Government urged not to ease up on fiscal consolidation efforts
While the deal will improve Ireland’s chances of meeting the troika-imposed 3% budget deficit target by 2015, the Government should not ease up in its fiscal consolidation programme over the next two years. The deal was a credit positive event which should be reflected by the ratings agencies, added Goodbody.
Ireland still has a junk status rating from the credit ratings agency Moody’s.
The paper’s author, Dermot O’Leary, says the deal was the best possible outcome in view of the ECB’s implacable opposition to anything that remotely resembled monetary financing.
Under the previous arrangement, the Government had to make a €3.1bn payment every March for the next decade. The Department of Finance claimed that because of restructuring, funding pressures have been eased by €20bn over that timeframe.
Mr O’Leary said the €20bn figure is correct on gross terms, but on net terms it was €10bn on the basis that there are significant winding up costs associated with IBRC.
Under the promissory note arrangement, there was a circular flow of interest rate payments between the Government, IBRC and the Central Bank which eventually made its way back to the national coffers.
Under the new arrangement, the Central Bank has to issue €6.5bn of Government bonds to private investors over the next decade.
“We estimate that in the previous structure, the NPV would have been €50.4bn. However, under the new arrangement, we estimate an NPV of €37.2bn.”
There will be no effect on the Government deficit this year because of the transaction costs of winding up IBRC.
The estimated savings over 2014 and 2015 are €1bn per year. Before the restructuring, Goodbody forecast that under the present consolidation efforts, the deficit would have reached 3.7% by 2015. However, “we now estimate that the deficit will be very close to the 3% target at the end of 2015.”
The main downsides are that the bonds have been issued to the Central Bank at floating rates, which creates a potential risk in the future. The transfer of assets to Nama means that the Government will have to make good any shortfall following the independent valuation process.
