per cent of tax and the debt/GDP ratio was back at 65 percent.

Allowing for the recent budget and also for the further €7.5 billion cuts promised in future budgets, debt interest will rise to one-fifth on all taxes by 2013, still not quite as bad as in 1990.

The debt/GDP situation does not look too rosy either. The December budget projected the debt ratio at 84 per cent in 2012, following which it falls modestly.

Of course, this does not include anything for Nama, whose debt will be off the balance sheet. If we add it in, the ratio hits 114 per cent in 2012. Neither does it allow for balances in the National Pensions Reserve Fund. Deducting these brings the net debt ratio back to 100 per cent in 2012 and it falls below 90 per cent two years later.

In broad terms, the task facing the country and the NTMA is of a similar order of magnitude to that in 1990.

Of course, the NTMA does not decide any of this –that is the prerogative of Government. The NTMA’s task is to manage the national debt and execute the other functions entrusted to it as efficiently as possible.

Clearly, however, the size of the task is important and represented the biggest challenge faced by the agency last year.

In the event, it raised €35 billion of which €25 billion went to fund the 2009 exchequer borrowing requirement (EBR), €5 billion to refinance maturing debt, leaving €5 billion to prefund the 2010 EBR.

In addition, the NTMA has another €22 billion in surplus cash balances, carried over from 2008 when the going got rough and it began to take defensive action.

So we are not exactly short of cash.

We were in dire straits last February, when the spread over bonds (the additional interest we had to pay) widened to almost 3 per cent and institutional investors accounted for less than half of the funding done. Indeed, were it not for the uptake by Irish banks, the auctions would have failed.

So what did the NTMA do?

First, it got major assistance from the Government in the form of the April budget and from the Minister for Finance who went on various road shows around that time. He appears to have made a very favourable impression on foreign investors.

The NTMA followed up with a number of initiatives. They launched a new treasury bill programme in March for short-term funding purposes.

In July, they launched another programme in the US and in June they introduced a new monthly Prize Bonds draw worth €1 million.

They also took on three new primary dealers to help them tap a wider range of investors and they managed to extend the maturity of some debt out to 15 years – for the first time.

The latter is, perhaps, the best testimony to their success last year.

One concrete achievement was savings of €686 million on projected debt service costs. Half of this reflects the fall in the cost of borrowing as the year wore on. The NTMA take credit for the other half, which was due to “timing issues related to the cash accounting treatment of the payment of coupons on debt issued in 2009”.

The challenge facing the NTMA in 2010 is much reduced thanks to the substantial prefunding and also to the smaller size of the deficit. The projected EBR is €19 billion and maturing debt is only €1 billion, giving a total funding requirement of €20 billion, down from €30 billion last year.

Of course, this does not include anything to recapitalise the banks. Here, the options are greater than is generally realised.

First, the €7 billion in preference shares put in by the Government last year could be converted into equity. Then there is €15 billion in the pensions fund and the €22 billion surplus exchequer balances. It is not clear fresh borrowing will be required.

Moreover, the new Nama chief executive was upbeat as regards the task, saying that the estimates issued some months ago for haircuts and so on remain good.

Probably the best summary of the overall situation is provided by the Irish and Greek bond spreads over Germany. Our cost of borrowing is again below that of Greece – and our premium over Germany is heading towards half of what it was early last year.