Thursday, February 7, 2013

7/2/2013: Trading Debt for Cash Flow Relief?

Muy thoughts (quick one between lecturing) on the deal:

As I understand it,

  1. We have converted quasi-governmental debt into pure Government bond.
  2. Maturity profile is very good - long dated, no restriction on NTMA raising funds at 20 year + 
  3. We are gaining some cash flow improvements up front (where they matter most), but 
  4. We are not getting a major write down on the debt overall. 
  5. Deficit impact is one-off 500mln, that will be absorbed into improvement over 2014 Budget and that's it as it becomes 'repeated measure' equivalent in 2015 and after. 
  6. So material saving to the economy is really 500mln and that is at the peak (2014-2015), after that the savings will decline, until finally, around ca 2020-2025 (needs more precise calculations here) the savings will become negative as we will be paying more in interest than we would have been paying before.
  7. Additional second order effect is that improved bond markets profile is likely to result in slightly lower borrowing costs over time, but this impact is off-set by the reduced Central Bank revenues remittable back to the Exchequer. 
The deal is not putting any final closure to the Anglo or INBS 'odious' debt, but simply constitutes an extension of the debt. 

It can result in the lower real value of the debt over the period of time, assuming Ireland can issue bonds at negative real interest rates (bond coupons below inflation rate), which is unlikely. 

Neither is the deal reducing the debt overall, which means the deal has no effect on the adverse impact of debt drag on growth. The Government never asked for a debt writedown (reduction in the overall debt levels).

The deal is a net positive, but materially not significant enough.

Basic summary - as expected last night on VinB.


Anonymous said...

Could you do NPVs for the deal and PNs which take account of inflation and modest growth assumptions?

Anonymous said...

Thanks Constantine.
The short term gain is that this restructuring will allow some room to manoeuvre in terms of our national budgets but nothing more.

No debt writedown (although none was sought which is appalling) and merely an extension to the time allowed to repay the debt.

It's not a lot to show for 22 months of government in my opinion

Anonymous said...

Curiously, the largest benefit occurs just before the latest date for the next election, and problems appear only after the next election after that. What a coincidence!

Anonymous said...

What they've done is convert debt to sovereign debt. Does it ever get paid? Does anyone care? Does it push Ireland closer to possible default on sovereign debt?

Miriam Cotton said...

Will you write a more in depth post on why you think this 'deal' is a net positive?