Debt deal an important step in our recovery - Costello
13 February 2013
by Cllr Joe Costello
I welcome this opportunity to speak on the agreement that was reached last week on the Promissory Notes Arrangement. While there is still much work to be done, this deal is an important step in Ireland’s economic recovery. I would like to pay tribute to Deputy Noonan, the Taoiseach and the Tánaiste for the work they have done to make this deal possible.
The previous Government lumbered us all with Anglo’s debts and used the cumbersome and expensive Promissory Notes Arrangement to do it. It would be been preferable if the State had never been made responsible for these debts. However, the Promissory Notes were already, in effect, national debt, and any default would be been regarded as a sovereign default. There is no magic wand that we can wave to make these debts disappear without serious repercussions. Instead, the Government had to work to restore Ireland’s reputation and engage in painstaking negotiations.
These negotiations have resulted in a deal that delivers on the Government’s commitment to put in place a fairer and more sustainable arrangement. It is a step forward along our path to economic recovery and renewed job creation.
This deal means that the annual Promissory Note repayment of €3.1 billion over the next 10 years will no longer have to be made. The replacement of the Promissory Notes by long-term bonds will lower significantly the financing needs of the government in the years ahead, which will make it easier to exit the bailout program and return to the markets. Moreover, the interest rate on the bonds is lower than what the Government would otherwise have had to pay. In effect, the Government has been able to arrange cheaper financing over a much longer period. We have effectively transferred over 40% of legacy banking debt into very long term debt and significantly reduced the cost of financing this debt.
The agreement results in significant cash flow benefits as the State will no longer have to borrow €3.1 billion each March to meet the Promissory Note repayments. This equates to a cash flow benefit of €2.3bn in 2014 and €20 billion over the next ten years. Furthermore, it reduces the deficit by €1 billion per annum from 2014 onwards and significantly improves debt sustainability. This means that the remaining adjustment required to bring the deficit below 3% in 2015 is reduced by €1 billion.
While the total debt has remained unchanged in nominal terms, the real value of what will end up being paid is reduced considerably. There has been much talk of “kicking the can down the road”. However, this ignores some of the very real benefits of the long-term bonds being used. Philip Lane has pointed out how the value of these bonds in terms of GDP should be reduced over the lifetime of the bonds. In 2013, €25 billion is 15 percent of GDP. The average maturity of the bonds is 34/35 years; therefore, by 2048, if nominal GDP growth is 3% a year, the maturity value of the debt will be 5.3 percent of GDP. In reality, we would be doing future generations no favours if we were to attempt to pay off these debts in the short term or if we were to lumber them with a Sovereign default.
The agreement reached last week is another step in working our way out of the economic crisis inflicted on the Irish people by Fianna Fail. With the reduction in the interest in the bail out loans secured last year and the deal on the Promissory Notes, progress is being made.
Dealing with these legacy debts is only one area were progress is also being made to get our economy back on track. For example, real advances are being made in boosting Irish exports. Last year, exports of Irish goods and services increased by 5.1% and are now well above pre-crisis levels. This strong export performance underpinned a GDP growth rate of 1.4% - an impressive figure given the very difficult economic conditions prevailing across Europe and beyond.
Both the Irish Government and Irish business have refocused in response to the economic crisis. The competitiveness that we lost during the Celtic Tiger is back - Ireland’s competitiveness vis-a-vis our trading partners has improved by over 20% since 2009. We are diversifying in terms of our export markets. The Government’s renewed focus on emerging markets is proving successful. Brazil, Russia, India, China and South Africa (BRICS) are being targeted in a special way. But there are a further twenty-two countries around the globe being prioritised by the Government as part of its Trade Strategy.
The Promissory Note deal is not in lieu of the commitment given on the 29th of June last year to break the vicious circle between banks and sovereigns. The Government is fully committed to the Banking Union, which is a precondition of using the European Stability Mechanism to address the capitalisation of the going concern banks. The Government will continue to participate in the development of the ESM and the structuring of the Single Supervisory Mechanism to ensure that Ireland will benefit from developments in this regard.
While progress is being made, the hard work must continue.