Paschal Donohoe (Fine Gael)

I welcome the Minister of State, Deputy Connick. This is a hugely important plan for the future of our country. This agreement will affect every aspect of Irish political life, so it is important we discuss it today. This agreement represents the manifest failure of the ability of this Government to manage our affairs over the past seven to eight years. That failure is so obvious that I will not devote much of my contribution to it. The cornerstone of the reputation of this Government in past elections was one of economic competence. The fact we had to invite an outside body to come into our country to help us to govern and with funding our State shows that claim can no longer be made, although I suspect it will not be made for a very long time. That is obvious to us and, I suspect, to the Government and the people at this stage.

I would like to address how this plan will work in the context of a new Government being elected which, I believe, will happen. I refer to annex 3 of the four year plan which preceded publication of the memorandum of understanding. In some ways, it picks up on the comments Senator Hanafin made on the appropriate economic measurement in regard to the sustainability of the debt of our country. I agree with Senator Hanafin that it is appropriate to consider the size of our debt relative to our national income, or the percentage of Government debt versus GDP.

Annex 3 goes into these scenarios in some detail and into the deficit dynamics which are likely to unfold under the four year plan. It portrays very starkly the challenge our country will face. It outlines a number of different scenarios in regard to the potential interest rate on our debt in the coming years. The baseline scenario forecasts an average interest rate between 2011 and 2014 of between 3.4% and 4.7%. That is the rate of interest the Government assumes we will pay on our national debt. The next scenario, which is referred to as the pessimistic scenario, forecasts an average interest rate of 4.4% in 2011, 4.9% in 2012, 5.4% in 2013 and 5.7% in 2014. Based on the memorandum of understanding and the events of last week, we are now clear that the average interest rate we are likely to pay on our borrowing over that period is 5.8%, which is higher than the worst case analysis in the four year plan. It is difficult to evaluate whether 5.7% or 5.8% is an appropriate interest rate for a Government and country like ours to pay. I was not involved in the negotiations and I do not know what discussions took place. Comparing this with the plan that the Government published the previous week, the highest rate of interest assumed during that plan averaged 5% but we now know we will pay a rate of interest of 5.8%. This puts into sharp contrast the difficulty our country will have in managing the level of debt we will have and in being able to ensure we can pay an interest rate on the level of debt that is higher than the Government estimated.

I made this point on the Order of Business earlier this week and I referred to a general rule of thumb which economists use when trying to evaluate whether an interest rate is sustainable for an economy. Roughly speaking, if the average interest rate an economy is to pay on its debt is higher than the rate of growth the economy will enjoy, the ability to pay the interest rate over time will go down and an economy will quickly get lodged into a cycle where the rate of interest paid will drag down the growth rate and make it more difficult to pay down debt.

If we are assuming the rate of interest on debt will be 5.8% and the economy is estimated to grow at between 1% and 2% over the coming years, how will the rate remain affordable? That question is based on the publication of the Government's own four year plan and is the key question the next Government will tackle as it looks at the affordability of the plan and the choices to be made in order for the country to flourish within the framework.

This leads to the next question, which is gaining momentum in this House and elsewhere, which is whether default should be considered. The phrase "default" is extraordinarily dangerous and we should be careful when using it. Default in the history of government and banking debt is where an economy or bank unilaterally decides not to pay its debt or pay only a small amount. Considering the history of companies or countries which have tried to do this, no one has been successful without incurring a very heavy cost soon after the decision was made.

The economies of Argentina and Russia have been mentioned, and because a decision was made in those governments not to pay a portion of their debt, even now, many years later, they are unable to get back into the bond markets to borrow. If they look to borrow, the rate is still prohibitive. For a country of this size, which is so open and dependent on foreign investment flows, to discuss generally the possibility of default would put our country at the vanguard of an experiment that no one else has managed to do successfully. It is certainly not a path I would want to see the country go down and I would not want any Government to facilitate it.

Another scenario discussed by people when considering default is the renegotiation of debt levels with the lender which makes the money available. In our case it is the European Central Bank, international banks or domestic lenders. With banking debt it is not obvious to me or many others that this is an option pursued with the kind of urgency we expect at this stage. There is a very simple model for consideration of how this would work, and this model has been successfully applied to many companies within Ireland. This model sees an investor in a company asked to swap the bond holding for equity shares. The total debt level comes down but the person holding the bonds is left with something in the anticipation of the company returning to growth. This model should be applied to banking debt.