Taoiseach Brian Cowen: debt forecasts exclude €25bn bank contingency fund he said would only be used in worst-case scenario

The answer to the simple question – just how bust are we or how much debt in billions of euro will be shouldered by Irish taxpayers? – should be straight forward. After all, the government in recent weeks produced in quick time a four-year plan – which it called the National Recovery Plan – and a series of detailed economic forecasts in its budget appendices. Then the EU and IMF weighed in with their loans – even though the Washington, Brussels and Frankfurt officials who had gathered in Government Buildings on Sunday 28 November sowed confusion about the amounts, the duration and interest rates on their loans.

The most recent documents – the 2011 budget appendices published on 7 December – show the sovereign or government debt here will peak at 102% of our GDP in 2013. Focusing on the 2013 forecast helps to avoid double counting because by then the government's famous cash balances will have been long spent and the first of the interest payments on the €31.4bn the government injected in the form of long-term promissory notes into Anglo Irish, Irish Nationwide and EBS will fall due. The government forecasts our national debt pile will rise to just over €179bn by 2013 – calculated on 102% of a gross domestic product the department believes will rise to €175.4bn. That's up from a national debt in 2011 of €159.5bn, or 98% of a GDP that will be worth almost €162bn in 2011.

What do the 2011 and 2013 debt forecasts include? They include the additional €10bn earmarked for the additional recapitalisation which will be injected into AIB and other lenders, including almost certainly Bank of Ireland, in the early weeks of next year.

More significantly, the forecasts exclude the €25bn fund that Taoiseach Brian Cowen described on 'IMF night' in late November as a contingency fund that would only be used by the banks on a worst-case basis if the loan losses on mortgage and company loans escalated.

Alan Dukes last weekend told the Sunday Tribune that he expected the whole of the €25bn to be used and he went further, telling Liz Alderman, a senior business writer for the International Herald Tribune and New York Times that the banks will need more than €25bn because "the number that's there at the moment is based on what we can expect of the commercial property market" only.

Dukes' forecasts support the thesis of UCD professor Morgan Kelly that the banks here are insolvent to gargantuan proportions.

Each so-called worst-case scenario for the Irish banks and for the government has played out in recent years. It would be foolish therefore to avoid any other potential liability, even if it is described by the Central Bank authorities as a contingency fund. Adding the €25bn brings the total government debt here by 2013 to just over €200bn, or 114% of GDP. The annual cost of servicing such a large debt pile is daunting.

In its 2013 calculations, the Department of Finance forecasts that, by that year, Irish citizens would be paying an "implied" annual interest rate of 5.7% on a debt pile of €175.4bn. That suggests we will be paying an interest bill of €9.9bn in 2013. Just under a quarter of all the €41.2bn in taxes the department predicts it will collect that year will be swallowed in interest payments alone.

But including the €25bn "contingency" bank funds pushes the debt service costs in 2013 to €11.4bn, accounting for over 27.5% of the all the projected taxes collected in that year.

It is a burden that cannot be supported. As some European economists predict, Greece and Ireland will inevitably be forced to 'restructure' their sovereign debt payments. That means that Ireland will pay back less, or over a longer period, the money it has borrowed from lenders.

What the experts say

Davy Stockbrokers

In its post-budget analysis for its private clients, the stockbroker said that debt in the 1980s was worse again because the overall debt pile reached almost 120% of GDP in the late 1980s.

But it added that the "elephant in the room" was that private-sector debt was around 50% of GDP back then, while now it was close to 200% of GDP. In 2010, combined private and government debt towered at close to 290%.


The giant global fund has for weeks predicted that Ireland, Portugal and Spain will need to recapitalise its banks before it can contemplate a restructuring on its sovereign debt.

Mike Amey, its portfolio manager in London, said last week that Ireland "was the key challenge" for Europe in dealing with the overhang of bank debts.

"The Irish government has guaranteed such large parts – so effectively the bank debt is sovereign debt, which is a classic example of how a sovereign government gets into trouble when the sovereign and banking merge into one," he told CNBC.

Asked if it was hard to see how Ireland could deal with its debt pile, Amey said: "The size of the debt and the interest rates they are being forced to pay would tend to suggest it would be a very impressive feat to get out of it…"

Bank of America

Silvia Ardagna, a senior European economist at Bank of America, said that there was a 60% chance that Spain would be in the bailout facility by the start of next summer.

Portugal would join Ireland in the rescue facility "even earlier" because it would be the first to come under pressure, she told the Sunday Tribune.

Ardagna said that Bank of America – which owns Merrill Lynch, the adviser to the Irish government ahead of its decision to give a blanket guarantee to the banks' liabilities in September 2008 – believes the eurozone will stay together.

"Spain is where we believe the line will be drawn," she said, adding there was enough money in the rescue facility to support Spain, Ireland and Portugal "depending on the details" of a future bailout.