THE NATIONAL Treasury Management Agency (NTMA) was set up two decades ago to manage the national debt and to finance, where necessary, the annual borrowing needs of government. Since then, the agency has greatly expanded its role.
Today this includes running a sovereign wealth fund, the National Pensions Reserve Fund; offering advice on the financing of public investment projects; and through the State Claims Agency, defending legal claims taken against the State. The establishment of the National Asset Management Agency (Nama) in November, under the aegis of the NTMA, added a new responsibility and presented a formidable challenge.
Results for 2009 reported by the NTMA last week show that it can be satisfied with its overall performance, in particular its skilful management of the national debt at a time of economic uncertainty and market volatility. As the Government tried to contain the rapid deterioration in the public finances last March, the NTMA struggled to finance a rising budget deficit. It did so with some difficulty and at a higher cost as increasingly nervous investors sought a higher return to compensate for the default risks associated with a sharply contracting Irish economy. The risk – or yield – premium that Ireland then paid on its borrowings was three percentage points higher than Germany. But by year end, that differential had halved. Ireland has regained in some measure the confidence of international investors who have been impressed by the Government’s efforts via two budgets last year to correct the fiscal deficit.
In this respect, Ireland and Greece present a study in contrasting fortunes and provide a useful lesson. Last March, Ireland’s cost of borrowing was higher than Greece’s. That position has since been reversed. Greece has forfeited investor confidence through its failure to produce either reliable economic statistics or credible budget forecasts. It has paid a huge price for that failure in the form of a much higher cost of borrowing as international investors worry about the increased risk of debt default. Ireland avoided Greece’s fate by sustaining investor confidence through resolute budgetary action and by skilful debt management.
In 2010 Ireland faces fewer problems in financing its borrowing needs. It will be borrowing an estimated €20 billion – far less than the €35 billion raised last year – thanks to a lower Exchequer deficit and a lower debt refinancing requirement. Nevertheless, the NTMA will be operating in global capital markets where borrowing pressures are set to intensify. The International Monetary Fund estimates the budget deficits of the advanced economies will average 9 per cent of national income this year, up from two per cent in 2007. In a bid to avoid another great depression, governments worldwide have raised spending as tax revenues have fallen. This has resulted in soaring budget deficits, higher than in previous peacetime conditions. And as these borrowings have to be financed, the increased demand for credit will push bond yields higher and put interest rates under pressure. That will be bad news for borrowers.