Analysis:The State's debts will pass the €200 billion threshold in the coming months. This is a shocking number. Relative to the amount of wealth created in the economy each year, this debt is among the highest in the world.
Despite tentative signs a real recovery is taking hold in the economy and despite last month’s deal on the €28 billion promissory note, it is still far from certain the State’s debt burden is manageable.
Sovereign default in the years to come is still a very real possibility. However, a Portuguese-led push in Europe, ongoing since late last year, is now all but certain to make that burden considerably more manageable (although, one hastens to add, even the best possible deal from Brussels in the weeks and months ahead will not be transformative).
Initiative
This new initiative amounts to a third track in the Irish Government’s efforts to have other European taxpayers share the burden of debts taken on by the State.
Until recently, the Government had focused on a two-track approach in Europe to making the debt burden more manageable. One track involved the promissory note used to bailout creditors in the defunct banks; the other centred on the retrospective European recapitalisation of the two pillar banks.
The Portuguese, who stood to benefit from neither of these Irish efforts, are in dire straits. Their debt burden is rising faster than Ireland’s and their economy is still sinking fast. It is increasingly likely they will go the way of Greece unless these two inter-related trends are halted soon.
Opportunity
Lisbon spotted an opportunity to make its position more manageable last November when a deal was done on the bailout funds Greece owes to the rest of Europe (four months ago the rest of Europe gave Greece something akin to the deal Ireland was given on the promissory note in terms of much lengthier repayment schedules and lower interest rates on its bailout loans).
If the Greeks get it, we want it too, said the Portuguese. Given that it is in nobody’s interests for Portugal to default, agreement in principle to revisit the terms of loans to bailed out countries was reached in January. That was reaffirmed this week in Brussels.
Just as happened in the summer of 2011, Ireland will benefit from others’ efforts. The extent to which this State’s debt sustainability is improved by the deal will not be known until the details are agreed, but the amount of bailout loans outstanding gives some indication of how big a difference it could make.
By the time the State completes drawing down the bailout funds from EU sources at the end of this year, these debts will amount to €40.2 billion.
