After debt do us part it will be a journey into the unknown
Published 30/10/2014 | 02:30
WHEN those in authority want to make soothing noises to the natives, or sell the country's merits to foreign lenders, they tend to say that we have been here before. In the 1980s, deficits were bigger, and the national debt higher, and we got over that, didn't we?
Except that, in the world of finance and economics, one has never been here before. Underlying truths may be permanent (despite the endless ill-fated attempts to deny them) but nothing ever repeats itself exactly.
Take debt. Back in the 1980s it was a central obsession, with lots of colourful statistics. The one I remember best was that we had more foreign debt per person than the Poles. This was considered very shocking, perhaps because Poland was still a communist country.
Of course there was the fact that almost all the debt was government debt, just like a communist country. The Irish people themselves were as frugal as church mice.
Not this time, which is why we have not really been here before. Today, household debt is almost twice average disposable income. This must be added to government debt back at 1980s levels but, strangely, debt does not seem to be the central obsession that it was 30 years ago. Even odder is the fact that the most intense debate was a few years ago - about future debt levels - and faded away as actual public debt ballooned.
Household debt was even bigger a few years ago - €40bn bigger to be precise. Perhaps this substantial "de-leveraging" is one reason for the somewhat muted discussion of what are, by any standards, nerve-wracking statistics.
Just how wracked should our nerves be? Opinions differ but I do wish we could find better ways of reporting on government debt. Last week, one British TV reporter actually referred to the EU "getting its hands on the cash" in the row over the UK's extra membership fee; as if David Cameron kept the £1.7bn in a very large safe at Number 10.
There is no such safe, in Downing Street, Merrion Street or anywhere else. If Britain does pay up, it will do so by borrowing the money. The UK can currently borrow at 2pc, so that the actual cost will be a paltry £20m a year (€2m translated into Irish proportions, which is indeed the extra EU bill for our "success").
It is the interest cost which matters. Judgements on Ireland's ability to carry its government debt have been complicated by the low interest rates finally offered - or dragged from - the EU and ECB. Then came the largely unexpected tumble in market interest rates, with Irish ten-year loans now costing much the same as those of Britain and the USA. Expensive IMF loans at 5pc are due to be replaced by market loans at 2pc.
In the Budget, the Department of Finance estimated this year's interest bill at €7.5bn, a good €900m less than it had thought in April (see what I mean about paltry EU bills). That works out at just over 4pc of GDP. Based on historical comparisons, that is a perfectly affordable interest bill, despite the very large size of the actual debt.
Even if we base it on the tax paid by foreign companies, rather than their bloated output, it is still less than 5pc of taxable national income. The 1980s were worse.
But there is another figure which is less comforting. That same interest bill is about 20pc of tax revenues. The historical comparisons also suggest this is about the limit of what countries can afford.
Despite all the austerity, Irish tax revenues are still comparatively low as a proportion of the economy so the bill is more onerous than the GDP comparison suggests. But there won't be any more tax increases any time soon.
Whether they will eventually be needed depends on how long those ultra-low rates last, and how much debt Ireland can lock in at bargain basement prices.
But if rates do stay low, it will be because the global economy is still struggling. That calls into question the optimistic forecasts on which progress on public debt depends.
Any assessment of household debt also centres around revenue and interest rates. One complication is tracker mortgages, whose lucky owners enjoy much the same borrowing rates as the German government.
A widely accepted ceiling for housing costs - mainly rent or mortgage payments - is that they become unsupportable above 40pc of disposable income. Yet an EU study found that only 2pc of Irish households are in this category, compared to an EU average of 8pc - and 25pc in Denmark. Trackers presumably.
Optimists about household debt tend to concentrate on the population under 35, who have no net debt at all, but net savings. For the economy, it is totals that matter, not individuals.
That total also has to include company debt. That is no small matter either, especially where SMEs are concerned. Central Bank research put their borrowings from Irish-owned banks at €26bn.
The problem here is property loans, often taken out by the owner of the company, rather than for the company's own requirements. In some ways this makes things more difficult - summed up as sound companies with busted proprietors. How to separate the two?
The optimists here point to the fact that less than 10pc of SMEs have property loans, although they do tend to be the bigger of the small firms. Hotels, restaurants and the retail trade are most affected. Hard-hearted optimists say these are the kind of firms that can and should be liquidated to let those less encumbered fill the gap.
Pessimists think there still needs to be more write-offs for indebted households and firms if the economy is to achieve the forecasts on which the recovery plan is based. They argue that more spending by the debt-free young - presumably on housing - will not be enough to compensate for the scrimping of the middle-aged.
Personal consumption will not recover as strongly as hoped for in government plans. Indebted SMEs will linger as a blot on banks' balance sheets and an impediment to investment and expansion.
Prominent among the unconvinced is Michael J O'Sullivan, the economist whose 2006 book, 'Ireland and the Global Question', identified the international weaknesses which threatened our boom.
In an article this month he argues that Ireland is still in a "house of debt" recession. Banks will have to re-structure more household and business debt, and will require more capital afterwards - some of it potentially from the taxpayer. Government debt itself needs yet more extension of repayment dates if it is to be sustainable.
Even those who think this is unduly pessimistic would agree that trend growth will improve if something like this is done. It is just that it seems implausible. Mr O'Sullivan accepts that it would probably take another deep recession to trigger an attempt, and some very clever politics to make a success of it.
That does not mean that nothing can be done.
The end of the ECB stress tests create an opportunity for more ambitious debt re-structuring by the banks and a more sophisticated approach to lending. Apart from that, we'd better just hope the optimists are right.