The truth about Ireland’s € 240 billion monster debt: It wasn’t the banks

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There is a notion that Ireland’s monster debt – it will be € 240 billion per capita by the end of the year, the third highest in the world – was brought there by a gang of renegade bankers. And that we as a people have been victims of a terrible injustice.

The truth is stickier and more inedible than the bar stool tales we tell each other.

Most of the debt – more than 100 billion succession.

The former Fianna Fáil-led government had spent a lot of money in the 2000s while using windfall taxes from the real estate sector to fill in the loopholes in their accounts.

When these taxes dried up, the deficit exploded. At the height of the crisis in 2009, the deficit was € 23 billion. The state spent 23 billion euros more than it received in taxes and other income.

This required extensive borrowing, which – to varying degrees – lasted over a decade until the state ran a budget surplus in 2018.

The original cost of bailing out the banks was 64 billion euros, but about 40 billion euros have been reclaimed through taxes, dividends and share sales from the state’s ownership of the banks.

It’s a large number, but less than half the bill that has been forced upon us by budget mismanagement, none of which can be reclaimed.

On a per capita basis, the state’s debt is € 46,000 for every man, woman and child in the state and € 103,300 for every employee.

And maintenance has cost us 60 billion euros in the last ten years, which is the equivalent of three years of healthcare spending. Make no mistake, the state pays for its nonsense during the boom.

So it would be wise to stand up and listen when the Irish Fiscal Advisory Council (Ifac) issues a warning regarding the government’s budgetary strategy, especially when it claims that we are sailing close to unsustainable debt trajectory – and that the council does not dismiss criticism, as some do, as an act of fiscal pedantry, far removed from the realpolitik of the government.

While the spending increase planned for the 2022 budget by 4.2 billion

Less manageable

This will leave the state with a larger and less manageable debt burden and therefore more exposed to the next crisis. There is now a one in four chance that the national debt will take an unsustainable path in the coming years, the council says.

The Council also warned that borrowing and spending increases during a strong recovery could “backfire” and trigger a price hike if capacity constraints, particularly in the construction sector, take hold.

As a heavily indebted country, one might think that the main threat here is rising interest rates, which are likely to materialize if the current rise in inflation is longer than expected.

The Council has stressed the Irish economy against possible rate hikes and growth shocks and found the latter to be a bigger problem.

While a big 2 percentage point shock in government borrowing costs would only increase the debt ratio by 0.4 percentage points in three years, it would hardly increase the annual cost of borrowing. This is largely because the National Treasury Management Agency (NTMA) issues bonds with a long maturity and essentially a fixed rate.

In contrast, a typical growth shock of 3.6 percent for two years could increase the debt ratio by more than 20 percentage points in three years. “With high debt ratios initially, this could create snowball effects and make it difficult to reduce debt ratios in later years,” it said.

Brexit plan

Two years ago, NTMA boss Conor O’Kelly was asked what the greatest financial risks for the agency were and whether they had a Brexit contingency plan.

He said the agency operates on a “permanent emergency basis”. As a small, highly indebted economy that relies on international investors for 90 percent of its loans, he said Ireland and the NTMA must be in a permanent state of crisis preparedness.

The reality is that the next shock, the next thing to hit our finance market is likely to be something we haven’t thought of and isn’t on the front page of every newspaper in the world, O’Kelly said. Nine months later, the Covid crisis struck, the global economy tumbled off a cliff, and the NTMA’s credit plans were out the window.

This gets to the heart of the Council’s comment: it is not about wondering whether there will be another recession or another financial shock, it goes without saying – they come every 10 years on average.

Downturns are part of the natural cycle and financial shocks are part of the global economy. The question is: will we be able to borrow and spend money?

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