The National Treasury Management Agency (NTMA) is presently sitting on a cash mountain of nearly €25bn. It places it on deposit in the Central Bank of Ireland and receives interest at a rate of just 0.1% per annum – yes, just zero point one per cent! The €25bn is either borrowed or could be used to pay down borrowings which cost us an average of 3.5% per annum. In other words, this State is sitting on a cash mountain costing us €875m a year in interest and if you deduct the €25m we get from the Central Bank, in net terms this mountain of cash is costing is €850m! Per Year!
Now, there is a reason why the NTMA does keep a cash reserve. Ireland is in a precarious financial position with a general government deficit over €10bn per annum and our deficit:GDP was about 8% in 2012 which is horrendous. And at the end of 2013, the funding from the €67.5bn external bailout from the so-called Troika comes to an end. And we have colossal borrowings which we need to repay – previously issued bonds and repayments to the Troika.
So the NTMA calculates that it needs some reserve or buffer. It calculates that if markets know there isn’t such a buffer, then those markets will demand higher rates of interest than they otherwise would on new issuance of bonds. Which all seems rational.
So, we’re buying insurance for the funding of the State which is costing us €850m per annum.
Is €25bn too big a cash buffer? No, according to the CEO of the NTMA this afternoon when he appeared before the Oireachtas Finance, Public Sector and Reform committee at Leinster House. John Corrigan (pictured above) said that he and his colleagues at the NTMA looked around and saw that other countries keep similar levels of reserves and indeed there is evidence of countries keeping 18 months of reserves.
But does Ireland need such reserves at this challenging time, when €850m could cushion austerity or provide a stimulus? And more importantly, when there are two potential sources of alternative funding in the guise of contingent facilities from the Troika and the so-called Outright Monetary Transactions (OMT) scheme at the ECB – this is where the ECB said it would buy a country’s bonds if the country was “regaining bond market access” and was willing to submit to ECB conditions.
This afternoon, John Corrigan confirmed that the State is in talks with the Troika over contingent funding arrangements when the official bailout funding is exhausted at the end of 2013. He could not be coaxed into providing details of the talks, but plainly if such stand-by funding were available from the IMF and the new EU fund, the ESM, then that should reduce the need for a cash reserve.
The NTMA CEO claimed that no-one really knows the criteria for the ECB providing OMT funding. This week, Minister Noonan bizarrely claimed the ECB simply required a country to issue two 9-year bonds or equivalent – “The preliminary steps would be to have two issuances of nine-year paper or its equivalent, and then we’re in a position to apply” he is quoted as saying in Brussels by the Financial Times. But even Greece could probably do that today at high interest rates and with a small amount of bond issued.
So right now, confusion and uncertainty about the ECB’s OMT and the IMF/ESM contingent or stand-by funding means that we are still maintaining a €25bn cash mountain.
The Labour back bench TD, Kevin Humphreys (pictured above) has noticeably been asking some useful questions in the Dail of late, and yesterday asked a series of questions about the cash holding at the NTMA. The response from Minister for Finance, Michael Noonan was hardly very helpful, but the Deputy did put the important questions on record – are we holding too much and would it not be better to deploy a reduced interest bill in the economy rather than paying interest on such a large cash mountain.
The full parliamentary questions and response are here.
Deputy Kevin Humphreys: To ask the Minister for Finance if he will provide the Exchequer cash balance at the end of December 2012; the source of these funds, specifically the quantum raised by the National Treasury Management Agency and the amount drawn from the Troika assuming that all tax revenues service spending, and that the cash balance is provided from borrowings, and if he is concerned at the very high costs incurred by the State in holding such large cash balances; and if he will make a statement on the matter.
Deputy Kevin Humphreys: To ask the Minister for Finance if he has considered delaying the draw down of funds from the IMF and EU funds and bilateral loans, which are being held as cash balances, until the moneys are actually required to reduce the costs of maintaining such a large Exchequer cash balance, recognising the need to raise market funds through the National Treasury Management Agency when conditions are optimal but reducing the overall cost to the State of these activities; and if he will make a statement on the matter.
Deputy Kevin Humphreys: To ask the Minister for Finance his views on recent media reports that the estimated cost of maintaining an Exchequer cash balance in excess of €20 billion results in a cost of approximately €35 million per billion euro on deposit, and that the State could find better uses for the annual sum that would be in excess of €700 million that is wasted due to this policy; if he will consider mechanisms to reduce this cost; and if he will make a statement on the matter.
Minister for Finance, Michael Noonan: At end 2012, the Exchequer had €19.3bn on hand in cash and deposits. As the proceeds of all borrowing, including borrowing under the EU-IMF Programme, as well as revenues including tax and non-tax, are lodged to the Exchequer account to fund general expenditure, it is not possible to disaggregate the balance on that account by source or derive a single robust cost figure in relation to the balances maintained.
Funds in the Exchequer are used for the ongoing payments necessary for running the State. Budget 2013 estimated that the cumulative Exchequer deficit over the years 2013-2015 would be close to €35 billion. In addition to these day-to-day costs, there are large debt redemptions that are scheduled from early 2013, including a €5.1 billion bond repayment in April 2013 and a €7.6 billion bond repayment in January 2014. The continuing budget deficits and debt redemptions must be adequately and prudently funded.
Decisions on the level of cash reserves, which are a matter for the NTMA, take account of various factors in addition to the cost of maintaining such reserves. These factors include considering the potential cost of not maintaining an adequate and prudent cash balance. This includes the risk that the Exchequer would be unable to meet its obligations and that market interest rates would possibly be higher than would otherwise be the case due to the perception that the State had a precarious liquidity position.
Exchequer cash reserves are an important component in bolstering investor confidence in Ireland as it continues on the path to full independent market access at sustainable interest rates. The EU/IMF Programme ends this year making such market access of critical importance. With regard to the drawdown of remaining funding from the EU/IMF Programme, I will continue be regularly advised by the NTMA, who manage the country’s debt, as well as my officials on Irelands debt strategy. However, it is fair to highlight that given the projected cost and duration of funding available under the Programme of external assistance, we would expect to fully draw down the remaining scheduled funds, in line with that provided for in Budget 2013.
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