Table A.5 of the Stability Programme Update, published in late April, contains an estimate of 4.1% for the average interest rate on general Government debt in 2014. However, it would not be appropriate to use this figure as the basis for making a realistic estimate of the debt service savings which would arise in 2014 if €10 billion of the current cash balances were used to buy back government debt. Any potential saving would depend on the price at which it would be possible to buy back the debt. Any attempted large scale repurchase programme in an amount of €10 billion would almost certainly result in the current market prices for Irish Government debt being bid up to much higher than their current levels. Indeed, it may not be possible to buy back such a large portion of the debt or if it is only at exorbitant prices. Any such estimate would also depend on the specific coupons payable on the bonds, general market conditions at the time and other factors.
Funds in the Exchequer are used for all the ongoing payments necessary for running the State, which include debt redemptions. The State earns a return on these cash balances and deposits, which the NTMA manages in a prudent manner consistent with minimising risk and always having sufficient cash on hand to cover any volatility which might arise.
Notwithstanding the progress made in stabilising and improving the public finances it remains the case that the State will continue to run large, though declining Exchequer deficits in the coming years. For example, SPU 2013 estimated the cumulative Exchequer deficit over the years 2013-2015 at €25 billion.
In addition to these day-to-day costs and as referred to above, the Exchequer must have sufficient resources to repay debt redemptions, such as the forthcoming €7.6 billion Government bond repayment in mid-January 2014. The continuing Exchequer deficits and debt redemptions must be adequately and prudently funded.
Decisions on the level of cash reserves take account of various factors in addition to the cost of maintaining such reserves. These factors include the potential risks of not maintaining an adequate and prudent cash balance, including 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.
The State is well positioned to have 12 to15 months of advance funding in place when the EU/IMF Programme comes to a conclusion at the end of this year, a level of funding which the Troika have noted in their recent reports on Ireland’s progress in implementing the terms of the Programme of assistance. It is necessary, for reasons of prudence and to assure investors that they will be repaid upon redemption, that the Exchequer maintains a sufficiently strong cash position at year end.
The NTMA continuously monitors market conditions for possible issuance and restructuring opportunities.