Ireland: how fast can gross debt go below 100% of GDP?

Ireland’s Finance Minister Michael Noonan is this week touring Europe in order to gather support for an early repayment of the IMF loan of EUR22bn. Noonan also stated last week that transferring Ireland’s stakes in the Irish banks to the ESM is less of a priority now that the holdings are worth more, ‘...is not as attractive a deal anymore because our bank shares have become very valuable’. It seems more likely that Ireland will embark on a gradual sale of its stakes in AIB and Bank of Ireland. In this note, we look at how these actions – reprivatisation, repaying the IMF and the recent acceleration in growth – could potentially affect the Irish debt level.

The pace of debt reduction depends on a number of assumptions such as the growth rate, the size of NTMA’s cash buffer and proceeds from privatisation. In our most positive scenario of strong growth, where part of Ireland’s large cash balance is used to repay the IMF loan and Ireland at the same embarks on reprivatisation of its bank stakes, the gross debt could drop below 100% of GDP already in 2016. By 2020, the debt level could go below 70% of GDP. According to the Irish Stability Programme 2014 (adjusted to ESA 2010), the Irish debt is set to drop to 90% of GDP by 2020.

We remain very positive on Ireland and expect that the convergence towards soft cores such as Belgium and France will continue. Ireland has tightened almost 30bp versus Belgium in the 10Y over the past month. We believe the move has further to go and that the spread will drop down to 20bp over the next six months.