The NTMA chief explained to TDs where the State's national debt is heading, writes COLM KEENA
THE EXTENT to which the crisis in the public finances is greater than the crisis with the banks was illustrated by figures disclosed at yesterday’s meeting of the Dáil Committee on Public Accounts (PAC).
As explained at the outset by the vice-chairman of the committee, Darragh O’Brien, of Fianna Fáil, the PAC is to call the secretary general of the Department of Finance and the Financial Regulator to its series of meetings on banking matters.
Yesterday it was the turn of the National Treasury Management Agency (NTMA), which manages the national debt. A lot of the questions put to NTMA chief executive John Corrigan had to do with the banks but the biggest figures were to do with the public finance deficit.
The national debt is forecast to be €94 billion by the end of this year, and €112 billion by the end of 2011. Total debt servicing costs this year will be approximately €5 billion, and €6.5 billion next year.
The costs are made up of interest and other charges. This year the interest payments will be equal to 14 per cent of all tax revenue and the expectation is that by 2014 interest as a percentage of tax revenues will stabilise at around 20 per cent.
Questioned by Pádraig McCormack of Fine Gael, Corrigan noted that the debt in 2005 was €38.2 billion. As Corrigan put it: “If you are borrowing €20 billion a year it mounts up pretty quickly . . . The main reason is the exchequer borrowing requirement.”
The banks’ effect on the national debt arises from the €4 billion already given to Anglo Irish Bank, the further €18.5 billion that may go to that bank, and €2.7 billion for Irish Nationwide.
The latter two figures are being given by way of promissory notes. The money will be drawn down over the coming years, but the amounts will be added upfront to the national debt.
The €7 billion invested in AIB and the Bank of Ireland came from the National Pension Reserves Fund. It bought preference shares in the banks that carry interest of 8 per cent per year. The investment does not affect the national debt.
The 8 per cent compares with the price being paid for the €1 billion to €1.5 billion the NTMA raises each month by way of bond auctions. It held an auction on Wednesday where the price it paid was 1.58 per cent more than what Germany would pay (the spread over Germany).
“There has been a dramatic improvement in the spread,” said Corrigan. The lower spread means Ireland will pay 4.7 per cent interest on the money raised on Wednesday.
The spread for Greece is 5 per cent, meaning the Greeks are paying more than 8 per cent on 10-year money, “if they can get it”, Corrigan said.
The European Commission prevented Bank of Ireland paying up on its preference shares and the NPRF received shares instead. They were vested at €250 million, but if were marked to market yesterday would be worth €90 million more. The same process is expected to occur in May when the time for AIB to pay its dividend arrives, Corrigan said.
On a fully diluted basis, the State has about 35 per cent of both banks.
As well as the interest, the preference shares carry warrants that allow the State buy bank shares at fixed prices.
The fixed prices for Bank of Ireland mean that if the warrants had been exercised yesterday, the profit would have been €400 million to €480 million, said Corrigan. The comparable figure for AIB is between €200 million and €300 million.
Referring to the conditions attaching to the preference shares, Corrigan said: “The conditions reflect our requirements. The banks were not negotiating from a position of strength.”
He was asked about off-balance-sheet debt by Róisín Shorthall of the Labour Party. The main item is Nama, which he said will issue Government-guaranteed securities worth approximately €40 billion.
Corrigan said the rating agencies focus on the ability of a lender to pay its debts. He said that notwithstanding the fact that the number of performing loans transferred to Nama was lower than had been envisaged, the expectation still was that Nama would be self-financing.
The ESRI has recently said that the State will get no return for the money put into Anglo Irish Bank, but Corrigan said: “I think we have to wait and see.”
So if Corrigan is correct, the cost of the bank bailout to the State might be in the region of €25 billion, minus any profits made on the two main banks, and any return from Anglo.
Meanwhile up to €20 billion per year is being added to the national debt from the deficit in the public finances.
Corrigan said Ireland’s credit rating, at AA, is a “perfectly respectable rating”. Our debt to GDP ratio this year will be 84 per cent, “broadly in line” with the euro zone average. The change yesterday in Eurostat’s figure for Ireland’s 2009 deficit did not affect this ratio, he said.
