Debt ‘high risk’ over medium term warns European Commission

A slowdown in economic growth coupled with a minor rise in interest rates would have a sizeable impact on Ireland’s debt ratio which poses a “high risk” over the medium term, the European Commission has warned.

The commission’s latest fiscal sustainability report acknowledges the country’s falling level of debt and finds little cause for concern in the short term, but warns of a potentially more worrisome scenario over a longer period of time.

Should fiscal policy remain unchanged and “normal” economic conditions persist, Ireland’s public debt would decline to just shy of 83% of GDP in 2023 before rising again to about 85% in 2026 as the costs of an ageing population and predicted interest rate increases have an effect, the report estimates.

A minor economic downturn, however, would significantly worsen the country’s debt position.

“Given the high initial debt, negative shocks to growth due to shocks to real GDP growth or inflation, and to interest rates would have a sizeable impact on debt-ratio developments,” the report reads.

A 0.5% decrease in GDP coupled with a 1% increase in interest rates would see the country’s debt ratio hit 90% in 2026.

Under those circumstances, there would be a 30% chance the Irish debt ratio would actually be higher in 2020 than it currently is.

Fiscal sustainability challenges remain but have lessened compared to 2012. Full report here https://t.co/8KhyFAzeeS pic.twitter.com/XiqqfpcSYh

— EU Commission in Ireland (@eurireland) January 25, 2016

The report states: “All in all, a very large set of jointly simulated shocks to growth, interest rates, and primary balance, reflecting the size and correlation of past shocks under stochastic debt projections, point to a probability close to 30% of the Irish debt ratio in 2020 being greater than in 2015.”

Greater fiscal discipline on the Government’s behalf, in line with the preventive arm of the Stability and Growth Pact, would see a much larger decrease in the national debt, however.

This would require the Government running a structural primary surplus of 2.5% between 2017 and 2026.

That is 1.2% higher than currently forecast for 2017.

Considering all the scenarios, the commission concludes that “Ireland presents a high risk in the medium term from a debt-sustainability analysis perspective”.

In the shorter term, the commission is confident there is little risk of fiscal shocks but warns that some issues may nonetheless prove challenging.

It again points to the high level of non-performing loans in the banking system as being problematic while also highlighting similarly high levels of private debt.

It lauds the impact of the Central Bank’s mortgage-lending rules to which it attributes a slowdown in the rate of house price increases.