Nama chief Brendan McDonagh: Ireland's debt pile has swollen because of the toxic loans scheme

What happened was like a head teacher hauling out the former star pupil from the back of the class. For Ireland, the once AAA student, there was no mistaking the serious warning handed out by the European Commission last week about the public finances. It mattered little that Ireland was among a group of five countries facing sanction for breaking the so-called excessive deficit procedures.

Being granted an extension of a year to the end of 2014 to reach an acceptable annual deficit makes little difference, say the international debt experts, because the challenge Ireland faces remains daunting.

That the EC cited Ireland along with the long-time 'class messers' such as Greece and Britain also affords little comfort.

The Sunday Tribune asked the world's three leading credit rating agencies – Fitch Ratings, Moody's and Standard & Poor's – whether they thought that Ireland could meet the EC's new extended target. The analysts, who have a big say in determining the views of Ireland abroad, believe that the challenge remains "enormous" bec­ause bond holders will be looking with concern at the big increase of the share of annual taxation that will now go to pay interest payments to service a ballooning sovereign debt pile.

The sovereign watchers say they include the €54bn of bonds issued by the National Asset Management Ag­ency (Nama) as part of the gross debt pile here because it remains a "contigent liability" for the Irish taxpayer. Significantly, the debt pile only starts falling when Nama starts to sell its assets in 2013 or 2014, the analysts say. Taxes may have to be hiked as early as next month's budget and the extra money to recapitalise the Dublin will need to be injected into the banks early next year, the analysts warn.

Fitch Ratings

Chris Pryce in London also watches Netherlands, Greece, Slovenia, Cyprus and Malta for Fitch Ratings agency.

Including the Nama liabilities, Pryce said that the Irish debt pile will rise to over 100% of GDP in short order. In money terms, the Fitch figures suggest that the debt pile here reaches a peak of 108% of GDP in 2011, or about €185bn. By any measure it is a huge slide in fortune for Ireland the star pupil that once had lowest debt pile in Europe at about €45bn only two years ago. Even without the Nama debts, the debt pile still reaches close to €135bn, or abut 90% of GDP, according to the Fitch figures.

"What I think is better to look at is the history of the country in meeting its debts," said Pryce. Ireland "has a good record", he said. None the less, Fitch forecasts the debt level here, including the Nama bonds, will reach 70% of GDP this year, up from 44% last December. Next year, for the first time in a generation, the debt pile climbs to over 106% of GDP, and continues to climb to a peak at 108% in 2011, as economic growth continues still to be too weak to make much of a difference to government revenues. Fitch forecasts that the debt pile will only start falling to 96% of GDP at the end of 2013 as Nama sells the first of its loans. Pryce believes Ireland will reach the 3% annual deficit by the newly extended deadline but only after the government hikes taxes. Significantly, he forecasts that the government will struggle in the budget next month to find €4bn in spending cuts and believes that it will have to raise "some" taxes to make ends meet in the 2010 sums. "It won't get any easier. Indeed, it will get harder," Pryce said. He forecasts that taxation here, including income taxes will need to rise "substantially" in the next two years to come closer to the average of 45% of GDP in the euro zone. Irish taxes account for only about 32% of GDP currently. "I honestly think the government would prefer to cut spending – but it will find that hard to do," he said.

Pryce estimates that the extra bill for re-capitalising the Dublin banks will range between €5bn and €10bn. He believes that the €10bn is the "worst case scenario" but that regardless the capital will "preferably" need to be injected into the lenders next year.


Dietmar Hornung and Alexander Kockerbeck follow Ireland from Frankfurt. Kockerbeck also covers Germany, Italy and Belgium for the agency. Moody's forecasts that including the Nama debts that Irish sovereign debt will probably climb to 120% of GDP in 2012, or about 90% if the Nama liabilities were stripped out. Its worse case scenario sees debts here at the end of 2012 reaching 130% of GDP, if growth is slower and the government fails to cut spending. Taxes will have to rise.

"It is up to the government but it is quite clear that the fiscal consolidation that is required is quite considerable. It will include measures on the expenditure side but measures on the revenue side will probably be included," said Hornung, diplomatically, when asked if the government will be forced to raise taxes as well as cut spending in next month's budget. "If you do not keep the business-friendly taxes then that threatens growth," said Hornung.

Ireland pays the same sovereign interest as Greece. "We assess Ireland at AA1- versus Greece at A1, which is under review in three months for a downgrade. So, Ireland, in our view is clearly more credit worthy than Greece because the [Irish] economy has shown flexibility in the past. We see the challenge in Ireland as enormous but we are seeing progress," said Hornung.

Kockerbeck said the challenge facing Ireland is because its debt had risen "almost overnight". Investors – the people who hold Irish sovereign debt paper – will look closely at the proportion of annual revenues the government raises in taxation that will have to go to service the government debt. Not since the late 1980s has Ireland has to worry about such matters. "You get lights flashing. When it is between 10% to 15% of revenues you wonder how long this can be controlled. When it goes to 17% or 19% or 20% then of course we get further questions. In almost all the scenarios we see a very strong rise in debt interest payments, " he said.

Standard & Poors

Trevor Cullinan and David Beers are the senior credit analysts following Ireland from London. The rating agency did not want to talk directly and referred to its Ireland report published in August. The report showed that the next month's budget "is expected to be an important milestone". S&P forecasts that government interest payments will almost triple to 8% of all revenues raised this year. The interest burden doubles again next year and peaks at almost 22% of all revenues raised in 2011.