Ireland’s Public Debt CrisisWhy Prof. Morgan Kelly is wrong (this time)

SEAMUS COFFEY

It is not implausible that prices could fall - relative to income - by 40-50 per cent.

We could see a collapse of Government revenue and unemployment back above 15 per cent.

Prof. Morgan Kelly, Irish Times, 28th December 2006

Primetime 17 April 2007 Kelly vs Power 4:30 11:30

December 2006

Irish banks were facing potential losses on their property lending of the order of €10 billion to €20 billion. Thanks to Brian Lenihan's master stroke it looks as if it will be you, rather than bank shareholders, who will be taking the loss.

Prof. Morgan Kelly, Irish Times, 2nd October 2008

Primetime 30 September 2007 Kelly vs Keenan 1:30 8:49

October 2008

To see what would happen to Ireland if foreign lenders suddenly pull the plug, we only need to look at what happened in Latvia last December. We would be forced to seek an international bailout, with the International Monetary Fund and European Union playing bad cop and good cop.

Morgan Kelly, Irish Times, 17th February 2009

February 2009

Brian Lenihan’s largesse to bond holders could cost you and me €50 to €70 billion.

The drift into national bankruptcy looks increasingly unstoppable.

Prof. Morgan Kelly, Irish Times, 3rd July 2009

July 2009

Between developers, businesses, and personal loans, Irish banks are on track to lose nearly €50 billion if we are optimistic (and more likely closer to €70 billion), which translates into a bill for the taxpayer of over 30 per cent of GDP.

M Kelly Bank Loan Loss Spreadsheet May 2010

Prof. Morgan Kelly, Irish Times, 22nd May 2010

May 2010

Where the first round of the banking crisis centred on a few dozen large developers, the next round will involve hundreds of thousands of families with mortgages.

If one family defaults on its mortgage, they are pariahs: if 200,000 default they are a powerful political constituency.

From here on, for better or worse, we can only rely on the kindness of strangers.

Prof. Morgan Kelly, Irish Times, 8th November 2010

November 2010

Irish insolvency is now less a matter of economics than of arithmetic. If everything goes according to plan, as it always does, Ireland’s government debt will top €190 billion by 2014, with another €45 billion in Nama and €35 billion in bank recapitalisation, for a total of €270 billion, plus whatever losses the Irish Central Bank has made on its emergency lending.

Subtracting off the likely value of the banks and Nama assets, Namawinelake (by far the best source on the Irish economy) reckons our final debt will be about €220 billion, and I think it will be closer to €250 billion.

Prof. Morgan Kelly, Irish Times, 7th May 2011

May 2011

So general govt debt of €148bn in 2010 + €43bn deficit 2011-2014 + additional capital for banks (€35bn earmarked of which

€25bn is described as a contingency) + debt redemption nil (rollover) + NAMA €45bn (€40bn bonds including pyt for sub-€20m

exposures and €5bn development debt) + swapping of ECB/CBI ELA for national debt x,

So €271bn + x for ECB/CBI ELA swap for general government debt.Obviously NAMA will have some value as will ELA and we start off with some funds in the NTMA/NPRF so the net will be less than that , but I would have said €220bn as a rough ballpark.

www.namawinelake.wordpress.com, 8th February 2011

Namawinelake

“There are grounds for believing that Kelly’s estimate is wrong to the extent of between €50 and €60 billion and that the real figure will be closer to €190 billion.”

Antoin Murphy, Sunday Business Post, 15th May

“For undisclosed reasons, he feels the resulting figure is too optimistic and adds a further €30 billion as a contingency provision. This brings his projection of the gross GGD to €250 billion at the end of 2014.Kelly’s inclusion of €35 billion under this heading is double counting.”

Tony Leddin and Brendan Walsh, Irish Times, 20th May

Reaction

What is the reality?

General Government Debt:

START: 2006 = €44 BillionMIDDLE: 2010 = €148 BillionEND: 2014 = €??? Billion

2007 to 2010: From €44bn to €148bnThree reasons:1. Annual Deficits: €52 billion2. Increase in Cash Balances: €12 billion3. Banks & Promissory Notes: €40 billion

2006 GGD of €44 billion plus this €104 billion

2010 General Government Debt = €148bn

2011 to 2014: From €148 bn to ???

What’s remaining?1. Projected Annual Deficits: €48 billion 2. Further Bank Recapitalisation: €10 billion3. Interest on Promissory Notes: €4 billion

2010 GGD of €148 billion plus this €64 billion

2014 General Government Debt = €210bn

2014 Government Debt

ITEM €billion2006 General Government Debt 44Accumulated Deficits 2007 to 2010 52Borrowings for Cash Balances 12Direct Payments to Banks 9Promissory Notes to Banks + Interest 35Bank Recapitalisation from Stress Tests 10Projected Deficits 2011 to 2014 482014 Projected General Government Debt 210Cash Balances -162014 Projected Net Government Debt 194

Breakdown of this €210 Billion Debt

2006 Pre-Crisis Debt: €40 billion2007 to 2014 Deficits: €100 billionBank Related Debt: €54 billionCash Reserves: €16 billion

By 2014, the bailout of the banks will be responsible for around 25% of our gross debt.

Domestic Uncertainties

On the asset side:1. Value of remaining €5 billion in the NPRF2. Resale Value of the Banks = €? Billion3. Lower interest rate on bailout funds4. Burning of senior bank bondholders

Bank Bondholders

Domestic Uncertainties

On the liability side:1. Slippage in the annual deficits above €48 billion2. Potential Losses on €30 billion of NAMA loans3. Further losses in the banks4. €130 billion of Central Bank Liquidity

Annual Deficits

Our Bust Banks are Covered

Losses Accounted For = €105 billion1. NAMA: €42 billion2. Stress Tests: €53 billion3. Stock Provisions: €10 billion

Money Provided to meet losses = €105 billion1. The State: €66 billion2. Equity & Reserves: €25 billion3. Junior Bondholders: €14 billion

Our Bust Banks are Covered

Our Bust Banks are Covered

Our Bust Banks are Covered

Can we even get to 2014?

How much do we need? Where can we get it?

Outstanding Government Bonds

Maturity Profiles

Maturity Profiles

Morgan Kelly's Ultimate Warning

Endgame