Such is the success of the National Treasury Management Agency, it has created a new economic and fiscal pitch for us – one that progressives should now seriously consider playing on. I won’t go over the tedious and ill-founded arguments – that Ireland’s fiscal plight is such that the international markets won’t continue lending to us. I don’t have to. The NTMA has settled that argument, if not once and for all, then certainly for the foreseeable future.
In the first week of October the NTMA successfully launched a 15-year bond which raised €7 billion. There are a number of noteworthy things about this:
First, they received €14 billion in bids. This showed considerable interest market appetite for Government debt. In fact, this was the largest bid for any bond in the Eurozone this year.
Second, over 90 percent of the investors were foreign – so this wasn’t a case of domestic banks returning the Government a favour.
Third, no one can question (at least in the international markets) Ireland’s ability to repay its debt. If there was any doubt, no one would invest in a 15-year bond.
So on the specific issue of Ireland’s ‘capacity to borrow’, which is different from the issue of how much we should borrow, there is no question: we have that capacity. Everytime the NTMA throws its net into the bond pond, it pulls out a lot of fish.
So what does this mean in fiscal terms going forward? It changes the situation substantially. Such is the scale of the NTMA’s pre-borrowing (borrowing, not for current, but for future needs) that by year’s end, they will have around €30 billion in ‘free cash balances’ – that is, the Irish Government will have access to €30 billion already borrowed.
What’s the purpose of having all this money sloshing about in a Central Bank account? When this strategy was published – just after the April Budget projections – the NTMA expected that its cash balances would be €20 billion (or 12 percent of GDP) in 2010. In the subsequent three years, part of the borrowing requirement would be funded, not by going to the international markets, but by drawing down on the reserve. This was the projected amount of ‘draw-down’:
- 2011: 2 percent (€3.5 billion) leaving a cash balance of 10 percent
- 2012: 3 percent (€5.5 billion) leaving a cash balance of 7 percent
- 2013: 3 percent (nearly €6 billion) leaving a cash balance of 4 percent
In these three years, nearly €15 billion would be drawn down – reducing the NTMA’s cash balance of €20 billion in 2010 to approximately €8 billion by 2013 (this would involve some topping up of the cash balance during those three years).
This, of course, was based on April projections. Already, under Fianna Fail’s woeful fiscal mismanagement, this has gone awry. Instead of annual deficits of 10.75 percent this year and next, we are looking at deficit of 13 percent for both years – with the risk for next year being on the downside. Therefore, we may need that extra padding the NTMA has provided. However, let’s just keep to the April projections for illustrative purposes.
Now, instead of having a cash balance of 12 percent of GDP, we have a cash balance of over 18 percent. If the drawdown schedule remains the same as above, by 2013 we’d still have a cash balance of 10 percent (not as the current strategy has it– at 4 percent).
In other words we’d have €10 billion more than planned for.
This is the new €10 billion pitch for us to play on.
This is the pitch from which a new fiscal policy could be launched – a policy that seeks to drive growth, not deflation; that seeks to invest in the economy to grow it, not depress it. This fiscal policy, in turn, would drive up tax revenue (through increased employment, aggregate wages, consumption, and investment) and, as a consequence, reduce demand on social welfare payments and social services – thus driving down the deficit.
And all this would be financed – not by deflationary spending cuts or new borrowing; it would be financed by money we have already borrowed. We’d be putting that additional cash that the NTMA has sourced to work.
It’s too early to say how much of that €10 billion we could prudently access – much will depend on the Government’s new projections in the upcoming budget (will they continue to hold to the 2013 target date for Maastricht compliance? Will they accept reality and adopt David Begg’s suggestion?).
But the NTMA has given us considerable fiscal flexibility. It would be a shame to squander that opportunity by continuing failed fiscal policies.
The NTMA has built a new pitch for us to play on. Let’s put on our jerseys and go have fun.
I am surprised that you don't consider the rate on the bond to be noteworthy.
If it was such a certainty in the market place that the bond would be repaid, surely we could have sold this bond at a fair few points lower?
Posted by: John | October 22, 2009 at 12:00 AM
Besides John's important point about the interest rate payable on these new bonds issued, I also find this a little breezy:
"This fiscal policy, in turn, would drive up tax revenue (through increased employment, aggregate wages, consumption, and investment) and, as a consequence, reduce demand on social welfare payments and social services – thus driving down the deficit."
OK, fair enough - you're only one person and it's just one blogpost making a particular argument, so it's unfair to demand a complete model showing how this works out....
...but. I'm not an economist, but I can't help but suspect that this is a lefty version of the Laffer curve (the idea that tax revenues are increased, or at least not reduced, by tax cuts). See Krugman's remark:
"I’m not proposing a fiscal-stimulus Laffer curve here: it’s probably not true that spending money actually improves the government’s long-run fiscal position (although that’s certainly within the range of possibilities.)"
http://krugman.blogs.nytimes.com/2009/09/29/the-true-fiscal-cost-of-stimulus/
Obviously, increased GDP and thus tax revenue as a result of stimulus offsets the cost of the stimulus but it seems optimistic to say that it exceeds it. You seem to admit this when you say that whether the government can access the NTMA's cashpile depends on whether it sticks to the 2013 compliance date for the Stability & Growth Pact - if stimulus will reuce the deficit, why should this be so?
Posted by: James Conran | October 22, 2009 at 01:06 PM
I do think you make a good point when you say that the NTMA's success might suggest that there is no longer serious doubt (if there was) over whether we have the capacity to fund our deficit in the next year or two. That leaves the question as to whether the benefits of a stimulus now would outweigh the risk of the state drowning in debt in the medium term.
Here I think another point made by Krugman in the post linked to above is valid. It is obvious that the Irish recession (as in many other countries) is primarily driven by a collapse in private sector investment, most dramatically in construction/property (which has in turn hit domestic consumption). Obviously a lack of investment now hurts our capacity for growth not just now but also in the future and hence our ability to service our public (and indeed private) debt.
Therefore the increased investment produced by a stimulus would partially mitigate the negative effect on sovereign solvency produced by the increased borrowing necessitated by such a stimulus.
Posted by: James Conran | October 22, 2009 at 01:18 PM
@John,
On the Irish Economy there was the point made in comments that our spreads has been falling. I make no claims to understanding international finance, so I ask you: does that mean that the price for Ireland's borrowing is going down?
http://www.irisheconomy.ie/index.php/2009/10/19/fiscal-consolidation-ii-lessons-from-the-last-time/#comment-21732
@James
I don't think Mr. Taft is the only person to claim that spending in times of recession stimulates the economy back to a growth position. There was some guy a long time ago, John Maynard Keynes, said the same thing. I think he was an Irish fella. True, I have been hearing people of neoliberal economic persuasions say that he was discredited, but so have their own policies, I think. The arguments have to be made very simple for me to understand them, but just looking at history, I think I'll go with Keynes, at least on fiscal policy -- and Mr. Taft too.
Posted by: Marise | October 22, 2009 at 05:53 PM
John, I have addressed the issue of bond yields in the past (in this post I concentrated on the issue of borrowing capacity and the surfeit of funds at our disposal). But let’s take up the bond yield issue for there is no consensus on why Irish yields remain so high. I suspect that the reason lies somewhere in the following mix: (a) initial misconception of the impact of the bank guarantee, wherein domestic and international commentators were suggesting that our debt was 200%+ of GDP; (b) further reputational damage made by, in particular, Irish commentators: one suggested there was a one-in-eight chance of Ireland defaulting on its debt while another said our credit-worthiness was worse than Peru. Davy Stockbrokers called such commentary ‘hysterics’. (c) speculative activity on the credit default markets, taking advantage of our reputational damage (the NTMA’s Michael Somers referred to this phenomenon earlier this year and predicted that, as it abated, bond yields would improve - as they have). (d) The conflation of bank and sovereign debt – it should be noted that the yield spread with German bonds skyrocketed after the bank guarantee and reached its peak with the Anglo-Irish nationalisation.
I’m not impressed by the ‘fear of default’ argument. First, there is almost no chance whatsoever of Ireland or any Eurozone country defaulting for the simple reason that they wouldn’t be let. The fall-out for the currency would be too unpredictable. That’s not factoring in that individual governments wouldn’t allow that to happen. Second, if the ‘fear of default’ was an issue, then why did bond yields consistently improve during the late spring and summer when the big 3 rating agencies were downgrading our rating? Personally, I doubt that anyone has a rational reason – and that may be due to the fact markets don’t actually act in consistently rational ways (ask Lehman Brothers).
James, thanks for the Krugman link (I actually missed this one). But maybe you might want to reread it again for I would suggest that it actually confirms my basic position. He quotes the IMF: ‘ the evidence suggests that economies that apply countercyclical fiscal and monetary stimulus in the short run to cushion the downturn, after a crisis tend to have smaller output losses over the medium run.’ Krugman further states:
‘ . . .fiscal expansion is good for future growth. Still, it does burden the government with higher debt, requiring higher taxes or some other sacrifice in the future. Or does it? Well, probably — but not nearly as much as generally assumed.
Here’s why: first, in the short run fiscal expansion leads to higher GDP, which leads to higher revenues, which offset a significant fraction of the initial outlay. A billion dollars in stimulus probably leads to only $600 million or a bit more in additional debt.
But that’s not the whole story. Crowding in (that is, stimulating future investment) raises future GDP — which raises future tax revenues. And the rise in revenues relative to what they would have been otherwise offsets at least some of the burden of debt service.
That’s sound economics. Of course, an stimulus investment programme for Ireland would look much different – as I’ve stated on a number of occasions – than those for larger, less open economies.
This is not a lefty version of the Laffer curve. Stimulus will increase borrowing and expenditure. However, on the other side of the recession, we will be in a stronger position to deal with that debt than we will if we follow on the present course. In the former, you prop up the economy, in the latter you batter it down. And just on the particular point – and I may have not been as clear as I should have been – the drawdown on the NTMA’s free cash balances is not directly related to Maastricht compliance dates. We could theoretically not borrow a penny on the international markets next year and, instead, draw the whole thing down from the cash balances. This wouldn’t change the deficit dynamic – nor would it affect the overall debt levels, since the cash balances are included in gross debt calculations.
Marise – it’s more than just siding with a great economist; while arguing for expansionary policies here is seen as reckless ultra-maoist nonsense, in other countries – regardless of the ideological orientation of the Government – it’s pretty middle-of-the-road stuff. Granted, there are debates over the contents of an expansionary package (tax cuts vs. spending increases, etc.) but the principle is accepted by American liberals, French Gaullists, German Christian Democrats, British and Australian social democrats and Chinese Communists. The only ones who don’t accept this principle are UK Tories and American Republicans. And Fianna Fail.
And the ultimate irony is the Keynes developed his theory to save capitalism from Bolsheviks. When asked why he didn’t join the Labour Party, he said he ‘couldn’t betray his class’. Of course, he also wanted to euthanise rentiers. He must have been great fun at parties.
Posted by: Michael Taft | October 22, 2009 at 07:41 PM
Michael if your basic point is what you say in your comment:
"Stimulus will increase borrowing and expenditure. However, on the other side of the recession, we will be in a stronger position to deal with that debt than we will if we follow on the present course."
Then Krugman's post certainly chimes with it (though of course he did write a famous column in which he said it looked to him like Ireland had no room for stimulus - would be great if he would take a closer look at our situation!).
But this is a different (and stronger) position than saying that the deficit would actually be reduced by a stimulus, i.e. that increased tax revenues as a result of stimulus would outweigh the increased borrowing to fun the stimulus.
Posted by: James Conran | October 22, 2009 at 09:10 PM
Thank you Michael, for your detailed response. Not being well-read, I am unclear about the positions of Mao, Marx, Engels, or even Keynes in entirety. I come from a philosophy of "Does it work? Has it worked in the past?" Being uneducated I couldn't tell ya what part of the political spectrum it comes from. I didn't even realise that I was "left-leaning" until my mother told me I sounded like a far-left loony when saying that I was not fond of American military adventurism. I'm sorry tha I cannot bring an erudite intellect to the debate; I'm here to learn. So far, on the discussions I have seen, I am yet to be convinced that 1) tax cuts give the best return in stimulus, 2) the dificit must be addressed RIGHT AWAY, and 3) there is no alternative to NAMA.
Many thanks to yourself and all other commentators, whether or not I agree -- I really respect the knowledge and intelligence, and find it all very helpful.
Posted by: Marise | October 23, 2009 at 04:31 PM
Thanks you Micheal for the information and I hope that in future also I will get this kind of article.
Thanks,
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Posted by: Portable Storage | December 03, 2009 at 12:47 AM