Implications of the IMF deal

Tom O'Connor29/11/2010

Tom O'Connor: The IMF deal which has just being announced should be filed under fairy stories. It is economically unrealistic and would be an impossible burden on the country.

Let’s take the figures. The interest rate on the deal is 5.8% and the deal takes €17 billion from National Pension Reserve Fund and National Treasury Management Agency. Remember, the Greek deal was only 5.2% over five years. The longer time period on the Irish deal forces a significant hike in interest rate. The longer time frame increases the amount of interest significantly also.

Let’s put this figure in to the macroeconomic framework. In 2014 our national income measured by GDP, the measure used by the EU, will be €183 billion. At the end of 2009 our national debt stood at €75 billion. This year’s deficit plus the deficits to 2014 plus the bank recapitalisation will bring the national debt up to 183 billion by 2014, 100% of GDP, according to the government’s four year plan.
Now this 183 billion is the principal owed and doesn’t include the interest. This bailout will fund the 35 billion bank recapitalisation and 50 billion in deficit repayments and is in line with the governments own projections in its four year plan.

The interest on the deal will be €45 billion. The total €69 billion plus interest amounts to €114 billion. This is to be paid by the start of 2020 and covers 9 years. This forms part of the national debt from next year onwards. A further €50 billion will be added to the €100 billion which is not part of the IMF deal and which already exists. The total government debt in 2019 without anything paid off it will be €264 billion.

Now, the government’s own four year national recovery plan shows it will run a deficit by until 2014. It will be lucky to break even in 2015. Even during the best year of the Celtic tiger, the maximum surplus run by the government was €3 billion.
So, the government would be lucky to gather €1 billion a year in surplus from 2016 to 2019. This will give them a tiny repayment capacity of €4 billion to the IMF who with interest will be owed €114 billion. Even the sale of all semi-state companies would only pay off another €5 billion.

The fact that we will owe €114 of our national debt to a ruthless organisation like the IMF is a very worrying prospect indeed, given its track record in Eastern Europe, Africa and Latin America.

Given that all the taxation increases will have been used up to bring down the deficit to 3% by 2014 to please the EU and taxes will then by quite high, there is no other avenue for the government to raise the rest of the money. The government cannot come even remotely close to paying. There are no Houdini tricks.

The government projects GDP will be €183 billion in 2014, based on its growth projections. Now, taking the very optimistic scenario that the economy will grow by an average of 3% in GDP terms to 2019, nominal GDP at that stage would be 205 billion. At that stage the €264 billion in national debt will be 129% of GDP.

This figure would include nine years of economic hardship and cutbacks. At the end of the period, Ireland would still owe one and a third of everything we produce in the country in one year, with the IMF being by far the biggest creditor.

The justification for the bailout is to save the euro and bring our economic figures in to synch with the EU’s Stability and Growth Pact. This is nonsense. True, we will be down to 3% in terms of our general government deficit by 2014. However, in that year our debt will still be 100% of GDP. Five years later it will be 129% of GDP. To achieve a worsening debt, we will have sacrificed hundreds of thousands to the emigration markets and unemployment will stay high.

In addition, at 2014, the government’s own four year plan shows that the amount of taxes going to service the interest on the national debt will be 20%. This is based on a rate of interest of 4.7%. This will rise to 25% just to pay the national/IMF interest bill only!

To make matters worse, by 2019 the pension bill will have risen considerably, given the ageing of the population. In fact, the National Pension Reserve Fund was set up to cover some of this cost. Even when the NPRF hadn’t been rifled by the government to recapitalise 7 billion to AIB/BOI and Anglo in the past two years, its total assets then of 25 billion was only equivalent to covering 25% of the pension bill by 2025.

This means that taking the NPRF money to pay the banks under this plan is ludicrous. There would be a strong case to take 8 billion from the fund to stimulate the economy and replace it in five years. This would drive down unemployment by 10,000 for every 1 billion spent and would improve the government finances. Squandering it on the banks, having already taken 11 billion from it for them, is nothing short of a national disgrace.

Even if we achieved an interest rate of 2% from the IMF, sold our semi state companies and ran an exchequer surplus of 6 billion by 2019, our debt GDP ratio would be still 107%. We need to fully nationalise the banks, burn the bondholders, amalgamate the big two banks and start afresh. Only depositors should be guaranteed.
We need to use some our NTMA and NPRF cash reserves of €40 billion to stimulate the economy. A partial long term loan without interest with our own un-borrowed reserves needs to be used to cover the deficits. Any partial EU loan should be without conditions over 20 years.
These are real alternatives - this deal isn’t. This deal is a monumental mistake. The deal cannot be passed until legislation goes through the Dail after Christmas to legalise it. It would be a national scandal if this government’s last sting of a dying wasp was to legally impose this deal on Ireland.This is an edited version of an article published in today's Irish Examiner

Posted in: Europe

Tagged with: EU/IMF fund

Dr Tom O'Connor     @justeconomics

O'Connor, Tom

Tom O’Connor is a lecturer in economics, public policy and health/social care at Cork Institute of Technology.


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