Debt Service and the Promissory note

Wednesday 12 December 2012 15.31

By Economics Correspondent Seán Whelan @seanwhelanRTE

Interest costs continue to mount on notes

It’s a number that leaps off the page – €1.9 billion in interest for the promissory note payment due next March.  It alone counts for most of the €3 billion jump in debt service costs next year.

According to the medium term fiscal statement, the total interest bill for the state is estimated at €6.3 billion this year, but surges to €9.3 billion next year – that’s 48% more interest on debt.

Without the promissory note interest charge the rise in debt service costs is still a hefty 18%.  But if you can save on an interest bill – you should. These figures highlight the Government’s urgent need to restructure the promissory note arrangement to make its debt figures look more sustainable.

In particular a deal could improve the debt interest ratios in the government accounts.  Back in 2007, debt service cost 3% of general Government revenues (or 1% of GDP).  This year it will be 11.4% of Government revenue (3.9% of GDP).  But next year debt service will account for 16.2% of government revenue (5.6% of GDP).   And it will stay around 16% of revenues until the end of the forecast period in 2015.

The impact of the promissory note – the mechanism by which the state repays €31 billion in emergency lending it got from the Central Bank to cover losses at Anglo Irish Bank and Irish Nationwide Building Society – is more acute next year because of the ending of a two year interest “holiday”. During this holiday the state did not have treat any of its annual €3.1 billion promissory note payments as interest, just principal.

But under Eurostat accounting rules, the state now has to treat a hefty part of the repayment as interest, worsening the debt service ratio (though not the cash position).  So in 2012, the accounts show a modest accrued interest charge of €15m on the promissory note.  But next year that leaps to €1.9 billion (and €1.8 billion the year after, and €1.7 billion in 2015).

Restructuring the promissory note along the suggested lines of a long term, possibly interest only, loan would help to keep the debt service ratio down, and improve the cash position of the government.  Is this what the European council meant in its June 29th conclusions, where it spoke of “further improving the sustainability of the well performing adjustment programme” for Ireland?

The Department of Finance admits 16.2% of revenue is an awful lot to spend on interest, though it says that back in the mid 80s debt service cost 20% of revenue, or nearly 11% of GDP (compared with an estimated 5.6% of GDP for next year).  So we survived worse.

But there was nothing as politically toxic or financially destructive as the promissory note back in the 80s.

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