I will go through my statement quickly.
The NTMA was established at the end of 1990 to borrow for the Exchequer and manage the national debt. Its original objectives were to ensure adequate liquidity for the Exchequer and to minimise the interest burden in the medium term, subject to an acceptable level of risk. Since then the remit has expanded greatly as the Oireachtas and the Government have delegated substantial additional functions to the NTMA, which include the State Claims Agency, the management of the National Pensions Reserve Fund and the National Development Finance Agency. Recently, the Government announced that it intends to establish a National Asset Management Agency, NAMA, under the aegis of the NTMA.
The NTMA operates as a financial institution with a commercial remit outside the Civil Service structure. Its organisational arrangements enable it to operate with a tight staff complement, currently about 170 across all business units and support functions. As such, it has the capacity to deal with a wide range of financial issues on behalf of the State and the flexibility to respond to current trends and market conditions.
When the NTMA was set up, Ireland's national debt was one of the highest in Europe, at around 100% of GNP. By 2007, the year under review today, it had fallen to its lowest level in recent years, 23.3%. The borrowing requirements published in the supplementary budget 2009 imply that the ratio will rise significantly in the next few years. Using the standard EU measure, the general Government debt to GDP ratio rose from 25% in 2007 to 43.2% in 2008, and is forecast to peak at 79% in 2012. It should be noted that the forecast euro area average for 2010, the latest year for which the Commission has published a forecast, is 83.8%, and Ireland is forecast to remain below this average. Additionally, the EU measure is a gross measure and does not allow the assets of the NPRF or the substantial cash balances that the NTMA has built up to be offset against the debt. These assets currently represent more than 20% of GDP.
In terms of the burden that the cost of servicing the debt places on the Exchequer, interest payments were almost 27% of tax revenue when the NTMA was established in 1990. This had fallen to less than 4% by last year. This ratio is also forecast to increase significantly over the next few years and, while it will reach around 18% in 2013, this is no greater than the levels experienced in the mid-1990s. Throughout the decade from 1998 onwards, the Exchequer was either in surplus or broadly balanced. However, as a result of the deterioration in the public finances, there was a relatively small deficit in 2007 and in 2008 the Exchequer recorded its biggest borrowing requirement ever, €12.7 billion. The supplementary budget forecasts borrowing requirements of around €20 billion each year for 2009 and 2010; almost €18 billion in 2011; €13.4 billion in 2012; and €9.4 billion in 2013. In funding these deficits, the NTMA must now compete not only with other euro area sovereign borrowers as they fund their deficits and recapitalise their banks, but also with banks as they rebuild their balance sheets with the backing of government guarantees.
Total sovereign borrowing by European governments this year is expected to be more than €1,300 billion, up one third from the 2008 total of €997 billion. The US budget office announced on Monday that it would borrow a record $1,841 billion in 2009. In 2008 the NTMA issued two new benchmark bonds which raised €11 billion. In addition, we used the short-term commercial paper markets to build up Exchequer cash balances to over €20 billion towards the end of 2008. This has assisted in the timing of borrowing in 2009, ensuring that the NTMA can raise sufficient funds as opportunities arise without having to enter the market at particularly turbulent times.
The first four months of this year have seen a continuation of the volatility that has characterised the global capital markets since August 2007. Nevertheless we have been successful in raising funds through a variety of initiatives. Two new benchmark bonds were issued by syndication, one in early January and one in February. They raised a combined total of €10 billion. Auctions of existing series of bonds raised a further €2.2 billion. In addition, we launched a new treasury bill programme in March which has raised €4.6 billion to date. The success of these deals reflects the continued confidence of investors in Irish Government debt. However, the spread in the cost of funding that Ireland must pay over the German benchmark rate began to increase towards the end of 2008 and rose sharply in January as a result of a number of global and domestic factors. These included: the prospect of continued contraction in Ireland and the major economies; the sudden and steep deterioration in the public finances; adverse comment regarding the bank recapitalisation programme; and the speculative activities of participants in the credit default swaps market. Spreads have been falling steadily, however, since the middle of March.
Funding the deficit and refinancing the existing stock of debt call for the maintenance of an active and liquid market in Irish Government bonds. Relatively, Ireland is a small issuer, with less than 1% of the euro government bond market and most Irish Government bonds – around 85% – are now held by investors outside the State. The NTMA actively markets Ireland's bonds and has already undertaken a number of roadshows in 2009 to highlight the positive features of the Irish economy.
The projections for borrowing and debt levels that I have given today do not include any increased issuance in connection with the proposed NAMA. The purchase of property-related assets by NAMA, at a discount yet to be determined, is expected to be paid for by the issue of Irish Government bonds directly to the banks. This will result in a significant impact on gross debt ratios, with the ratio rising to over 100% over time depending on the level of the discount applied and the fiscal deficits. The income streams from the NAMA assets will mitigate the cost to the Exchequer of servicing the additional debt and the proceeds from their eventual sale will accrue to NAMA and the Exchequer. The establishment of NAMA will require legislation. However, last week the Government announced the appointment of Brendan McDonagh, NTMA director of finance, technology and risk, as interim managing director of NAMA to proceed with the implementation process pending legislation.
The NTMA manages the National Pensions Reserve Fund. It was appointed as manager in April 2001 for a period of ten years. The fund is controlled by the National Pensions Reserve Fund Commission. The functions of the NTMA include provision of policy advice to the commission and implementation of the fund's investment strategy as well as selection of the fund's investment managers. The fund is currently valued at around €17.2 billion and has earned a return of 3.8% to date this year. Overall, since its inception in April 2001, the fund has earned an annualised return of 0.9%, excluding the Exchequer contribution. At the start of 2009, cash balances comprised over 10% of the total fund. These cash balances have been reduced and the fund's government bond investments have been liquidated to finance the €7 billion purchase of preference shares in Bank of Ireland and AIB. This purchase was directed by the Minister for Finance under the Investment of the National Pensions Reserve Fund and Miscellaneous Provisions Act 2009. The NPRF Commission has conducted extensive due diligence of both institutions at the request of the Minister for Finance.
Since December 2001, the NTMA has acted as the State Claims Agency, managing claims for personal injuries and damage to property against Government Ministers, the Attorney General, health enterprises and other State authorities. It is currently managing approximately 4,150 claims, with potential liabilities of €643 million. It also has a risk management role, advising the various State authorities on how to minimise their claims' exposures. Employer liability claims have declined by 78% since the inception of the SCA, and public liability claims have declined by 38%. The resulting direct cost savings are estimated at €70 million. Indirect savings associated with loss of staff, training, absenteeism, overtime, sick pay, administration and so on are estimated at €280 million.
The National Development Finance Agency advises State authorities on the optimal means of financing public investment projects, including projects procured via public private partnerships, PPPs. The National Development Finance Agency (Amendment) Act 2007 expanded the role of the NDFA, giving it responsibility to undertake the procurement and delivery of certain public private partnership, PPP, projects. So far, 127 projects have been referred and the NDFA has completed its advice on 40 of these. The NDFA is the designated procurement authority for ten projects.
In accordance with statutory requirements, the NTMA is audited by the Comptroller and Auditor General. Since its establishment, the NTMA has had in place an internal audit function which operates in accordance with the framework code of best practice set out in the code of practice on the governance of State bodies. The work of internal audit is informed by analysis of the risk to which the NTMA is exposed, and annual internal audit plans are based on this analysis. This work is supplemented by an external firm of auditors engaged by the NTMA to perform internal audit work. All internal audit reports are made available to the Comptroller and Auditor General each year. We have furnished the committee with terms of reference and scope of internal audit plans.
The National Treasury Management Agency internal control system relies on strict organisational independence of the monitoring and control functions, segregation of duties and the application of the maker-checker principle to all activities. The NTMA has received satisfactory reports from both its external and internal auditors in respect of 2007. The NTMA operates with four external boards and two audit committees, namely, one each for the NTMA and the NPRF. These audit committees review the effectiveness of the controls of the NTMA and its service providers through meetings with management, the office of the Comptroller and Auditor General and the internal auditor.
To safeguard the assets it manages on behalf of the State, the NTMA has in place a comprehensive system for managing its credit risk with other financial institutions. Counterparties are constantly monitored for any events that might affect their creditworthiness and all counter-party limits are subject to an ongoing detailed review process. The credit crisis has illustrated the importance of sound risk management. We have seen now the consequences of questionable risk control in the Irish banking sector and the impact on the broader economy. On a global level, the IMF has had to increase repeatedly its estimate for worldwide losses stemming from US-originated assets to $4,000 billion in its April global financial stability report. The NTMA continually reviews its own processes and procedures in the light of lessons learned from the crisis.
Since September 2008, at the request of the Minister for Finance, senior staff from the NTMA have been involved in work relating to the position of the Irish financial institutions. This has been a huge task and none of us expected the situation to turn out as it has owing to an unforeseeable combination of events, including the worldwide economic downturn, the repercussions of the collapse of major international institutions such as Bear Stearns and Lehman Brothers, and the high levels and concentration of property lending engaged in by the Irish institutions.
This gives a brief summary of the main activities carried out by the NTMA. The agency also manages other Government funds such as the social insurance fund and the dormant accounts fund, and borrows on behalf of the Housing Finance Agency. In addition, we operate a central treasury service for non-commercial State bodies.
We are happy to answer any questions on any of these activities. My colleagues, Mr. Paul Carty, chairman of the NPRF commission, and Mr.Brian Murphy, chief executive of the NDFA, will now elaborate on those particular businesses.
