It won’t be the bank bailout cost that pushes us over the edge…..

10 May, 2011

Morgan Kelly‘s latest episode of “The Sky is Falling” appeared in Saturday’s Irish Times (here).  The opening sentence says it all: “With the Irish Government on track to owe a quarter of a trillion euro by 2014, a prolonged and chaotic national bankruptcy is becoming inevitable.”

I took refuge in Seamus Coffey’s “Economic Incentives” blog, which was more measured and thoughtful.  I hope he doesn’t mind me quoting a few paragraphs.  His analysis helps me to get a clear picture of the components and dynamics of our indebtedness as a nation, and underscores the fact that the cost to the taxpayer of the bank bailout(s) is responsible for only a minority of the debt mountain we are bequeathing to future taxpayers.  The real issue continues to be the chasm that exists between tax revenues and government spending, a problem that we have barely begun to fix.

Starting with the €154 billion GDP outturn for 2010, and assuming moderate nominal GDP growth rates of 1.0%, 2.0%, 3.0%, 3.0% and 3.0% between now and 2015, means that the debt ratio in 2015 will be around 120% of GDP using the General Government Debt measure.  By just looking at the money that would actually have been borrowed by then the debt-to-GDP ratio will be around 108%.  Higher nominal GDP growth would reduce that but there is little sign of that at present.

If the country had avoided assuming the debts of the banking sector the GGD ratio in 2015 would still be around 95% of GDP, which is better than 120% but would not eliminate the fear of default because of the annual deficits……

Servicing the €205 billion debt mountain we have created will cost about €10 billion a year and this will consume close to one-fifth of government revenue.  The actual servicing cost will depend on the average interest rate.  This is a huge burden for the country to carry and one that will require further adjustments just to keep expenditure constant.  It will be just possible to manage this but it may be decided that this is a burden that the country should not carry…..

If the option to default is to be taken those to suffer will be holders of Irish government bonds.  It is more than a little incongruous that those who invested in our delinquent banks are getting their money back while those who invested in our country may be forced to carry losses.  As with a lot of things in this crisis, this just does not add up.

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