Irish leverage in international perspective

An old friend has alerted me to this short note which has impressive pictures, and gloomy implications as far as Ireland is concerned.

17 replies on “Irish leverage in international perspective”

The question has been asked many times, so let me try it in a slightly different form: how close are we to trying to repeat, or mimic, the policy of staying on the gold standard, or its modern equivalent?
Before John the Optimist decscends from on high, let’s try and address the simple analytical point: debt deflation, cet par, in a highly leveraged economy, does set up one or two headwinds for growth that are made worse when the exchange rate is appreciating.

I think that we need to factor in that some of the decline in GDP is the removal of unsustainable spending as well as unsustainable borrowing. We

If one accepts that we will have to make do with less money and with reduced services, the next issue is how does one share the smaller cake out fairly, i.e. how does one attack unemployment. This is the crucial task for the good of our society and economy.

For too long, the citizens of developed countries were being rewarded far beyond the value or worth of their efforts as compared to citizens of developing countries. Globalisation will bring us benefits, but I posit that, ultimately, the removal of western hegemony through the strengthening of the BRICs will likely lead to a narrowing in the gap of real incomes between educated people in different countries.

We will have to get used to doing with less and less money so we better put our minds to how to do so. In that regard, perhaps the decline in unsustainable borrowing and spending and a willingness to save will help to prepare us.

“unsustainable spending as well as unsustainable borrowing”

Surely those are the same thing.

It’s an interesting note, but, aside from the international comparison, I’m not sure it really tells us a lot. He demonstrates there’s a correlation between higher prices and higher leverage, but it doesn’t bring us any closer to quantifying the effects of either.


Perfectly put! The whole box of wax has advantages for the share out, but are you not falling into wishful thinking? The BRIC will bypass western banking and thus escape western kleptocrats. These kleptocrats still exist and their bite, from Ireland is getting much bigger now….. They are no longer as strong as they once were. The man behind the curtain is no wizard! Ireland is being plundered because of …..?

““unsustainable spending as well as unsustainable borrowing”

Surely those are the same thing. ”
Not really. If we had borrowed loads of money (more than we could realistically paid back) and built a network of motorways, that would be sustainable spending from unsustainable borrowing. If we borrowed money for top of the range cars, plasma TVs, bling and tat… well, first of all, it is all imported, its passthrough benefits are low (retail jobs), and it is bought with borrowed money…

@ Chris Johns

You referred to debt deflation. You are spot on. But little of our public (or indeed academic) analysis accepts that framework even though every single one of Irving Fisher’s steps in the debt-deflation process are operating today in Ireland:

“Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a “capitalistic,” that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
7. Pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.”

– Irving Fisher “The Debt-Deflation Theory of Great Depressions”, 1933

Sadly this process is set to continue as we endure an ECB monetary policy that may be appropriate to the Eurozone as a whole but will be inappropriate to our needs (and indeed those of Greece and Spain).

From the article, “Figure 4 shows that countries experiencing the largest increases in household leverage before the crisis tended to experience the most severe recessions, where severity is measured by the percentage decline in real consumption from the second quarter of 2008 to the first quarter of 2009.”

Why would you not measure the severity of the recession by measuring aggregate output, either GDP or GNP?

“Overall, the data suggest that recession severity in a given country reflects the degree to which prior growth was driven by an unsustainable borrowing trend.”

What if it were actually driven by the collapse in investment (GFCF)? As in Ireland, where personal consumption has fallen peak-to-trough by €3.8bn but GCCF has fallen by €7.5bn, or the US where personal consumption fell by $102bn and private investment fell by $530bn, or Britain where the categories were household consumption down £31bn, and GFCF down £47bn, etc, etc.

Over-leverage in the household sector is a factor in, but not the driving force of the recession.

The charts made sense till I looked at Denmark…. Can anyone explain Denmark on those charts? What are they spending their money on over there, maybe we can flog them something 🙂


“If we had borrowed loads of money (more than we could realistically paid back) and built a network of motorways, that would be sustainable spending from unsustainable borrowing.”

Only if we got value for money, which we clearly weren’t during the boom. Paying boom prices for one construction project (roads) is just as unsustainable as paying boom prices for another (properties).

So now even our sustainable spending is unsustainable! But you’re right and it’s not just the price that was paid (well above the potential RoI?), but the attempt to do it all at once. One road project competing with another for resources. All pushing up prices. And so on. Spending that is not sustainable… even if that was all we were borrowing for (i.e. the borrowing was sustainable).

I was being overly positive with my first post.

It is clear a reduction of spending of imprudent borrowing leads to a reduction in domestic demand. One then must deflate wages and prices to partly return to where one should have been without the unsustainable borrowing/spending. This puts you back in the same position as the prudent nations save for the additional pain caused but the debt hangover.

The question then arises as to who the debt overhang affects different parts of the economy.

The first element I see is personal consumer debt and mortgage debt. Most people do not have mortgages. Many people have small mortgages. Therefore the effect of mortgage debt is discrete. The effect of personal consumer debt (credit cards, personal loans) is similarly discrete.

The second element I see is debt of businesses and business owners. This debt is a major problem in that it can cause additional redundancies within a business and loss of trade and the creation of bad debts for other businesses. I suggest that the effect of business indebtedness would not appear to be discrete. However, certain businesses cannot feasibly be saved as their business model or market was unsustainable. This limits the scope of desirable remediation efforts.

The third element I see is bank debt. Again this is massive and not discrete. As the banks are at the heart of the issue the scope of the remedial works are clear. The magnitude of the efforts required may be too large to bear though.

This leads us on to the fourth element: sovereign debt. The effects of spending cuts are relatively discrete as is the scope of the problem to be solved. The benefits of remedial measures are uncertain, although the consequences of not taking minimum measures are dire even if uncertain.

We need to weigh these elements against each other in terms of
– how much damage they are causing, and
– how and to what degree this damage can be ameliorated, and
– how certain we can be of achieving such amelioration, and
– the consequences of not taking measures.

I guess that is the essence of the problems of excess private leverage. Maybe others could add to or criticise my characterisations of the elements of debt?


I believe the Danes and the Dutch have amongst the highest property borrowings in Europe. I expect it is to do with the mortgage products and linked tax breaks which they offer. However, it is possible that their borrowers also substantial savings which they have received tax breaks for as consequence of having a mortgage. The data only shows borrowings, not net wealth.

“The first element I see is personal consumer debt and mortgage debt. Most people do not have mortgages. Many people have small mortgages. Therefore the effect of mortgage debt is discrete. The effect of personal consumer debt (credit cards, personal loans) is similarly discrete.”
The problem is not so much the proportion of the population that has the debt, but the makeup of that proportion and the absolute level of debt of the worst cases. In aggregate, I reckon everyone who has a mortgage is in negative equity…

We also need to look at cross-effects between landlords and businesses, for example. Does it make sense to pursue landlords for debt at the cost of keep prices high for consumers? (because rents stay high). On the other hand, what would the effect on pension funds be of allowing rents to reach a market-clearing level?


Maybe I should have limited the first element to home/consumer mortgages.

I think that Landlords wil pursue tenants for all they can get and that new lettings will not be affected by landlord debt as the market is flooded. Landlords are unlikely to make gifts to tenants just because the landlord’s bank is being lenient. Tenant’s generally have to show the landlord that the tenant will go to the wall and possibly that guarantees are worthless before the landlord will compromise.

Existing leases are somwhat analagous to borrowings in that tenants are committed to making payments over a period of years. To the extent that the rent reviews are favourable to landlords or are on an upwards only basis, many leases carry a substantial negative value for tenants. This is a drain on employment and businesses.

In this regard, one can say that lease obligations are an additional indebtedness affecting businesses, which additional indebtedness arises because of property bubbles and ancillary additional domestic demand caused by excess leverage generally.

On the other hand, this is not necessarily a matter to be addressed in analysing excess leverage as the amount of the liability is uncertain and variable.

The elimination of upwards only rent reviews going forward is the critical measure in this regard and that has been taken. One might wish to require landlords getting leniency from bailed out banks to pass on that leniency to tenants in the interests of the general economy, but it is questionable whether markets would tolerate this kind of state intervention in banking practices.

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