It'll be the debt of us!

Fears are mounting that Ireland could default on its soaring national debt pile, amid continuing worries about the troubled banking sector.

The cost of buying insurance against our government bonds rose to record highs on Friday. Debt-market investors now rank us as the most troubled economy in Europe. Pledges made by the Government to support the banking sector now amount to 220% of our annual economic output. The total loans held in Irish banks are more than 11 times the size of our economy.

Following the scandal at Anglo Irish Bank over undisclosed loans, the market fears there are more hidden problems that could ultimately fall to the state to resolve. With the Government set to borrow an additional €15 billion (£13.4 billion) this year, the national debt pile will hit €70 billion. The cost of insuring Irish debt hit 350 basis points on Friday, meaning that for every €100 of debt, it would cost €3.50 to insure against default. A year ago it would have cost 10cent to insure every €100 of our debt.

One possible solution might see Germany buy billions of euros of Irish government debt through a fund set up by the European Central Bank.

National debt on the up

The National Treasury Management Agency (NTMA) was set up by the Government in 1990 with the specific purpose of managing the National Debt and borrowing on behalf of the state, jobs previously carried out by the Department of Finance and the Central Bank. Money is borrowed by the NTMA in a variety of ways. Some of it comes from personal savings invested in An Post. For instance, if you put money into Post Office Savings Certificates, you are actually lending the money to the Government through the NTMA. Other funds are borrowed from financial institutions on either a short or long-term basis. Most new funding is raised by the sale of Government bonds. These are not unlike IOUs. A financial institution lends the money and in return they get an IOU (the bond) that provides a promise to repay the money at a fixed date in the future known as the maturity date and to pay interest each year.

This afternoon, the NTMA said Ireland's national debt at the end of 2008 stands at €50.7 billion, up by €13 billion on last year. The Government had originally forecast in last year's budget that the national debt would rise by €4.8 billion. For next year, the Government had forecast borrowings of €18.4 billion but this does not include any additional funding required since Budget 2009 in October or the recapitalisation programme for the banks announced earlier this month. The NTMA also revealed today that the National Pension Reserve Fund fell in value by 29.5% last year, which the government plans to tap for the bank bailout. The National Debt GDP ratio also increased from 24.8% last year to 41.3% this year.

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