Anglo Irish and Nationwide rescue to see deficit hit 17%

THE Government’s decision to pump extra capital into the failing institutions Anglo Irish Bank and Irish Nationwide Building Society (INBS) is likely to bump the 2010 budget deficit up to 17% of GDP – nearly 6% higher than initial targets.

The Central Bank’s latest quarterly bulletin published yesterday forecast that the budget deficit is set to come in at 11.8% of GDP this year, in line with Budget 2010’s 11.6% target.

However, when the payment of promissory notes to Anglo is taken into consideration, the projected budget deficit for this year, would rise to 17%. Promissory notes allow for payments on investment to be spread out over several years. Some €10.9bn of these notes are being invested in the two institutions.

Furthermore, the Central Bank said if the investment in Nationwide is reclassified in the general government sector, as was the case with Anglo, the budget deficit could actually rise to 18.7% by the end of this year.

The €10.9bn investment – €8.3bn for Anglo and €2.7bn for Nationwide – was announced last March and excludes the additional €2bn in capital provided to Anglo in May.

“The fourth quarter, 2009 and first quarter, 2010 capital injections into Anglo Irish Bank were treated in Government accounts as capital transfers; thereby directly impacting the Government deficit by €4bn and €8.3bn. The €2.7bn capital injection into Irish Nationwide in the first quarter was provisionally treated as a financial transaction and, therefore, doesn’t currently affect the deficit adversely,” the Central Bank explained.

This year’s banking bailout investments by Government are seen as once-off and the Central Bank said, because of this, the budget deficit should return to normal levels of around 10% of GDP by the end of next year.

The latest set of forecasts from the Central Bank also show the country’s overall debt, as a percentage of GDP – made up of accumulated yearly budget deficits – should come in at 77.9% this year. This would be a significant rise on last year’s level of 65.6%; but the forecasts also show the rise next year will be slower, with 2011’s debt level expected to be around 83%.