Ireland, like other countries, is going to commit eye-watering amounts of money to deal with the coronavirus epidemic. The required spending could easily reach €15 billion this year alone. But where do we get the money to pay for this – and how much cash do we have in various accounts already which might help pay the bill ?
1. We borrow it: The financial markets remain open and the actions by the European Central Bank (ECB) last week – promising over €750 billion in bond buying – is designed to keep interest rates low. The last long-term bond raising by the Irish government a few weeks ago was achieved at a negative interest rate. Borrowing costs have gone up a bit since then, but the interest rate on 10 year Irish bonds is still at just over 0.2 per cent.
Every country is going to be issuing bonds – so the price of raising new money might go up a bit.And we would be adding to our €200 billion national debt. But it is inevitable now that the budget will move significantly into deficit and thus the debt level will rise.
2. We get some help from the EU: The EU has lifted restrictions on national government budgets because of the emergency situation. It has also started to make available European Investment Bank funds to help banks to support SME credits. However, the unprecedented scale of what is happening is putting it under pressure to do more.
One proposal is that the EU would use its financial strength, and the underwriting of the big powers like Germany, to raise money at a very low interest rate to help fund the coronavirus economic response.
As this would involve taxpayers from traditionally fiscally conservative countries like Germany and the Netherlands effectively underwriting loans for bigger debtors, this could be politically controversial.
A variety of financial structures have been proposed by which this could be done an EU finance ministers are starting to look at options. One would involve using the assets of the European Stability Mechanism (ESM) established as the bail-out fund for countries in trouble.
For Ireland guaranteed cheap funding would be welcome – though at the moment markets remain open to us at cheap rates. It would remain to be seen what conditions might be attached to any such programmes.
In the meantime, the actions by the ECB, announcing that it is willing to spending €750 billion buying bonds, is useful for Ireland as it is intended to keep borrowing rates down on the market. This cuts the long-term cost to us of new debt and hopefully ensures markets remain liquid and open.
The markets will be watching closely how this is operated, given reservations from more conservative council members. The ECB has said it will interpret rules which could hinder the operation of this programme flexibly, but this remains to be seen.
A number of commentators argue that the ECB must go further and effectively finance the deficits of the euro zone members by buying bonds directly from governments, This is anathema to the German/Dutch/Austrian group on the ECB governing council – because it is directly financing government borrowing – and is contrary to the ECB’s legal mandate. At the moment the ECB only buys bonds in the secondary market – in other words from other investors. Nonetheless, some experts feel the ECB will come under pressure to enter new territory.
Whatever way the EU goes, it faces a huge challenge to its cohesion as an economic unit and the politics of this will be vital. The scale of what is happening may push leaders to examine unprecedented actions.
3. We use our cash reserves: In terms of our net debt this is not a lot different to borrowing . We do have significant cash resources . The National Treasury Management Agency (NTMA), which manages the national debt, has cash reserves of more than €26 billion. This sounds like a lot, but maturing borrowings which it needs to repay come to over €19 billion this year, including a €10.6 billion bond redemption in April.It also would like to maintain a decent "float" so as never to have to borrow in an emergency fashion if at all possible.
Apart from that the State has about €4.5 billion in liquid investment in the Irish Strategic Investment Fund. There is a further €1.5 billion in the rainy day fund. And National Asset Management Agency (Nama), which is winding up , is due to repay €2 billion to the exchequer later this year and another €2 billion next year.
So ignoring the NTMA cash – most of which we probably should hold in case there is some bond market hiatus – we have about €8 billion in cash available pretty much immediately and another €2 billion due from Nama next year ( it is not clear whether this can be accelerated, it may require selling assets and now may not be a good time).
In our net position, these are useful sums and give us some flexibility.
4. The Apple money. Some €14 billion to €15 billion is sitting in an escrow account relating to the judgement by the European Commission that this money is owed by Apple to Ireland.
Sinn Féin’s Mary Lou McDonald has been among those saying the money should be accessed to help pay for employee supports. However this isn’t possible – unless Apple as well as the State agree to drop their appeal to the EU courts against the commission’s ruling.
The money was put into the escrow account as Ireland was obliged to collect the money – and Apple obliged to pay it – after the commission verdict. This is pending the appeal to the European courts, which could take some years as it is currently under consideration by the European General Court and can then be appealed to the European Court of Justice.
In the meantime, the agreement has, in the words of the Comptroller & Auditor General, led to “joint control” of these funds by the Government and the two Apple companies involved.The money is under the control of a custodian, Bank of New York Mellon, subject to a set of rules. So we do not have access to it
In a Dáil answer in July, Minister for Finance Paschal Donohoe said: "The arrangements in the Escrow Framework Deed include the agreement that all claims of ownership and access to this money is suspended until the European Courts have concluded the proceedings that the Government and Apple have brought."
So the money could only be released if both Apple and the Irish Government dropped their appeal. There is another potential complication in that the terms of the judgement appeared to leave it open to other EU countries to claim a share of the money, on the basis that it is due to them and not the Irish exchequer. The Government has referred to this possibility, thought the precise basis on which any claims might be made are not clear.
The bottom line is that we have significant cash both in the NTMA’s reserve and in other sources which can be used, if needed. For the moment the markets also remain open to borrow more.
A delicate balancing act lies ahead in paying the bills and higher debt levels and a move into deficit mean the outlook for the next government has changed significantly.
