Business Irish

Wednesday 7 December 2016

Return of 'leprechaun economics' as CSO reports 40pc debt hike

Published 02/11/2016 | 02:30

The Central Bank recently noted that Irish non-financial sector debt was the second highest in the EU
The Central Bank recently noted that Irish non-financial sector debt was the second highest in the EU

Private debt in Ireland surged by more than 40pc last year, to stand at three times the size of the economy, according to official data. However, the statistics are again distorted by one or more multinationals restructuring balance sheets.

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The figures released yesterday claim that private sector debt now stands at €776.1bn - or just over 300pc of the value of the economy - driven by a jump in the debt of non-financial corporations (NFCs).

On paper, that means the private sector debt level here is considerably higher than the 133pc private debt-to-GDP threshold guideline laid down by Europe. But economists argue the headline figure does not give an accurate picture due to the influence of multinationals.

"I think those distortions are well known at this stage," said Dermot O'Leary, economist with Goodbody Stockbrokers. "These multinational debt financing operations have huge distortions on the Irish data and make the non-financial corporate debt on a total basis meaningless.

"The devil's in the detail. You can't look at the headline statistics in isolation. You need to look at the breakdown. And that goes for private and public debt. The public debt is the same issue. You have to adjust the debt to GDP numbers for those distortions in the denominator."

The data was contained in a Central Statistics Office (CSO) release, which stated that total private debt rose by 42.8pc last year, driven by a massive 63pc surge in the debt of NFCs. But, the CSO said the increase in debt reflected changes by multinationals in how they classified their accounts, rather than new borrowing within the economy here. It was, in part, these same factors, which contributed to Ireland's GDP last year being dramatically revised upwards. That has been dubbed "leprechaun economics".

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The Central Bank recently noted that Irish non-financial sector debt was the second highest in the EU in the first three months of this year, surpassed only by Luxembourg, which also has a lot of large multinational companies relative to the size of its economy.

The Central Bank has noted that the increase in overall NFC indebtedness since 2008 predominantly relates to debt issued by foreign-controlled firms. Data from the first quarter of this year showed debt held by Irish resident companies has been on a downward trend, standing at €168bn in the quarter, down by 24.8pc compared with the first three months of 2012.

"We've had these difficulties for a very long time, and they've always played havoc with the level of corporate debt in Ireland," said Conall Mac Coille, chief economist at Davy Stockbrokers.

"Part of my job has been to spend a lot of time searching through corporate data and working out were the corporate sector is in terms of indebtedness. And they're still quite distressed, and SMEs have lots of NPLs, but that's based on about €68bn of bank lending to the Irish corporate sector and even less to Irish SMEs. So what we're dealing with here is multinationals and maybe some companies that should be part of the financial sector rather than the non-financial sector."

The data also stated that the contribution from households to total private sector debt, composed mainly of mortgage-related debt, has maintained a decline from its peak in 2008 of €202.7bn, falling by €53.1bn in the intervening period.

Irish Independent

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