SSISI Talk: The Dynamics of Ireland’s Net External Position

This post was written by Philip Lane

I will talk on this topic on Thursday at 6pm at the Royal Irish Academy.

Update:  I will post the paper and slides early next week.


Ireland’s net external liability position expanded in dramatic fashion during 2008- 2010, despite relatively small net financial flow during this period. Understanding the the source and persistence of this negative shock is critically important in as- sessing the future path for the Irish economy but data analysis is made difficult by the confounding impact of Ireland’s major role as an international financial centre, such that the “core” international balance sheet remains obscure. However, there is considerable indirect evidence to believe that a substantial component of this decline is genuine and relates to the internationally-leveraged structure of the financial port- folios of domestic Irish residents.

21 Responses to “SSISI Talk: The Dynamics of Ireland’s Net External Position”

  1. Desmond Brennan Says:

    With all the ”pass-thru’ MNCs here, and IFSC, surely there are significant data quality issues in this area ? Any BIS figures prove next to useless…curious as to what data sets you are operating from ?

  2. The Dork of Cork Says:

    We just invested into leveraged unproductive consumption sinks.
    Contrast this with the modern Finns who experienced a catastrophic leverage episode as a trade shock multiplied their losses in the early 90s.
    They subsequently invested in things that made sense from a Finnish perspective and perhaps with central goverment funding.
    i.e. - they had a very large consumption of electricity because of their climate / latitude / Industry - so they invested in things such as Nuclear although with problems & large Peat powered stations etc etc.
    Also there has been little discussion about the lack of investment by the EIB since they need a domestic agent to put up 50% of the funds.
    We are too busy paying off failed adventures so why can’t our Goverment plead a special case given the very special nature of our cryptic CB ?

    PS - does any economist agree with this Dork regarding central fund services as a percentage of GNP………. is the true metric of domestic leverage or is it not ?

    PS PS try messing around with the World bank graphs of exports & imports as a % of GDP - its a mad laugh of a thing.
    I love it when exports approach GDP with Ireland at 90.7% in 2009 , the only more extreme country that I can see is Singapore with exports at 211.1 % of GDP in 2010.
    Irish Imports at 75.4% of GDP while Singapore is out there man………at 183% of GDP in 2010.
    We are a extreme economy baby

  3. The Dork of Cork Says:

    Hold it - forgot about Luxembourg………its intermediate with 167.5% of exports as a % of GDP in 2009.
    Lets face it we are somebodies Bitch and we are being slapped hard for letting the facade of a happy marriage slip.

    Oops sorry about that……. we break for some nice Euro Lullabies

  4. Cearbhall O'Dalaigh Says:

    Eurozone debt web: Who owes what to whom?


  5. Joseph Ryan Says:

    re Eurozone Debt

    That BBC chart is a ‘thundering disgrace’. Some figures are wrong. The foreign debt figures given for the different countries are not correct. Interesting chart when they get the figures right.

  6. genauer Says:

    @ Joseph,

    so which numbers are wrong, and where do I find the right numbers?

  7. David O'Donnell Says:


    Worldwide debt was $82 tn in 2002 and is $195tn today. Let’s round it up and say - ~$200 Trillion.

    Howzat for a number?

  8. Ceterisparibus Says:


    And the answer to more debt is not to drink seawater to quenche your thirst….

    “Jens Weidmann, president of the German Bundesbank and an ECB policymaker,
    said it was not the central bank’s job to finance public budgets. He told reporters that adopting a policy of quantitative easing – as in Britain and America – would be like drinking sea water to kill the thirst. “Whoever believes that the current crisis can be overcome by giving up crucial principles of stability orientation, pushing current legislation aside, is wrong.”

  9. Joseph Ryan Says:


    I don’t know that Ireland had a foreign debt of €1.7 trillion. I sure hope it doesn’t.
    These foreign debt figures (on the right hand side of the chart) are all wrong or else I am not interpreting them correctly.

  10. genauer Says:


    I should have read the bbc page more carefully by myself. This gross external are worldbank data, like:
    and depending on how you read it, the data are either wrong for Germany or for Ireland (even larger !). In general they are of limited use, because they also contain bank and “other” (corporations, private …?, which should cancel out roughly by assets) data, and for Ireland the government is the tiniest part. It could become a problem, when your debtors dont pay, and your creditors are not mellowed by that.
    But the arrows (based on BIS data) look reasonable to me.

  11. genauer Says:

    @ David
    according to the CIA Worldfactbook the world has a GDP of 74 t$.
    So 195 t$ is a factor 2.6, and that is OK. Working capital 3.0 x 0.5 debt fraction, 0.5 Government, + 0.6 private debt (chinese have mortgages too)

    a money factor of 195/82 = 2.38 over 9 years = 10 % per anno, with global growth =4.5%, and 4.1 % global inflation, leaves a little over 1% for capital deepening in the merging markets, looks fine

  12. fitz Says:

    look up frequently asked questions for answers to interpretation questions. some info there

  13. fitz Says:

    look up frequently asked questions for answers to interpretation questions. some info there. on bbc chart that is.

  14. David O'Donnell Says:


    The debt crisis that began more than two years ago in Greece and snared Ireland, Portugal, Italy and Spain has closed in on France and now risks engulfing Germany, the region’s biggest economy. Political leaders are struggling to find a fix for the crisis, with German Chancellor Angela Merkel rejecting proposals for the common currency-area bonds, while the European Central Bank resists calls to boost sovereign debt purchases.

    The yield on 2.25 per cent securities maturing in September 2021 climbed four basis points to 1.96 per cent at 11.37am Irish time today. The price of the bonds slid 0.40, or €4 per €1,000 face amount, to 102.520. The cost of credit default swaps on German debt rose six basis points to 107, according to CMA prices. The euro weakened as much as 1 per cent to $1.3374.

    Total bids at the auction of securities due in January 2022 amounted to €3.889 billion, out of a maximum target for the sale of €6 billion, according to Bundesbank data. The securities were sold at a yield of 1.98 per cent.

    French and Belgian bonds fell for a third day after De Standaard newspaper said Belgium is seeking to renegotiate the break-up plan for lender Dexia.

    “The notion some people had that Germany could be insulated against market developments was a pipedream,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said. “The systemic crisis in the euro zone is eating its way into countries that are solvent and have competitive economies, like Germany. But because they are in the euro zone the crisis is spreading to them.”

    The rate on 30-year German bond climbed as much as seven basis points to 2.68 per cent, the highest since November 9th. Germany’s Finance Agency sees no risk in financing the government’s budget after demand was weak at a debt auction today, a spokesman said today.

    The yield on 10-year French debt increased 10 basis points to 3.63 per cent, while the rate on similar-maturity Belgian securities was 14 basis points higher at 5.22 per cent.

    Sodium Chloride is not Pepper - Herr Weidmann musta got the cellars confused :lol:

  15. David O'Donnell Says:


    I usually take the CIA WorldFactbook with a pinch of oxymoronic salt - but due to austerity imposed from the kore I’m cutting out all sodium chloride from me diet of deutsche serf_itude on brown bread and fresh water so that I’ll be fighting fit for the upcoming invasions of Gaul and Wall Street.

  16. Incognito Says:

    I am trying to write down my analysis of the current situation. Here is more or less how I start:



  17. genauer Says:

    @ David and all,
    lowering the Euro to its fair value of 1.22 Dollar or below is very helpful for all the Club Med States with respect to exports.
    And bringing yields back to normal levels like 4 -5 % doesn’t hurt anybody with a conservative fixed rate mortgage, but helps retirees a lot with daily expenses. ftalphaville even has some conspiracy theories that the Bundesbank engineered it : -) for sinister controlling reasons, like always

    btw, cutting back on salt is bad for your health, it just has some short term blood pressure lowering effects :

  18. Incognito Says:

    Sorry, some technical problem. Would be nice to have the possibility to edit one’s posts. :-)


    GDP growth has stalled and most economists now expect a recession in the coming quarters. Most financial assets have lost a good deal of their value. Euro Area stock markets have lost +/-20% of their value since April. Government bond markets of most Euro countries have also lost a good deal of their value and in fact look distressed. Surveys indicate that banks are tightening credit conditions in every Euro area country.

    Such developments could be explained by a strong fall of savings or by a clear increase of credit demand across the economy. But that would translate into strong economic growth which is clearly not the case. On the contrary, I believe that economic data in the 3rd and even more so in the 4th quarter will show that the savings rate is increasing, and credit (growth) decreasing. Furthermore, I expect that the Euro area will see its current account move from a balanced position into a surplus. On a macro-economic level thus, the Euro Area is perfectly able to provide for all its financial needs, and even export some capital to the rest of the world. And of course, unlike some emerging markets, most of the financing in the Euro Area is done in its own currency.

    Last but not least, inflation expectations have collapsed in recent months. The French and German inflation break-evens for the next 5 years have fallen below 1%. My assumption is that the financial markets in fact expect the Euro area to move into deflation for a few years.

    Open now any economics 101 textbook and try to identify what ailment corresponds to all these symptoms. It will not take you long. If it looks like a duck, swims like a duck and quacks like a duck, then it is probably a duck. All the developments above correspond to a massive monetary contraction.


    When we observe that economic activity is cooling down, that inflation expectations are falling fast, and that the money supply is expanding slightly, we can only conclude that the velocity of money is dropping like a stone. In normal economic circumstances, the velocity of money is assumed to be broadly stable, and the central bank conducts monetary policy by adjusting the money supply. Now, we have a massive monetary contraction in the Euro Area, but not due to a contraction of the money supply decided by the ECB, but by a fall of the velocity of money due to developments outside the control of the ECB.


  19. christy Says:

    So Ireland’s net financial position with the rest of teh world has tanked despite a closing current account deficit.

    We took leveraged positions in foreign assets (property) and then lost all the equity in the downturn. Is that the story?

    What is the net position now?

  20. inscrutable Says:

    Our debts are approximately as follows:

    €150 bn net debt on government balance sheet @ end 2011
    €193 bn household debt @ Q1 2011
    €99.3 bn non-financial corporate debt @ Q2 2011

    Contingent liabilities are €29 bn for NAMA, €20 bn ELA, & €113 bn ELG as at end 2010.

    The non-financial corporate debt figure is up for debate.

    So the combined debt is around 354% of 2011 GNP. Much higher than the 180% considered empirically sustainable.

  21. christy Says:


    But what about foreign assets of the Irish private sector?

    Is Prof Lane’s paper not about the NET foreign assets position

    Can we see the paper?

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