15 thoughts on “Credit-Less Recoveries”

  1. Does anyone on here know if, or how, the economic forecasting models used by the ESRI and Central Bank of Ireland incorporate credit availability into the forecasts.

    We are supposed to deleverage €70bn of mostly loans from the covered banks in the next three years. Won’t such delevering have the same reciprocal impact as the inflow of credit in the 2000s? That is, it will lead to deflation and economic contraction.

    Does anyone know how the delevering is handled by our economic forecasters, presumably it’s a component of money supply projections. Could it be that neither the Bank or ESRI actually consider money supply as an input in projections?

  2. Hi Jagdip,

    I’m not sure the deleveraging you refer to will have a huge domestic effect. This will mainly be achieved by the banks selling off “non-core assets”. Most of these will be loan books held in other countries, and most of that again will be loans held in the UK.

    For example, PTSB is being forced to sell it’s €10 billion UK mortgage book (at an expected loss of €2.2 billion which is a large reason why it is being nationalised). There are €60 billion of other sales across the remaining banks with an expected loss of around €11 billion.

    The bigger domestic effect may be the requirement to keep their loan-to-deposit ratios at around 120%, but implementing that will require the banks to get back to ‘normal’ trading conditions which seems unlikely in the medium term.

  3. Interesting results, but….

    Having had a quick look at the paper I do not see where or if they have taken into account the role that currency devaluation has had in credit-less recoveries.

    It seems likely to me that in the EMs that they have studied, particularily where there has been a currency crisis, the devaluation of the local currency played a significant role.

    If they have not taken account account of this, then I think the work is incomplete and not worthy of publication.

  4. @Seamus, those are important points and some delevering will be of overseas assets but alas, the delevering will impact the Irish operations as they currently stand and also ongoing operations as the banks stay within lower loan:deposit ratios.

    In the 2000s, banks were creating money in the economy through credit which was sourced not from deposits but from money markets including bond markets and the inflationary effect was everywhere to be seen.

    As bonds get repaid (which is part of the delevering) and as Irish banks return to a funding model based more on old-fashioned deposits and are forced to maintain low (by recent standards) loan to deposit ratios, there is a concern that this will lead to deflation and economic contraction.It’s not just that we might be faced with an ongoing credit-less environment, there will additionally be pressure to contract existing lending.

    We seem to have been caught unawares by the credit expansion in the 2000s. Is there a risk of the reciprocal happening now?

  5. “Credit-Less Recoveries”

    Taking the concept “credit-less recovery” as relevant to TROI and operating on the principle that the quality- -content of one’s starting will influence the quality- -content of one’s finishing, I would think some elaboration on the concept “recovery” would be useful.

    Not wishing to pre-empt a reply, but if it means “return to growth”, then I would want the implied definition of “growth” or of GDP – and whether borrowing for consumption is treated as growth.

  6. Outstanding Private credit peaked at over 400 billion in the autumn of 2008 and now seems to have declined by roughly 75 billion.
    The contraction does not appear to want to stop.
    Deposit declines are primarily the result of credit contraction & not deposit flight in my opinion although they do feed into each other.
    It appears our European “partners” want their banks to produce the credit and we export to credit creation zones of influence & also hope they come over here as tourists and spend a few bob.
    At 120% loan to effectivally external credit will crash the property market to near cash price.
    I have no problem with this if bank liabilties are written off as without this we will enter a full scale debt peonage system.
    If 100+ billion of external credit liabilties cannot be destroyed then Punts is your only man.

  7. Outstanding Private credit peaked at over 400 billion in the autumn of 2008 and now seems to have declined by roughly 75 billion.
    The contraction does not appear to want to stop.
    Deposit declines are primarily the result of credit contraction & not deposit flight in my opinion although they do feed into each other.
    It appears our European “partners” want their banks to produce the credit and we export to credit creation zones of influence & also hope they come over here as tourists and spend a few bob.
    At 120% loan to effectivally external credit will crash the property market to near cash price.
    I have no problem with this if bank liabilties are written off as without this we will enter a full scale debt peonage system.
    If 100+ billion of external credit liabilties cannot be destroyed then Punts is your only man.

  8. Is this a curious way of evaluating banks?
    From Reuters…
    “In the drive for credibility, the European Banking Authority (EBA), which runs the tests and the ECB, which sets the macro economic scenarios, are pushing for more banks to fail than last year’s seven.

    “How many do we expect to fail? I would say 10 to 15,” said one senior euro zone central banking source.

    The EBA wants the number of banks that do not pass the tests to be around that level to show the examinations are serious, said a second source, adding that the authority did not want to push for more, for fear it could spark panic and intensify the euro zone’s debt crisis.

    “In order to demonstrate that it is credible, the EBA would need to show that the number of bank failures is significant, without being substantial,” said the source. “A number in the teens is about right.”

  9. @Jagdip

    its very unlikely the ESRI or CB forecasts will include the impact of deleveraging in their models. the DSGE / reduced form models employed in central banks over the past decade did not incorporate any role for money growth / lending. in short financial market frictions were assumed not to be important in those models.

    since the credit crisis the likes of Michael woodford…… (author of the tome ‘interest and prices’ but excluding the ‘money’ from the original title) and central banks have falling over themselves to bolt on credit spreads into their models,

    the fact such adjustments lose the pure microfounded base, of which Woodford had been so proud, has been conveniently ignored. in short its hard to impose financial market frictions when you assume a perfectly rational representative consumer.

  10. Reading the paper and extending their general empirical findings to Ireland, one is drawn to the prediction that unless the Greek problem blows up in our face a creditless recovery for Ireland seems likely over the next year. Admittedly, as they note, creditless recoveries tend to be relatively weak. The Irish banks are insolvent and not lending, but many of Ireland’s stronger growth industries are not particularly reliant on bank credit for growth. One of their key findings is that creditless recoveries are not that unusual particularly with a favourable industrial structure not overly dependent on bank credit. But if the Greek problem blows up, or the banks are strong-armed into excessive debt forbearance, things could go very sour.

  11. @ Gregory

    So the sweet prospect is recovery in the well funded capital intensive high tech employment-lite FDI sector with stagnation in the relatively low tech bank-dependent domestic sector ?
    Or am I mssing something ?

  12. @Paul Quigley

    FDI firms are not at all dependent on Irish domestic bank credit and they are already recovered. Yes of course your are correct they are employment-lite and do not generate much domestic profits to capital claimants or tax revenue. Related high-tech domestic firms are also less bank credit dependent, but lots of other bank-credit-dependent sectors will continue to drag due to the bank credit drought. It will be creditless recovery or no recovery. This should be discernible in the relative performance across industries correlated with their domestic bank credit dependence.

  13. Well one positive thing is coming tommorow – the ending of the car scrappage scheme.
    It was perhaps the product of Bill Cullen like strategic thinking………do we have any car part manufacturers ?
    Was this a grand gesture from the Dail Samurai to our continental overlords ?

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