State interest repayments to soar

The cost of repaying interest on Irish national debt will rise from 3.8 per cent of tax revenues in 2008 to 18.7 per cent in 2013, according to the State’s debt manager, the National Treasury Management Agency (NTMA).

In its annual report for 2008, the NTMA said the sharp increase in borrowing requirements is due to the deficit in the Government finance. It says while the burden of interest repayments will increase “it will be no greater than the levels experienced in the mid-1990s”.

So far this year the NTMA has raised €22.7 billion from the bond markets out of total borrowing requirement for the State of €25 billion. For further bond auctions are planning between now and November.

The NTMA said it had built up end-year Exchequer balances to €21.4 billion, ensuring ample liquidity for early 2009. Exchequer cash balances currently stand at around €25 billion.

Chief executive of the NTMA, Dr Michael Somers said the market sentiment had improved significantly in recent months and that there was increased demand for Irish Government debt.

"This week alone we had an auction of bonds for €1 billion we had cover for somewhere between €3 and €4 million demanded and the yields that we paid were significantly below what we had been paying earlier in the year,” he said on RTE radio this afternoon.

Mr Somers said there had never been any question that the State would not repay what was borrowed. Part of the reason for the change in sentiment was the fact that the NTMA has kept a “huge mountain” of €25 billion in cash available meaning it can easily meet any repayment demands.

Mr Somers added that he was “all in favour” of the proposed National Asset Management Agency (Nama).

A second factor was that even now, Ireland’s debt to GDP ration was relatively low relative to other euro member states.

Minister for Finance Brian Lenihan said he was pleased that the interest rate premium paid on Irish debt was falling as "investors take a more realistic view of Ireland's position". Despite this, the Minister said it was "vitally important" that the country's debt levels were kept under control as much as possible.

He said substantial, as yet unquantified, amounts of borrowing would be required for the Nama although he said some of the assets acquired by the agency would provide income streams that would offset debt servicing costs.

At the end of last year, 82 per cent of Government debt was held by international investors.

The NTMA said it had used the short-term debt markets towards the end of 2008 to build up its cash balances that had provided the agency with more flexibility with regard to entering the debt markets this year.

The NTMA said the national debt had increased from €37.6 billion at the end of 2007 to €50.8 billion at the end of last year, a debt ratio to gross domestic product ratio of 43.2 per cent, below the euro area average of 69.3 per cent.

Ireland’s debt to gross domestic product ratio is expected to rise to 73 per cent in 2010 although, according to the NTMA, it will remain below the euro area average of 83.8 per cent.

It notes that these assumptions “do not include any adjustment in respect of debt issued in connection with the proposed National Asset Management Agency”.

However, it adds that it is possible that support to financial decisions during the crisis may be classified as being outside the Government sector and its liabilities “off balance sheet”.

It expects Nama to pay for the impaired loans it will remove from the balance sheets of Irish banks by issuing government securities directly to the banks or by securities issued by Nama and guaranteed by the Minister for Finance.

“The objective is to enable the supply of credit to the economy to resume; this will be done by transferring certain impaired assets from the financial institutions to Nama in order to clean up the banks' balance sheets,” the NTMA said today.

So far this year three credit ratings agencies have reduced Ireland’s long term debt rating – which can determine the interest rate the State must pay on its borrowings – by one level, while Standard and Poor’s has reduced it by two levels.

All the ratings agencies have a “negative” outlook on the long-term rating.

The National Pensions Reserve Fund, designed to pay for welfare and pension costs from 2025 onward and managed by the NTMA, increased in value by the end of June to €19.4 billion from €16.1 billion at the end of 2008 after a frontloading of exchequer contributions for 2009 and 2010.

In 2008 the investment return was -30.4 per cent.

The Government has invested a total €7 billion from the pension fund to recapitalise AIB and Bank of Ireland, giving it 25 per cent stakes via preference shares.

Among the NTMA’s other activities last year was managing the balance in the exchequer account at the Central Bank which had a turnover of €310 billion.

Through the State Claims Agency, the NTMA manages personal property damage and clinical claims brought against certain State agencies.

At end-June 2009, there were 4,140 claims outstanding with potential liabilities of €658 million, the vast majority of which were related to the medical sector.

It is thought that the NTMA may take control of Ireland's top 50 property developers who have loans of approximately €30billion before the end of the year.