Ireland’s National Debt - Is the debt sustainable?

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McFadden, Liam
Issue Date
MBA in Finance
Dublin Business School
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The national debt of Ireland is enormous. At the end of Q1 2016, the amount owed by the country stood at €206.8bn or €43,453 for every person in Ireland. As a measure of GDP, Ireland’s debt now stands at 80.4%. The debt soared after the global financial crisis began in 2008. From a long standing level of approx. €40bn, Ireland’s debt jumped to over €215bn by Q2 2013. This happened because Ireland was forced to pump over €70bn to bailout the banking sector, at the same time the economy crashed, causing a massive collapse in budget finances. Led by its political leaders and the banking hierarchy, Ireland now finds itself living on debt through cheap rates of credit – largely a result of global quantitative easing. Interest on the national debt costs €7bn per year, and whilst falling, is an enormous burden on the Irish people. Irish issued government bonds from the crisis have maturities out past 2050, so future generations of Irish people will be paying this part of the national debt for years. And though the debt is quoted as a % of GDP, and may appear to be falling, it’s only because our GDP is growing. Ireland’s nominal debt has only decreased from €215.0bn in 2013 to €206.8bn presently. In GDP terms our debt has fallen from 124% to 80.4%*. This somewhat false sense of achievement gets brought into sharp focus with the reality that the debt would inevitably spike back up again in the event of an economic downturn. In any downturn, there’s a double whammy effect – more debt needs to be issued to finance the country’s activities and GDP naturally falls as a result of reduced economic activity. A cautionary note of warning needs to be made in terms of our debt’s sustainability – financing debt today is much cheaper because of the vast amounts of liquidity in the market and ultra-low interest rates. With Ireland achieving strong economic growth over the past 2 years, this should not be taken that manging the national debt is straight forward or painless. Ireland is susceptible to a debt crisis should there be another economic downturn, credit crunch or any one of a long list of economic pitfalls – such are the consequences of being a heavily indebted small open economy. Author keywords: Ireland, National debt, sovereign debt, financial crisis, Irish fiscal crisis, leprechaun economics