Saturday 10 December 2016

Ireland's colossal level of indebtedness leaves any new government with precious little room for manoeuvre

Despite strong debt repayments by Irish households and businesses in recent years, Ireland remains the second most highly-indebted country in the developed world after Japan. Dan White weighs up the costs of this debt

Published 17/04/2016 | 02:30

At last count, Irish households owe a total of €151.2bn — and that’s down 5pc on the year before
At last count, Irish households owe a total of €151.2bn — and that’s down 5pc on the year before

Figures published by the Central Bank last week show that Irish households owed a total of €151.2bn at the end of the third quarter of 2015, a reduction of 5pc on the total household debt of €159.5bn a year earlier.

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Despite the post-2008 house price crash, mortgage debt - over €110bn of it - remains by far the largest element of Irish household debt. That's 72pc of the total borrowings of Irish households.

Even after the reductions of the past year, Irish household debt remains extremely high by European standards, at over 150pc of household incomes. Only two other European countries - Denmark and the Netherlands - have higher household debt-to-income levels than Ireland.

SMEs have also been reducing their borrowing, with the most recent figures from the Central Bank showing that lending to non-financial, non-real estate SMEs had fallen by a massive 46pc to €20bn between the first quarter of 2010 and the third quarter of 2015, with SME lending having fallen by a further 8pc in the six months to the third quarter of last year.

These trends are a reflection of what is happening with overall bank lending. It peaked at almost €380bn at the end of 2007 and had fallen to €197bn by February of this year. Although the Irish economy (measured by GDP) grew 7.8pc last year and the ESRI is forecasting 4.8pc growth this year, overall Irish bank lending is still falling - down by another 11pc in the 12 months to February 2016.

Even government borrowing has apparently been reined in. At the end of last year Ireland's general government debt stood at €204bn or 97pc of GDP. This was down from 107pc of GDP at the end of 2014. The Department of Finance is predicting that the debt/GDP ratio will fall to less than 93pc by the end of 2016.

That's the good news.

The bad news is that, even after the improvements of recent years, total Irish indebtedness, both of the public and private sectors, remains extremely high. Management consultants McKinsey compared the total indebtedness (public and well as private) of 47 countries in February 2015. It put Ireland, with total indebtedness of 390pc of GDP, in second place after Japan on 400pc.

Dreadful and all as this was, the McKinsey ranking almost certainly flattered Ireland.

McKinsey used GDP, which includes repatriated multinational profits, rather than GNP, which excludes them. Irish GNP was only 86pc of Irish GDP in 2014. If McKinsey had used GNP rather than GDP when compiling its indebtedness league table, then Ireland would have leapfrogged Japan to top the table at 450pc. This is one global league table that we don't need to be topping.

A word of a caution: when calculating total indebtedness McKinsey includes not just bank borrowing but also corporate bonds, securitisations (where financial institutions sell packages of loans to investors) and other lending by non-bank financial institutions, so-called 'shadow banks'.

This means that its calculations aren't directly comparable to the official Central Bank banking statistics.

McKinsey breaks down total Irish indebtedness at 115pc of GDP for public borrowing, 189pc for corporate borrowing and 85pc for household borrowing. It also calculates the total debt of the financial sector at a whopping 291pc of GDP - a figure exceeded only by the Netherlands on 362pc.

While the indebtedness of the financial sector is distorted by the IFSC, the fact that eight years after the bust Ireland remains so exposed to the vagaries of the financial sector should be a cause of extreme concern to ministers and civil servants.

When the Celtic Tiger expired in 2008 Ireland had the cushion of extremely low government debt, about €47bn - or 25pc of GDP. The post-2008 collapse in tax revenues and the €64bn gross cost of bailing out the banks quickly removed that cushion, with nominal debt more than quadrupling, and peaking at 120pc of GDP in 2012.

It was private sector debt, most of which went into an overheating property market, that got Ireland into trouble after 2008.

While the Troika returned home at the end of 2013, Ireland's continuing very high levels of government debt means that our economic homework is still being marked by our European 'partners'. Even if it wasn't, our capacity for significantly increasing government borrowing is very limited. The events of the autumn of 2010, when Ireland was shut out of the international bond markets and forced to fall back on the tender mercies of the Troika, should not be forgotten.

The Central Bank household debt figures come at a time when we are still without a government, almost eight weeks after the February 26 General Election. As our politicians squabble over secondary issues such as the future of Irish Water (Uisce Eireann, anyone?), our continuing extremely high levels of both public and private indebtedness are being largely ignored.

The would-be ministers are almost certainly missing the wood for the trees. Forget about increased public sector pay, health spending, education budgets and other politically desirable goodies. Even at the height of the post-budget fiscal euphoria before the General Election, the so-called "fiscal space" available for increased public spending and tax cuts was just €1.5bn a year.

A deteriorating international economic outlook and a welcome outbreak of post-election realism seems to have confined the fiscal space to the dustbin of history. The electorate's implicit rejection of Fine Gael's election promise to scrap the USC would seem to indicate that voters are ahead of the politicians on the need to cut our cloth to suit our measure.

As our TDs finalise the details of a deal to form the next government, they need to realise that our very high levels of public and private debt give them very little room for manoeuvre.

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