NTMA chief executive John Corrigan: revealed government paid €3.2bn to service debt pile

Citizens of Ireland will hopefully never become too acquainted with the number five. As a rule of thumb, Ireland would reach a crisis point if sovereign interest rates were to stick for some time above 5%, warn the world's leading government debt experts.

A 5% rate, they say, is the point at which European countries are likely to find it impossible to pay the interest on their mounting sovereign debt. Unfortunately, Irish sovereign rates remain closer to 5% than most others.

The cost for Ireland to borrow money for 10 years – a proxy for the average annual cost of servicing the national debt – is currently trading at 4.7%, a rate significantly higher than most other European countries. If the interest rate rises significantly past 5% in the coming months, a new crisis will likely loom because the cost of servicing the debts will become too burdensome.

Paying significantly more in annual interest rates than other countries risks revisiting the 1980s when so-called debt-service costs ate into a large part of government tax revenues.

Ireland and Portugal are now paying the highest interest rates of the 16 countries in the eurozone to borrow money. They have to pay big annual interest payments because they are judged as the most likely countries – after Greece – to be cut off from the debt markets governments use to finance existing debts and plug the holes in their annual deficits.

In this way states can face a crippling debt crisis long before an actual default event occurs if interest charges become a greater and greater share of the revenues the government raises in any year.

John Corrigan, the new chief executive at the National Treasury Management Agency, told the Public Accounts Committee last month that the government last year paid out €3.2bn to service the national debt pile last year.

The service bill included interest payments on the debt and payments the agency regularly makes into so-called sinking or contingency funds. He forecast the total debt-service cost this year would reach €5bn, and increase to €6.5bn in 2011.

The interest bill component of this year's debt-servicing cost was forecast to be approximately €4.4bn, while the interest bill was forecast to account for €5.7bn of the overall debt-service cost in 2011.

The government forecasts its revenues will slump to €33.4bn this year, rising to only €33.8bn next year and to €36bn in 2012. Therefore the government's debt-service costs of €5bn and €6.5bn will account for as much as 15% of its revenues this year and reach as much as 19% in 2011.

They are the figures that will most worry the people who lend Ireland money. If the sovereign interest rate rises substantially above 5%, more and more of the government tax and other revenues would need to be earmarked just to service the national debt.

Fitch Ratings, like the other credit rating agencies, keeps score on the borrowings of almost every sovereign government in the world. The agency ranks the debt levels and debt-service costs of each state and compares the sovereign borrowers for the health of their banking systems and finances.

Fitch places Ireland in the class of 13 countries with an AA rating, although the state is on negative watch at AA-. Ireland shares the same grade with Cyprus, Italy, Portugal and Saudi Arabia.

Fitch sees Irish economic worth or GDP this year at €165bn, compared with €161bn for Portugal, whose population of 10 million is over twice that of the Republic's. But the Fitch figures clearly show that the Irish economy has suffered the sharpest decline of any advanced economy in recent times.

Economic output here will have dropped about 12% in the three years from the start of 2008 before it splutters to a growth of 3.3% next year, Fitch forecasts. In comparison, the economies of Iceland and Hungary, which were bailed out by the IMF last year, will have dropped only 9% and 7%, respectively. Italy's economy, long among Europe's most indebted, and a fellow AA- class member with Ireland, will have dropped by only 6.5% over the same period.

The figures for the Irish banking system and the debt burden also make Ireland stand out from most of the rest of Europe.

Fitch estimates that in 2008 Irish bank loans accounted for 222% of their deposits. Only Denmark, at 300%, had a greater proportion of loans to deposits, while the average for all AA- rated countries in the world stood at 95%.

Fitch forecasts Ireland's budget deficit this year will reach 11% of GDP, and will fall to only 10% next year. Britain, currently nursing a similarly large budget deficit, is seen trimming the shortfall to under 9% by the end of 2011, while Portugal's annual deficit is forecast to fall to 6.5% of GDP.

Ireland will continue uncomfortably to feature in the annual deficit debt league for some time.

Including the Nama bonds, Fitch sees the debt pile here peaking next year at 107% of GDP – or about €180bn – compared with the 90% debt peak for Portugal.

Irish debt last year stood at about 190% of government's revenues, while other AA countries had an average debt-to-revenue of only 88%, according to Fitch. The government forecasts its revenues to grow only slowly by 2014. Sovereign interest rates rising above 5% would all but guarantee an Irish debt crisis in that case.