A Halloween nightmare but Ireland not alone facing scary debt

In Times Square, they have that famous clock with the blurred digital displays trying to keep up with the additional millions of dollars the government of the largest economy on earth needs to borrow every few minutes. Ireland's equivalent of the American debt clock is the more prosaic web page of the National Treasury Management Agency (NTMA), where the agency offshoot that issues sovereign IOUs on behalf of our Government publicly keeps count of the rising sovereign debt pile here. Its debt clock - updated monthly - shows the debt pile at €70.75bn, and rising. Eighteen months ago, the debt pile barely constituted being called a debt mound. Then only at €25bn or €30bn, Ireland, after tiny Luxembourg, had the lowest debt in Europe when measured against the size of the output of its annual economy, or GDP. Fast forward to the present and one senses that the national discourse about the size of the national debt has yet to begin. The big scary numbers will become the stuff of Halloween nightmares for many years to come. The debt pile will inevitably - and unavoidably - grow much higher. It sounds like economic heresy to say that the debt mountain will grow whether or not Minister for Finance Brian Lenihan delivers on his proposed €4bn in government spending cuts in his December budget. Indeed, it matters little whether he or a future finance minister secures another €4bn in cuts the following December and another €4bn in cuts the December after that. That's because government revenues have taken such a severe hit. At the same time, the demand on the taxpayer from five banks for new capital is also large. Sovereign debt is set to soar whether cuts, large or small, are implemented to annual spending. Even slashing €10bn in public spending in each of the next four years would fail to stop the debt pile growing. It's what happens when economies shrink under severe economic stress. Only a miraculous rebound in the world economy - and it would need to be starting almost immediately - would cap the Irish debt pile at lower levels. The debt figures are scary. Fitch Ratings, one of the world's big three ratings agencies, updated its Ireland forecasts last week. Fitch is paid by the people buying or holding any form of debt paper - sovereign IOUs issued by a government agency like the NTMA, municipal authority or a private company - to assess the creditworthiness of the borrower. Or, to put it another way, Fitch or Moody's or Standard & Poor's measures the risk that the lender will fail to get his or her money back. In the arithmetic of the big scary numbers, Fitch has bundled in the €54bn in debt paper that the new National Asset Management Agency (Nama) will pay the five banks, in instalments, through next summer for their discounted €77bn of troubled commercial property loans. The Department of Finance and the debt agency, NTMA, will dispute the way Fitch has done its sums. The Nama debt loans, as the Government rightly says, will not trade freely like sovereign debt paper on any secondary market. When issued, the Nama bonds will instead stay on the balance sheets of the five Nama-ed banks, including AIB, Anglo Irish and Bank of Ireland. The Government will also point to the endorsement it received from Eurostat, the EC watchdog that polices the accounting tricks of national governments. Favouring Dublin's interpretation, Eurostat deemed that the Nama bank bonds will not count in the official sums when comparing the debt piles of countries across Europe. That's all well and good, says Fitch, but Irish taxpayers will still be liable for the Nama-related bond debt through their future tax payments. Bond market lenders, the people who buy Irish sovereign paper, will therefore view the Nama bank debt the same as sovereign bond debt. Regardless of what the Government here or Eurostat allows under its accounting rules, bond markets will pile Nama and conventional sovereign debt paper together on the big Halloween bonfire pile. Fitch's frightening figures see gross sovereign debt here climbing to €115bn by the end of December, including some €15bn of the €54bn it calculates will be paid over to the banks by the end of the year in the form of Nama debt paper. Next year, pile up the remaining €39bn of debt linked to the Nama loans, add a new €20bn of conventional sovereign debt the Government will need to borrow that year and the bonfire rises from €115bn to a new height of €174bn. In 2011, the Government, even if it were successfully to cut spending in each and every budget, would need to borrow another €12bn to balance the books, bringing the debt pile to €186bn by then. A little bit more - €6bn - is added to the bonfire the following year, Fitch forecasts, and the debt pile by the end of 2012 amounts to €192bn. From there on, a quickening pace of economic recovery helps to cap the debt edifice and the debt pile settles close to €195bn by the end of 2013, according to Fitch. The gross numbers in sovereign debt look very large but tell us very little. To make international comparisons requires the gross debt level to be divided by the annual GDP number. Just two years ago under this measure, Ireland's so-called debt ratio was only 25 or 30 per cent of its annual GDP - the lowest in the European Union. Fitch estimates that this year's €115bn debt pile will amount to a still respectable ratio of 70 per cent of a GDP that has shrunk to €165bn. Turbo-charged by the Nama loans, the ratio climbs to 108 per cent of GDP by the end of next year and peaks, in 2011, at 110 per cent of GDP. Economic output by then is assumed to have started to grow again, to €169bn. By the end of 2012, the economic pressures ease a bit more but the legacy of the debt burden remains. Ireland will be paying debt service charges on sovereign debts of €192bn. By then, the debt ratio will have shrunk slightly to 107 per cent of GDP, estimated at €179bn. It's striking that the legacy cost of the bank's reckless lending to property developers can be measured. If the Nama bond debt were stripped out, the sovereign debt pile, says Fitch, would only amount to €138bn, or 73 per cent of GDP, at the end of 2013. However, even if the banks had behaved reasonably and financial regulators had done their jobs, the costs linked directly to the economic slump would still have contributed a huge - and the largest share - chunk of the debt pile. Other countries' debt burdens will rise, too. International comparisons make Ireland's fall from the status of a debt-light to a debt-laden sovereign only slightly more palatable. Fitch forecasts debt piles in Italy and Greece will peak in the next few years at 120 per cent of their respective annual GDPs, and British debt will reach 90 per cent of its GDP in 2011. And as the debt clock in Times Square speeds on, the cost of the recession will likely push American debt to new heights before recovery eventually reduces its debt pile.