We are nowhere near being out of the woods

So, we are back in the bond market, which must mean that the recession is over… three cheers … No? Really?

Well, one cheer for the NTMA anyhow, which did a solid job of tapping the existing bond base for additional money. What many commentators fail to realise is it’s a long time, back in the late 1970s, since we actually paid off debt.

National debt, which plugs the yawning gap between government income and expenditure, doesn’t get paid off any more but gets rolled over.

The concerns of Central Bank governor Patrick Honohan that the markets don’t get it and demand a risk premium over Germany are, I fear, misplaced. We are nowhere near out of the woods.

Between this year and next we need to redeem over €13bn of government bonds, monies previously borrowed. Between now and the end of 2016, the sum is closer to €27bn. So this modest sum is a useful step towards the funding of that repayment, which must be made before a single penny is borrowed to fill the €20bn or more that will be spent by the Government in excess of its income.

Mr Honohan has expressed concern that the markets are not recognising fully the efforts that have been made. The NTMA has also expressed its concern. However, the reality is that the markets are only vaguely efficient, if even that.

Bond investors are concerned with getting their money back: in the pre-crisis period the assumption was that within a union there was, somehow, equalisation of risk and that lending to Greece or Ireland was no riskier than to Germany. Of course, we know now that was completely untrue — it relied on an unspoken, untested assumption that the richer nations would bail out the poorer in a manner that would not scorch the economic earth. That this equalisation is not going to return was noted by Honohan. But it then becomes clear that for the very long term we are going to pay much more than Germany or Austria for our debt.

If we examine Ireland and Greece over the last decade we can see why. The Government has done an excellent job of making clear that Ireland is not Greece. But from a high-level financial analysis perspective, it’s not that clear that we are, in fact, so very different.

Take debt/GDP ratios; for Greece that has risen by 80% from the 2000 base while for us it has gone up by 350%. The difference was that Greece started at a high level, while the banking crisis has dragged us up. EU forecasts are now for debt GDP ratios in 2014 in Ireland to be 120% (140% vs GNP, which given we are unwilling or unable to tax multinationals at any higher rate is the more appropriate level) versus a Greek 188%.

We have run cumulative primary deficits equivalent to 40% of GDP while Greece ran at 25%; Greece will be paying 6% of GDP in interest payments on debt in 2014, we will be paying 5.6% (6.7% of GNP); the implicit interest rate on Greek debt is forecast to be 3.2% while we will be paying 4.8%. What distinguishes us from Greece is:

n1) a perception, broadly correct, that we as a nation have played “straight” in making public our problems and having an effective, efficient tax collection system.

n2) a perception, again broadly correct, that we have better midterm prospects. Thus Ireland is able to contemplate returning to “normal” borrowing while Greece is still in trouble. But normal borrowing is contingent on several stars coming into alignment

First, we must continue to get our basic financial position in order. We still face deficits of 7% and 5% for 2013 and 2014. Little radical change has been done.

Second, and related to that, we continue to pin our hopes on export-led growth, into a challenging world economy.

Third, government trust (even if ratings agencies and analysts disagree) that the banks are sorted, in that the slow erosion of capital by the slower writing down of mortgage loans will not result in a need for more capital.

And fourth, the market perception is that a meaningful deal will be done on the bank debt.

The latter is getting more and more unlikely. Finance Minister Michael Noonan has signalled that he is keen to exit the banks, selling the ownership stakes valued at €8bn. These represent the NTMA valuation of the €20bn injected.

The only large chunk of debt on which meaningful (setting to zero) action is the Anglo note, and Brian Hayes stated last Wednesday that it will be paid back in full. So no meaningful deal will emerge — nor should it, if we are back in the markets, out of the banks and singing that we are all OK.

Brian Lucey is professor of finance at TCD