Up to our neck in it
By Seán Whelan, Economics Correspondent
OK, we know it’s bad, but how bad. The Fiscal Council has done us another favour by trawling through all the various state accounts to try and figure out the impact of the financial crisis on the state.
Their basic approach has been to look at the state’s balance sheet, and see to what extent assets offset liabilities. We all know the state has a lot of debt – more than €200 billion or more than 120% of GDP. But we tend to forget about the other side of the balance sheet, the assets.
Yes, the state has assets – both financial (like cash) and non financial (like land and buildings). Indeed as a percentage of GDP Ireland has more liquid financial assets than Germany (15% vs 10% says Eurostat). That’s cash money folks – some €24 billion worth.
Shares and other equity make up another €24 billion. Half of this sum is made up of the equity value of semi-state companies and €2 billion of central bank reserves. ESB is about half the value of the semi-state portfolio.
National pension reserve fund assets are valued at €9 billion, and include some bank shares, but not preference shares. They are included in another category “other equity holdings”, valued at €3 billion. This includes the value of direct exchequer holdings of bank shares, investments in the insurance sector and contributions to the European Stability Mechanism, the ESM. Yes, our contribution to a bailout fund is a state asset.
Then there are securities other than shares, valued at €10 billion. This includes the value of the NPRF’s holding of preference share warrants of €5 billion, and the €3 billion contingent capital provided to AIB, Bank of Ireland and Permanent TSB.
Then there are loans and other assets (such as accounts receivable). This is valued at €15 billion, and includes such odds and ends as loans from Housing Finance Authority, tax accrual adjustments, EU transfers, spectrum auction money etc.
The eagle eyed amongst you will have no doubt realised by now that this haul of assets is not enough to offset the liabilities of the state. Indeed it adds up to €73 billion (at the end of 2012).
So when we lay out €73 billion of financial assets on one side and €208 billion in liabilities on the other, we end up with a Net Financial Asset position of – €135 billion. That’s 82% of GDP. And that’s bad.
How bad? Well in 2007 the state’s financial assets and financial liabilities cancelled each other out, so we had Net Financial Assets of zero. So we went from zero to -€135 billion in five years. Ireland suffered the largest cumulative deterioration in its net financial position of any country in the euro zone. Only Greece and Italy have a worse position. And measured by GNP instead of GDP, Ireland’s net financial asset position is as bad a Greece.
Luckily the state has other assets – non-financial assets. These are not broken down in detail by the CSO, but include fixed assets, stocks, land (including other natural assets), and intangible assets (like what – the value of “brand Ireland”?). Anyway, the CSO says the non-financial holdings of the state have a monetary value of approximately €57 billion.
So adding financial and non financial assets of the state and setting them against the liabilities…….still leaves us short. Well short. Like €77 billion in-the-hole-type short. So the net worth of the state is -€77 billion. Or -47% of GDP.
As recently as 2009 we were still in the black – to the tune of €20 billion – thanks to non-financial assets valued then at €61 billion. There was no estimate for non-financial assets in 2007, when the net financial position was zero. So the net asset position would have been much better (if we assume non financial assets were worth as much in 2007 as they were in 2009, then the state was positive €61 billion in net assets).
Of course these are just the “on balance sheet” liabilities of the state we are talking about here. NAMA, for example, was deliberately set up in such a way that its liabilities would not appear on the state balance sheet. It is an off balance sheet contingent liability of the state, as the Minister for Finance has guaranteed 95% of the value of NAMA’s €31 billion of bonds. Though to date NAMA has paid back €6.75 billion, and says it will have paid €7.5 billion by year’s end – one quarter of its liability.
This is one example of why the Fiscal Council says we have to be careful in looking at off balance sheet liabilities. It notes that the usual way they are presented is to stress the worst case scenario (in NAMA’s case the assumption that all €30 billion of cost would fall on the taxpayer). But in reality worst case scenarios rarely come to pass. Which makes it harder to assess the actual potential cost of things go wrong.
The bank guarantee is another contingent liability where the full cost will not be the worst case scenario. The worst case was the €375 billion that was covered by the state guarantee on the night of the bank guarantee five years ago. Since then that scheme expired (after two years), was replaced by another, ELG, which was abolished in March. At that point the contingent liability to the state was down to €75 billion, and has fallen further as instruments fall out of guarantee.
Up until the end of 2012, the state was paid €3.8 billion in fees by the banks for the guarantee. So far the only money paid out under the guarantee was €1.1 billion, triggered by the liquidation of IBRC (formerly Anglo Irish Bank).
Public Private Partnerships add another five billion in contingent liabilities, bringing the total at the end of 2012 to €119 billion.
Then there are the implicit liabilities of the state things that aren’t formally guaranteed, but the state ends up picking up the tab for anyway if things go wrong. In Ireland we know all about the implicit guarantee that states make to their banking sector – they aren’t implicit anymore. The EU “banking union” plan aims at reducing the hit on national governments if banks run into trouble in future.
But there are other implicit guarantees out there too – such as welfare obligations. There is no explicit contract, we just assume the state will find the money somehow. Related to this is the cost of an ageing population – our ageing costs will increase faster than the EU average over the next half century.
And then there are monies the state has (or is is likely) to cough up to keep an industry going – such as the €900m it has had to loan to the insurance compensation fund since 2011 to keep Quinn Insurance going. Or the recapitalisation of VHI, or the possible cost of the Waterford Glass pension judgement in the European Court of Justice, which could cost up to €280m.
So what happened to the €64 billion we “invested” in the banks. Well the CSO valued it at year end at just €11 billion. That’s split up in the accounts as €4 billion in the NPRF bank equity holding, €4 billion in Exchequer held preference shares, and €3 billion in Contingent capital (€1 billion of this – in Bank of Ireland – was sold earlier this year, moving from equity to cash).
Any upside for the taxpayer depends on the value of the banks rising – which means profit growth and a recovery in property values, the main asset bank lending is secured on. Such things can happen (the sell-back of Lloyds in the UK is an example), but such is the level of non-performing loans in Ireland – 25% of the loan books – that the IMF regards this as an immediate concern.
The effects of the decision to liquidate IBRC get a whole chapter to themselves in the report -such is the highly complex nature of the arrangement. In brief, the IFAC believes the deal will be positive to the state to the tune of about €1 billion a year. The gain comes in the form of a reduced funding requirement, improving the General Government Deficit by that sum. In other words, its not a case of suddenly finding an extra billion in cash to spend, it’s a gain because the state needs to borrow a billion less each year.
Other gains are harder to quantify, as they involve investor perceptions and how they might improve the overall borrowing costs of the state. For example the ending of Exceptional Liquidity Assistance – the funding raised on the prom notes from the ECB that was re-approved every two weeks – and its replacement with a stable long term arrangement.
As for the big question – how much is owed by the state – the report says there is no simple answer, as adding up the different classes of assets and liabilities can be misleading. But it is clearly a lot.
As the authors themselves say: “The financial crisis has transformed the public finances in Ireland. Substantial government deficits and costs related to rescuing the banking sector have led to a large increase in government debt and created significant contingent liabilities.”