Free What If Ireland Defaults? by Brian Lucey Page B

around 4 per cent a year, though changes to real growth or inflation will affect this. This will still be below the average interest rate on our debt, which is forecast to be 5.2 per cent in 2015, so in the absence of a sufficiently large primary surplus the debt ratio will continue to rise.
    The primary balance is forecast to move from a deficit of 4 per cent of GDP in 2012 to a surplus of 3 per cent in 2015. It is this improvement in the public finances that will stabilise the debt ratio. If these conditions are satisfied in 2015 the debt will fall from 117 per cent to 114 per cent of GDP over the year.
    This dynamic was improved considerably by the EU decision in July 2011 to reduce the interest rate on loans provided as part of the EU/IMF programme. This decision reduced the average interest rate on Irish debt by about 1 per cent and substantially increased the impact of a primary surplus on the debt ratio. If these interest rate reductions were not granted it is unlikely that the debt ratio would have been contained.
    To see why this debt sustainability story is plausible we are going to do two things. First, we will explore how the GGD got to €166 billion by 2011; and second, what it will rise to by 2015.
    At the end of 2007, Ireland’s GGD was €47 billion. This is the debt level we brought into the crisis, which was largely a result of the previous crisis in the public finances in the 1980s. In general governments do not repay debt, rolling it over instead by borrowing anew. From 2007, the debt then increased by €119 billion in just four years.
    From 2007 to 2009, the cash balances in the Exchequer and other accounts increased from just under €4 billion to almost €17 billion. During 2008 and 2009 the National Treasury Management Agency had the foresight to borrow funds on international markets to build up these cash balances before Ireland was shut out of the bond markets in late 2010. This increase in our cash buffer accounts for about €13 billion of the rise in the government debt.
    Financing the services provided by government in these four years required €59 billion of borrowing. This was necessary to fill the gap that emerged between government revenue and government expenditure and to ensure that the government could meet its pay, pensions, social welfare and interest outgoings. Interest expenditure over the four years was €13 billion.
    Separately, there is the money that has been used for the bailout of our delinquent banking system. By the end of 2010, the Exchequer had contributed around €9 billion directly to the banks. This was evenly split between borrowed money paid into the National Pension Reserve Fund since 2007 that was subsequently used as part of the initial recapitalisations of AIB and Bank of Ireland, and direct contributions from the Exchequer to Anglo, Irish National Building Society (INBS) and EBS.
    There was also the creation of €31 billion of promissory notes given to Anglo, INBS and EBS in 2010. These are a promise by the state to pay this money to the banks, but the payment will be spread out over an extended period. The first instalment of €3.1 billion was made in March 2011 and these will continue well into the next decade until the full amount, plus accrued interest, is paid to these zombie institutions. The final cost of repaying the promissory notes has been estimated at €48 billion and if these repayments continue to be made with borrowed money the total cost of the promissory notes will exceed €80 billion by 2030.
    We will look at Anglo and INBS in more detail in a later section but it is important to remember that the cost of the promissory notes and the cost of the recapitalisation are not the same thing. The repayments on the promissory notes include €17 billion of interest. This is being paid to Anglo Irish Bank and INBS, which are state owned. They in turn are using the promissory notes to avail of emergency