Categories Uncategorized Debt and Deleveraging Post author By Stephen Kinsella Post date January 23, 2012 79 Comments on Debt and Deleveraging Paul Krugman links to the latest McKinsey report on debt and deleveraging. There’s a lot of useful data in there, but this chart struck me as worth posting on this blog, with little comment required. Related Tags debt, deleveraging By Stephen Kinsella Senior Lecturer in Economics at the University of Limerick. View Archive → ← Prospects for the agri-food sector in 2012 → Review of the Universal Social Charge 79 replies on “Debt and Deleveraging” Given that we never really ran very large current account deficits, at least not for a long period of time, is it the case that we really owe all this money to ourselves? Secondly, given that, for example Greece, did run large current account deficits is it not teh case that they owe large net amounts to foreign creditors? Does it follow that to teh extent that debt is an Irish problem it could at least theoretically be solved by a redistribution or wealth. In other words could creditors simply write down unsustainable debts without affecting real resources or productivity? More comment is required. 1) Debt to GNP would probably be a better benchmark for Ireland. 2) There is a need for comment on how much of that 259% associated with financial institutions is an IFSC effect that has little relevance to the domestic economy. Strange how Greece is the one receiving debt forgiveness and we are happy to pay for the far larger bad debts of our top 1%. Also, the size of teh debts owed by non-financial corporations seems very large especially since a not insignificant part of employment here is by MNC who presumably don’t count. Is it possible that MNC’s are setting up subsidiaries here and raising debt through them for tax reasons? Look at their energy import dependency. In 2008 Ireland was No 4 in Europe at 90 .9% Italy was No 5 at 86.8% Portugal was No 6 at 83.1% Spain was No 7 at 81.4% Greece which produced less credit & more money (commercial bank credit is taking energy from the future) is down a bit at no 10 at 71.9% Cyprus which also had a huge credit bubble is No 1 at 100% Malta & Luxembourg at 2 & 3 Ranking are too small to register in the energy sphere. Debt dynamics are complex things so energy does not explain everything but most of these countries energy profile in the last 20 / 30 years was heavily influenced by a rush to gas which had a decapitalising effect on utilities and / or massive european road infrastructure projects that benefited the cores mercantile goals rather then the peripheral states. Paying for energy is a form of interest on external debt , if there is a rise it means you cannot utilise the goods you have already bought to the same degree. Road based vehicles are the most energy intensive of goods……….so if there is a rise in raw untaxable input costs……………………. the cars & the infrastructure built around them are the first to break down. @all very revealing, good work. I wouldn’t worry about the financial sector debt to much as this is mostly financial trickery. The non financial sector corporations debt is the most worrying for me as it suggest ordinary manufacturing and services companies are likely heavily leveraged and this debt will that to be paid down before these companies can grow significantly and employ people. The household debt figures are very high also and this will also be a drag on demand, but then that’s hardly news. The very useful McKinsey data should be seen in two contexts: a) Irish data would be more meaningful if expressed in terms of GNP. Answering a parliamentary question put to him by Peter Mathews last autumn, the Minister for Finance disclosed that Irish household debt is 147% of national income (GNP), corporate debt is 210% while public sector debt is 137%. b) in a paper delivered to the Federal Reserve conference at Jackson Hole last summer (not be confused with the Central Bank picnic at Jack’s Hole), “The real effects of debt” by Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli (BIS), it was reported that “beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.” This is the key reason why Irish economic growth forecasts are being continually revised downwards: embedded debt levels are enormous and an enormous drag on growth. Fiscal Advisory Council: take note. The FAC should also note the following passage from Reinhart & Rogoff’s “This time is different: eight centuries of financial folly” whichh states (page 289 of of 2009 edition) “debt sustainability exercises must be based on plausible scenarios for economic performance, because the evidence offers little support for the view that countries simply “grow out” of their debts.” Krugman is cautiously optimistic in this piece — perhaps he could join with tag line “Paul the Optimistic” since we need one. It is very important to deal with IFSC debt correctly, otherwise these Ireland-compared-to-world-average debt comparisons are pure garbage in – garbage out. “In other words could creditors simply write down unsustainable debts without affecting real resources or productivity?” Most of this is mortgage debt. Surely it would be especially painful for the Irish if the creditors(banks) accept writedowns as thanks to your government the taxpayer is effectively insuring the banks? http://www.irisheconomy.ie/index.php/2012/01/19/whelan-time-for-a-deal-with-super-mario/#comments Apparently our naivety knows no bounds: For example, Varadkar has warned us not paying Anglo $1.3 bn this Wednesday would result in a financial bomb going off in Dublin. A Little bit of Math warrants here: http://www.politics.ie/forum/economy/140523-anglo-irish-bank-bondholders-revealed.html BrahMos is a stealth supersonic cruise missile that can be launched from submarines, ships, aircraft or land. It is a joint venture between Republic of India’s Defence Research and Development Organisation (DRDO) and Russian Federation’s NPO Mashinostroeyenia who have together formed BrahMos Aerospace Private Limited. It is the world’s fastest cruise missile in operation. http://en.wikipedia.org/wiki/BrahMos Unit cost US$ 2.73 million = ¢2,111,140 My math gives 1000000000/2111140 = 473 Brahmos So, the equivalent of 473 of the latest cruise missiles in financial terms will be targeted at Irish taxpayers this Wednesday. The irony is Varadkar is warning of significant increase in borrowing costs for Ireland if the Anglo bondholders are not repaid. The markets are punishing Ireland BECAUSE they are paying off these bondholders…. No folly too great to build for this most incompetent Government Europe has known; I include the last in that. Massive numbers leaving the public service in health/education on great pensions will have to be rehired towards end of year on special contracts to fill up the black holes. More Math: Irish economy to grow by 1.3% this year; Troika says .5%. Assuming Troika figure which is understated, correction means statistically the government has made a significant error of judgment of the order of magnitude: (1.3 – .5)/.5 * 100 = 160 %……Sounds like they’re up to their usual standards then Along with the pension mess above, the Troika are concerned the financial sector has not even begun to shed the number of jobs required. They are looking at layoffs 2-3000 required between now and April; how long the government can hide from shedding these jobs is anyone’s guess. Hoping for reform? Not a chance. Too busy cutting and slashing the lower end of health/education to protect Croke Park. Even the troika are underwhelmed at the outrageous salaries paid out by a bankrupt government to senior cronies across the public service. From a macroeconomic point of view a stage is reached in every currency crisis when the elite circle the wagons around themselves to protect their interests. Nothing above is any different to the experience of other countries eg Argentina, Russia. Its the eye of the storm used to save what can be saved before the titanic capsizes. Right now we’re on top of the waterfall paddling full steam ahead on exports; even though shaken by threats re CT and a financial tax. Foreign bondholders are looting what they can before the inevitable fall. Fa la lala la, la, la, la, la a financial doo doo. We may be paddling but we’re making no headway against the current of debt. @Cormac These sound like magical numbers – how do these guys make such precise measurements ? Surely debt (at least goverment debt) is just money or the grease to keep the engine going , how does this effect growth ? We now know that Sov goverments can engineer any interest they wish & not bond traders as they have monopoly control of the currency. Japan is still growing albeit slowly (perhaps more sustainably ?) when its goverment debt is over 200%. Why is that ? Energy is the driver of growth. What is happening here is pretty simple to understand – our sov debt is chiefly external. So in a envoirment of private debt repayment our overall money supply MUST FALL . The core must feed off the periphery to grow as they are farming whatever surplus energy is remaining through the mechanism of debt peonage as they either don’t want real continental growth or are unable to execute a rational plan for this growth. According to the graph, the IRish non financial corporate sector owes about 300bn in debt. What corporates owe this. What is the level of leverage? To who do they owe it to? CRH has about 5bn euros of gross debt against 21bn of assets. Are there 60 CRHs out there? Two-thirds of American household deleveraging results from mortgage and consumer debt defaults. Paddy’s for the poorhouse then. @Cormac Lucy I agree the numbers are simply awful and the countrys daily pre occupation of the Govts debt load based on these numbers clearly looks misplaced – the real issue is in the homesteads of the country. Given the numbers and the conclusions drawn from all the studies available is it fair to say that Ireland Inc really has only one option and that is to take a knife to the mortgage debt and write it off ? If the model required to do that indicates a number of c€30bn to get to a meaningful place where mortgages are say at 110% of expected PTT falls in residential houses being about 75%. What then? Revise the Basel rules for Ireland and seek a deregation for a number of years ? How do we get to the promised land ? Bankrupting potentially thousands of home owners as is consistiently called for by many on this site to me is a very strange way to right the wrongs of banks clearly mispricing property and associated lending. No matter what the solution folks it aint going to be ‘fair’ – so stop dreaming. How does the ‘non financial corporations’ debt breakdown by sector in Ireland? For a relatively underindustrialized country, the figure is puzzling. Does anyone have a trend graph of these figures? The most important indicator of how long a debt-driven recession lasts is the speed at which deleveraging takes place. For instance the McKinsey report quoted at the top of the article emphasized that the US was perhaps a third through its deleveraging, whereas the UK and some other Eurozone economies had barely started. I get the feeling that here in Ireland we have been deleveraging fairly smartly (earlier deflation, payments surpluses) are there any numbers, or published graphs, to back it up. Does anyone have the comparable total debt figures for 2008 and 2011? I think the sum of these figures completely overstates Ireland’s level of indebtedness. Financial sector debt matters but it only exists if someone owes the money to them. 259% of GDP is around €400 billion. What debt does this represent? Covered banks? Non-covered banks? IFSC? The 7% of GDP figure for Greece indicates that this is influenced by the structure of the financial system as much as anything. Are Irish banks 40 times more in debt than their Greek counterparts? Non-financial corporation debt is put at 194% of GDP or just over €300 billion. Again this appears excessively large. According to Central Bank figures, credit advanced to Irish resident private sector enterprises (ex financial intermediation) by banks in Ireland peaked at around €175 billion in the third quarter of 2008. Two-thirds of this was to property-related sectors and much of the losses on these loans are now counted in government debt through the bank bailout. These figures put the total amount of debt in Ireland that is almost 2.5 times that of Greece. However, in 2010, households, firms and government in Greece paid the equivalent of 12.1% of GDP on interest. In Ireland the figure was 10.4% of GDP. If our debt levels were so high surely the interest burden would match. In 2010, the EU average was to spend 8.6% of GDP on interest. Ireland is above that but not by much. Ireland has excessive household debt but one-third of it is incredibly cheap tracker mortgages with interest rates now of around 2%. Ireland has excessive, and growing, government debt. I’m not sure we can glean too much about the financial and non-financial corporate sectors from these figures. @ All The real interest of the report is not the dodgy figures in respect of Ireland but the lessons drawn from the Swedish and Finnish experiences (conveniently summed up in the executive summary; linked PDF document). The lesson drawn appears to be the quicker private debt is deleveraged, the more rapid can be the recovery. Where are we on this score? @Seamus Using Govt yields as a benchmark for debt size is a pretty lame way of trying to compare one entire countrys debt pile versus another one must remember that in the summer of 2008 Greek CDS spreads with within a hairs breath of German equivalents. So over reliance on point in time yields/spreads is a dangerous methodology. You correctly state that the cost of the household debt in Ireland is very low and the 8.6% number v GDP illustrates this – but surely this is the most worrisome fact of all – even with negative interest rates our household debt pile is completely unsustainable as the mortgage data has been illustrating for some time. I have noticed that some of your commentary in relation to the mortgage disaster has tended to focus on the net debt pile as if the value of the property negates somewhat the effect. To me this is reasonably sound when the property market is in a ‘normal’ state but when we’re looking like seeing average PTT falls of about 75% for residential properties and with banks for all intents and purposes absent from the market the comfort of a net position is to me misleading at best. I go back to my overriding issue here and that the mortgage disaster stems from a mis pricing of the asset class arising out of flawed mortgage lending models and these are banking errors. In all cases banks had the opportunity to stop these property transactions proceeding – they decided against that and expected the lending margins to be earned and the bonuses for the lending departments to follow. Please can someone explain to me how a new personal bankruptcy/ solvency scheme of arrangement solves the issue when the error in the overwhelming majority of the cases rests with the lending banks. I’m at a loss on this one. “I go back to my overriding issue here and that the mortgage disaster stems from a mis pricing of the asset class arising out of flawed mortgage lending models and these are banking errors. In all cases banks had the opportunity to stop these property transactions proceeding – they decided against that and expected the lending margins to be earned and the bonuses for the lending departments to follow. Please can someone explain to me how a new personal bankruptcy/ solvency scheme of arrangement solves the issue when the error in the overwhelming majority of the cases rests with the lending banks. I’m at a loss on this one.” I think this is pretty clear. Even if banks were foolish to make the mortgage loans they did that in no way affects the enforcability of those contracts – morally or legally. Almost all contracts involve a division of risk – a collapse in property prices (whatever the cause) was risk borne, first by the borrower, and upon default, by the lender. Simple as that @ Yields or Bust. You are not alone in your perplexity, hence my question above. More worryingly, there seems little acceptance that the entire approach of banks to property lending has to be revised. The above figures state that Irish household debt is 124% GDP for Q2 2011. However, the latest Central Bank Private household credit report shows gross household debt at 77% and net debt at 21% GDP. Yet, the source for the McKinsey graph is “national central banks”. Can anyone explain? @DOCM, Where are we on private deleveraging? Well, going by Central Bank data, in Q1 2010 financial liabilities of private households and non-profit institutions that serve them were €194.2bn, which fell to €193.2bn in Q1 2011. I’m sure there are other series that will show a slightly different picture, but my overall take is that household deleveraging is not happening. It seems to me that the government’s strategy of seeking to drive economic recovery by boosting consumer spending is obviously off the wall, when viewed in this context. @ Seamus Coffey, $1.3 bn this Wednesday is no optical illusion or overstatement, its unfortunately, very real. However, I agree with your post. There is quite an amount of obscurity in the matter of full detail on what constitutes our precise debt profile. I would like to see a precise accounting of the figures involved. It would go a long way towards this to see a full profiling of the debt accounted for by the full financial sector located in the IFSC. We are all aware of the practice of B&B debt in the financial industry. I would be concerned that Ireland through its CT haven status is in part a dumping ground for debt that comes through the IFSC from other flags. The overall debt volumes at half the stated amounts would be untenable. If we were an Iceland or a Lehmans; or even a Dexia exposed both to Greek debt default and to subprime OTC’s sold on to us through Morgan Stanley, then sure, those volumes are possible. But we had a plain vanilla property bust. Yes, developers ploughed their loans into property markets across the world, but the total volumes of debt appear to exceed even these liabilities. Is it possible to have a precise accounting of all liabilties the state is currently liable for? Is it a case of we’re drowning in debt already, so our ‘allies’ get to hide some of their debt in ours, in a similar manner to the way European corporate profits get processed through Irish CT? @Ossian Smyth The data looks like CSO (the latest entry of which I can find is 2010). Maybe the CBI sent the author raw data? @ Yields or Bust, I made no reference to government yields, but simply stated that amount of money that is paid in interest. I can’t recall using a “net debt” measure in relation to the mortgage crisis but perhaps I did. On Monday, Paul Krugman shows that the deleveraging of the American private sector has counterbalanced the public deficit ,on Tuesday he cites the McKynsey report approvingly ,but fails to mention that this report ascribes most of the deleveraging to foreclosures and bankruptcies ! It is not a detail ,I doubt that the Irish people will accept that for the good of the country they will have to leave the roof above their head and sleep somewhere else . This would not help the banking sector or Nama either. I too have a hard time to believe those numbers . I feel a little bit frustrating that nobody on this blog ,which is supposed to be a blog by and for Irish economists ,seems to have definitive numbers on Irish level of debts. I always wondered why the central bank or the financial regulator did not try to stop the real-estate bubble ,now I know :nobody had a clue about what was going on! @christy Unfortunately it isn’t as simple as you claim it to be. The citizens of the country have come to the rescue of these banks – and I’m pretty sure I’m not alone in not actually remembering signing my name to any bailout contract and yet I end up paying for those who actually contracted to take the risk of the banks going bust i.e. the financiers being the equity holders, the bond holders and the depositors. So your so called contractual approach fails at the first fence. The problem I believe as has been the methodology employed by the Courts in dealing with the issue. To me it is a case of divide and conquer and hence the reason why the banks will always come out on top in mortgage default cases. You are correct insofar that each individual contract looked at as a separate case will always favour the banks – but the fact there are so many of these individual cases surely its not beyond the wit of the Courts to join the dots and ask the bleeding obvious question being – whats the common denominator here? – the answer being of course crazy lending practices by those who were Regulated to know better, whose day job it was to know better and whose economic well being is based primarily on them ensuring the integrity of the market is maintained. All tests which the banks have comprehensively failed. In addition the normal ‘out’ for struggling mortgage holders has historically been to sell up and rent. This normal out has also been denied because of the small matter of c150k of unwanted product sitting on the market. Now perhaps you could explain to me why any bank is entitled to 100% of their cash back when they have screwed the market up for all participants including themselves – burden sharing I would have thought correctly begins with those who caused the problem in the first instance – given that property is a market which is utterly dependent on leverage for its survival explain to me exactly why the party to any contract who does their level best to destroy the market and the hand that feeds them should be entitled to 100% of their cash back. Over t @christy Unfortunately it isn’t as simple as you claim it to be. The citizens of the country have come to the rescue of these banks – and I’m pretty sure I’m not alone in not actually remembering signing my name to any bailout contract and yet I end up paying for those who actually contracted to take the risk of the banks going bust i.e. the financiers being the equity holders, the bond holders and the depositors. So your so called contractual approach fails at the first fence. The problem I believe as has been the methodology employed by the Courts in dealing with the issue. To me it is a case of divide and conquer and hence the reason why the banks will always come out on top in mortgage default cases. You are correct insofar that each individual contract looked at as a separate case will always favour the banks – but the fact there are so many of these individual cases surely its not beyond the wit of the Courts to join the dots and ask the bleeding obvious question being – whats the common denominator here? – the answer being of course crazy lending practices by those who were Regulated to know better, whose day job it was to know better and whose economic well being is based primarily on them ensuring the integrity of the market is maintained. All tests which the banks have comprehensively failed. In addition the normal ‘out’ for struggling mortgage holders has historically been to sell up and rent. This normal out has also been denied because of the small matter of c150k of unwanted product sitting on the market. Now perhaps you could explain to me why any bank is entitled to 100% of their cash back when they have screwed the market up for all participants including themselves – burden sharing I would have thought correctly begins with those who caused the problem in the first instance – given that property is a market which is utterly dependent on leverage for its survival explain to me exactly why the party to any contract who does their level best to destroy the market and the hand that feeds them should be entitled to 100% of their cash back. Over t @ christy “I think this is pretty clear. Even if banks were foolish to make the mortgage loans they did that in no way affects the enforcability of those contracts – morally or legally.” Don’t know about that? They were not paid huge salaries and bonuses to be foolish and there are many who say that the foolishness stayed into the area of criminal negligence. If that is true, it changes the culpability for the loans. It took 222 years for BoI loan book to reach 100bn but 4 years later 2008 it was 200bn surely they cannot expect to collect that? How were thousands of shareholders who invested in these well run banks literally wiped out. I know many people who depended on their bank shared for nursing homes and they are distraught. Meanwhile the guy leading the Anglo investigation retires with 150K and 75K pension and takes up a job over at BoI. Surely, there is a major conflict of interest? Can someone explain why when you step literally 1 meter over the border into NI and a radically different insolvency regime applies? So, if someone has a loan with BOSI (any bank) they are crucified in the republic where BOSI no longer even have an ATM machine but if they rent a derelict flat in NI and apply for bankruptcy there they can hit the road running after 12 months? As for the data above, Constantine Gurdgiev has been banging on about this for almost 2 years now i.e. Ireland being one of the most indebted nations on the planet but finally it seems to be gaining traction. @yields or bust Given the importance of teh overall debt levels I think the thread probably deserves better than a digression by us into the morals of debt forgiveness but… “The citizens of the country have come to the rescue of these banks – and I’m pretty sure I’m not alone in not actually remembering signing my name to any bailout contract and yet I end up paying for those who actually contracted to take the risk of the banks going bust i.e. the financiers being the equity holders, the bond holders and the depositors. So your so called contractual approach fails at the first fence.” this seems to fall into the trap of thinking two wrongs make a right The State owns the banks – and given the current gov’s policy – every penny written off unnecessarily on mortgage debt is another penny that must be paid by the taxpayer. So the fact that citizens have rescued “the banks” is not relevant. (And even if the state wound up the banks it would be under a duty to maximize the returns for creditors of the bank) The key question is whether creditors OF THE STATE should be allowed write off their debts – and I say that it is plain that it would be unfair to allow them to do so. (sorry don’t know how to highlight words other than putting them in capitals) The state provides welfare payments on a needs basis – and there is no reason to believe mortgage borrowers are more needy than other potential recipients of social welfare. Now, if some people can’t pay, then that is a different matter- they should be allowed to have some reasonable method of starting again. Also, it may be the case that for practical reasons we are better off writing off some of these debts – but that is a different argument altogether than saying they have a moral or legal case for having their debts written off. The amount of household debt is a fundamental problem in trying to engineer recovery. Talking about a bankruptcy period of 3 years or 5 years because people have a bee in their bonnet about Fitzy and Quinner is madness. We have to have a personal insolvency regime that is no harsher than the UK or we will lose businesses to the UK. We also need to get as many people into and out of this system as quickly as possible. The Government (particulary An Taoiseach, Min for Finance and Min for Justice) need to have the balls to do what is right for the country. There may be a disparate band of pinsters, Joe-Duffyites and FG-Savanarolas who will choke on their cornflakes at this but we have to take the chance that losing all your dosh is enough to avoid moral hazard. Of course some people will do very well out of it because the banks won’t foreclose but that is happening anyway, except in slow motion. In the meantime, there are plenty of others sinking into depression, suffering permanent psychological damage and even committing suicide. Share of Total primary energy supply in MTOE – IEA figures. Spain : Y2007: 143.87 / Y2008 :138.79 / Y2009 : 128.19 …. decrease :15.68 MTOE Italy : Y2007: 179.09 / Y2008 :176.03 / Y2009 : 162.71… decrease :16.38 MTOE Ireland: Y2007 : 15 / Y2008 : 14.98 / Y2009 : 14.01… Decrease : 0.99 MTOE Greece :Y2007 :30.22 / Y2008 : 30.42 / Y2009 : 29.05 Decrease :1.17 MTOE Portugal :Y2007 : 25.07 / Y2008 :24.16 / Y2009 : 23.85……. Decrease :1.22MTOE Total MTOE lost from 2007 to 2009 :35.44 MTOE Thats 2 X 2007 Ireland’s worth of activity gone somewhere else + a extra 5.44 MTOEs for good measure. The 2010 Data is probally still very negative but the IEA charges for the 2010 figures. So where did this stuff Go ? – not the UK UK : Y2007 : 210 .06 / Y2008 : 208.45 / Y2009 : 197.60………… Decrease of 12.46 MTOE. Still it was a lot less given that the PIigs have perhaps double the GDP of the UK. Maybe the UK which still has one of the densest rail networks in Europe is benefiting from its 19th century rather then 20th century investments as it can squeeze more output from less BTUs. Switzerland was one of the few European countries to increase its TPES ….funny that. Switzerland :Y2007 :25.72 / Y2008 :26.70 / Y2009 :26.92 Rise of 1.2 MTOE. But most of the excess energy is finding its way to China & oil /coal exporters such as Australia / Saudia Arabia or other major manufacturers such as S.Korea. re Krugman: “My preference is to leave financial-sector debt out of the picture, because it’s conceptually very different from nonfinancial debt. Think of it this way: compare two banking systems, one in which banks directly lend deposits out to customers, another in which many deposits are lent out through the interbank wholesale market, and then lent on to nonfinancial customers. The second system will show much higher financial-sector debt, and it is in some real sense more risky than the first, but the real economy isn’t more highly indebted than in the first case.” Re Par 2 , this is a key difference between the FED and the ECB. The second system has a system of checks and balances operated by the FOMC to redistribute the effects of this interbank lending among the players involved. The only shakeup involved is through a QE which might have an inflationary effect, the real economy is a different matter. However, the weakness of the euro project means no such second system exists. Once deposits are lost eg in a property bubble, these losses leak into the real economy; nationalisation or state guarantee bring them into the real economy. Unfortunately, the poor design of the euro means the only way of dealing with such losses is a one to one relationship the ECB has with its CB’s . What ECB lacks is probably a new one to many relationship with its buyers; so debt can be purchased and redistributed among its members through eg a system of eurobonds designed to absorb loss, transfer loss, manage loss making divisions in the EMU. Right now its a credit union, each member has to deal a one to one solution with ECB/Troika/IMF upon which political pressures make more difficulties. The forcing by the ECB of eg Ireland to take on financial sector debt in the absence of financial tools to regulate the debt of financial institutions, has led to financial services and banking debt become amortized into sovereign debt and therefore leak into the real economy. This is the real scandal of the euro credit union. “But what I’ve been able to gather is that Europe has had a substantial rise in public debt, with little or no private-sector deleveraging.” Indeed, thats why banks are not allowed to fail in Europe, because it gets switched into public debt so easily; with the backing of our politicians. ‘Growth’ Watch – an occassional posting on meaningless statements about growth. Spanish economy minister Luis De Guindos today: “It’s a two-pronged approach: austerity on the one hand and economic growth on the other.” Er, wasn’t Spanish ‘growth’ for 2012 revised down to -1.5% very recently? I can’t find the quote now but the fragrant Christine has also continued her calls today for growth in Europe (speaking in Berlin), knowing that a) she’s not the one who’s actually got to make it happen and b) it won’t happen this year anyway as the EU heads into an almighty double dip. Does anyone who contributes to/posts on this blog actually go to Davos? Can’t say I’ve spotted an invite this year (again). Overseas com “I feel a little bit frustrating that nobody on this blog ,which is supposed to be a blog by and for Irish economists ,seems to have definitive numbers on Irish level of debts.” I think the figures obtained by Peter Matthews in a Dail question are the ones that many people seem to have the least difficulty with. The big lesson from Japan is that once you get to a certain level of debt going to pay interest it can make recovery very very difficult even in the medium term. Any gains in growth go straight to repaying debt which remains stubbornly high regardless of the levels of Austerity the country is prepared to endure. Last par above, Constantin Gurdgiev True Economics http://bit.ly/AtoaDR puts it much better by quoting Nassim Taleb: AN excellent quote from Nassim Taleb via @econbrothers : “”If we attempt to systematically extinguish all forest fires, we will eventually experience a big one”. Which, of course, goes to describe concisely and precisely the fallacy of rescuing all banks that Europe has pursued as a principled policy. The old Schumpeterian creative destruction is a required condition for functioning of the private economy, with the latter being the required condition for functioning of the public economy as well. Bankruptcy – as a tool for clearing the hazardously dead forest of private enterprises – must apply to the banks too. By underwriting the entire private banking system, the EU has created the Mother of All Hazards – a dry forest with numerous pockets of quasi-extinguished fires burning. Now, all we need is wind… “ The banks have created this mess because international short term funding was not outlawed, which it must be in future. That is how BOIs balance sheet went from 100bn to 200bn in 4 years as Robert Browne says. The money that provided these loans has been withdrawn by the original lenders and now the ECB has stepped in to fund the difference while we wait for the loans to be repaid. However a large proportion of these loans will never be repaid so the government has capitalised the banks massively. Incidentallly this shows the folly of the capital ratio being the main tool of regulators when loans massively exceed deposits. With 1 simple change in regulation – to make Loans to Deposit Ratio >=100% illegal this crisis would not and could not have happened. So what are we do to now? I am not so clear on this, I would favour the government fully nationalising all remaining privately owned banks – I would expect their losses would justify this. Then there would have to be mass bankruptcies and foreclosures before we could start again with a new banking system. @Eamonn You are looking at growth rates in Yen !!!!!!!!!! Have you any idea what the Yen has done over the last few years ? They own their own debt !! – they don’t export their money. Considering the Japanese economy is very very resourse poor & its unfortunate nuclear accidents over the years it has done very very well. However the world banks successful attempt to liberalize their post office will have grave long term consequences for unsophisticated long term savers in that country who have been the real winners over the last 20 years. The World Bank cannot allow this perversion to continue. Re Mathews, debate with McHale, once again, is it not strange a full audit of debt is not freely available: This was back in November: Here Matthews figures range up to ¢ 100 bn from ¢ 70 bn from losses due to the turbo charged credit bubble http://www.cahill-printers.ie/Debates/DDebate.aspx?F=FIJ20111117.XML&Ex=All&Page=6 I cannot but highlight the complete and utter idiocy of Plan A. Did the troika foist this upon us in return for ‘bailout’; did a ‘blind’ Department of Finance or NTMA led negotiating team swallow this whole, the same crew of the Marie Celeste, who brought the IMF here in the first place? The whole of the EMU and the western world must be laughing at this? “Plan A, although it will be incredibly difficult, is the best route towards a solution to the crisis. It means we will get through it with our creditworthiness as a state intact. We will not have defaulted and there will be reputational benefits, affecting not just the State but also the economy. We are a trading nation heavily dependent on investment. Plan A would reduce the risk of a really sudden cessation of funding, which could occur and which would be incredibly damaging given our financing needs and the size of the deficit we will have on an ongoing basis. Trying to keep the finances in place and spread the adjustment over time seems to be the best approach. Plan B is just too risky to contemplate at this stage.” The notion that this country is concerned re the reputational damage of its negotiating team, or its banks, at this point, is a joke. To realise the present government are confidently pursuing PLAN A is worth a laugh from the Three Stooges 🙂 http://www.youtube.com/watch?v=0UDu4IEkPPI “Hey, chucklehead, did you get the tools?” “What tools?” “The tools we’ve been using for the past ten years” “Oh, those tools!” “Yeah, I got em ” Lol @colm brazel The next forest fire in the property world may very well involve ‘collateral insurance’. This ‘beauty’ operated by having the last (sub)contractor out sign for almost everything, from the architects drawings to the quality of the plumbing. So the guy finishing off the final bit of tiling in the lobby, just wants his cheque. He is handed a bundle of paper, told to sign and then gets his cheque. Something wrong with the build? Guess who the insurance company first taps? And as for personal debt, the government is determined to martyr thousands in forests of dark debt rather than introduce commercially reasonable and humane bankruptcy laws. Dork just talked to a business contact in Saudi, petrol is (wait for it) €0.09 a litre there… Considering that 2/3rds of petrol price here is taxes (and taxes on top of taxes) …. @Minister Noonan Olli Regn Mario Draghi Kiel Institute ….. Ireland needs, badly needs, simply must have, a reasonable hair-cut – Kiel reckons 30% ~€50 billion. http://www.spiegel.de/international/europe/bild-810806-307316.html @all Sounding emerging on personal bankruptcy etc are not encouraging …. 5,6,7 years: would somebody pls get real! One Year is sufficient. @ Alchemist, Was there to be legislation re builders having to supply bonds to prove they would finish unfinished estates; or, make sure the previous scam of not paying tradesmen for work they carried out on estates, with the developer just closing his company and starting another under a new name, meanwhile the brickies/painters/plasterers end up with nothing…I think it was one of Sean Gallagher’s platforms….your example recently in the news re whole rebuilds required due to bad workmanship/fire hazard…I don’t follow that area but notice reform there is not in the media, so must be on the back burn…Germany’s regulatory regime works extremely well for them and avoided them a property scam like ours! I’m off, have a good evening 🙂 Looking at the IEA energy balance figures for OECD Europe from 2007 to 2009…….. TOTAL TPES in 2007 : 1826 .57 MTOE in 2008 : 1821.5 MTOE in 2009 : 1720.9 MTOE Decrease of 105.67 MTOE So using TPES metrics during those years the PIigs took one third of the total adjustment for the Entire OECD Europe !! Wow The PIigs are certainly no where near one third of total GDP for OECD Europe. And the black pudding manufacturing was just starting then. Love to see 2010 figures. Anybody have TPES figures for 2010 ? @Christy “The State owns the banks – and given the current gov’s policy – every penny written off unnecessarily on mortgage debt is another penny that must be paid by the taxpayer. So the fact that citizens have rescued “the banks” is not relevant.” One problem with this logic is the context within which it took place. The state failed to damp down a housing bubble which inflated accommodation costs for both buyer and renters. Some would feel that it cheer-led the bubble through tax policy. The state also levied some of the largest property-related stamp duties (land and property transfer taxes) and development levies in the Anglophone world throughout the bubble period. It used this tax revenue to fund reduction of direct taxation rates on labour among other things. This behaviour amounted to a transfer from property buyers to everyone else, and the sums involved were often very large. These policies were not accidental and were deliberately engineered by the Irish state. In the aftermath of the collapse of the productive part of the economy, which it was responsible for overseeing, it seems to me that it may have a very clear moral responsibility to return at least some of the money it gouged from taxpayers who were subjected to inflated property transfer taxes during the bubble years. This would arise in cases where such individuals are now at risk of financial ruin mainly due of the disastrous stewardship of the economy by the state during and after the bubble years. How it is to be done is another matter but the moral principle of restitution from tax beneficiaries to those who were clobbered by stamp duties during that era seems clear enough to me. @EIS If we did not tax the stuff even more consumption would flow to the Saudis via our money exports. The recent EU efforts to stir up trouble in the Middle east is all about recapitalizing western banks via petrodollars rather then saving western states & their money. If we had a world financial system based on final settlement, large taxes on energy imports would be a very good thing. Indeed a functional trade system could not work without it. A accurate measure of the failure withen the west is how much we pay soccer players – where do you think that money comes from ? You pay the ticket , buy the shirt , get sky sports and then , then you export your money to the Swiss / Saudi oil cartel. Then they inflate soccer players wages rather then increase our real capital base. Its a pathetic world really. @Seamus Coffey Indeed. Also BIS data collection criteria (upon which the chart is likely sourced) are hopelessly outmoded due to: 1) Increased globalisation 2) Financial sophistication: lots of hedging goes on, and nett positions often lower than gross Very little attention has been paid to improving economic stats in order to keep pace with globalisation. I think it would be helpful if this blog was to campaign for: 1) Improved BIS standards (which effectively govern much CBI/ECB standards) and 2) Increased domestic data collection Such things take years to achieve…and it would be nice to have richer data soon DOC its not peak oil your average person in this country is worried about its “peak taxation” DOD, People really should listen to what Merkel says not what we want her to say. There will be no significant write down of peripheral debt bar Greece. She wants to win the next election. Burning the savings and raising taxes of German workers to pay higher paid Irish public servants and welfare recipients would cost the CDU seats. Zhou, Since there will be no debt relief from abroad, what you propose is a wealth transfer from those who were financially responsible in the boom years to those who are victims of the downturn and those who were down right irresponsible. Helping the former under certain conditions is necessary but helping the latter will draw the ire of vast swathes of the population. If I become an FF Borgia can I have a dig out. @EIS In many ways – its the same thing. Think of the final settlement process during the gold standard years. If the trade balance is negative and / or the activities of multinationals & off shore corporations cannot be taxed……………………………… We have deserved some of this really – we have lain with the beast. Anyway we have a national reserve currencies now – therefore you get the artificial “adjustment” process you see with the PIigs. This destruction is a very managed process. You can make multiple killings from these massive inflation / deflation cycles – especially if you control the spice………….oil. @ Eamonn Moran The figures provided to Peter Mathews suffer from the same difficulties as those used here. In fact there are the same. If asked to pin down the level of debt at the end of 2011 I would go with: Household Debt: €186 billion Government Debt (ex Prom Notes): €139 billion Credit extended to Irish Private Sector Enterprises: €99 billion Bank of Scotland (Ireland) commercial loans: c. €15 billion Irish non-financial corporate bonds: c. €10 billion Irish Loans in NAMA: c. €50 billion Any figure preceded with “c.” is a bit of a guess. If the Promissory Notes are included as part of government debt I would change the amount attributed to NAMA to the consideration it paid for the Irish loans (c. €20 billion). The total is around €500 billion which is 320% of GDP and 390% of GNP. This is a higher level of debt than the countries shown above. @ All A sobering assessment of the situation from Der Spiegel and of the now near total isolation of Merkel. http://www.spiegel.de/international/europe/0,1518,810806,00.html The latest news is that the suggestion of Draghi – to combine the remaining funds of the EFSF with those of the ESM for a total of €750 billion – is likely to be accepted by Berlin. The only taxpayer cash cost to Germany hitherto has been in respect of her own banks. The constant foot-dragging by Merkel, and the misrepresentation of the costs and benefits to Germany, has resulted in a likely final bill which will surpass anything that might have been the case had action been taken earlier (a point made repeatedly by the SPD opposition). Very strong PMI data out of the Eurozone this morning btw, now looks like no recession in EZ and economic activity bottomed out in Oct/Nov. Revised Q4 growth data may also not look as bad as initially gauged. @Tull said: “Zhou, Since there will be no debt relief from abroad, what you propose is a wealth transfer from those who were financially responsible in the boom years to those who are victims of the downturn and those who were down right irresponsible. Helping the former under certain conditions is necessary but helping the latter will draw the ire of vast swathes of the population.” This is the essence of the stupidity that pervades the debate around bankruptcy reform. I would make the following points: 1. The losses have occurred – stop fooling yourself that there is blood in the stone. 2. Longer bankruptcy periods will hamper debt recovery and wealth generation in the future. 3. Apart from those who did not take on too much debt (myself included), there are a lot of children who should not be paying for the sins of the reckless. 4. We are in an dire economic crisis which demands more dramatic actions to get recovery in motion. Accordingly, a shorter bankruptcy period is required than would otherwise be the case. There are always people who will look first to their self-interest and the high esteem in which they hold themselves, and who will thereafter happily cut off their own nose rather than see their next door neighbour escape decapitation. It is the responsibility of Government to recognise and explain the errors of these ways and to ensure correct action is taken. There’s a rather good discussion of our debt here: http://www.askaboutmoney.com/showthread.php?t=150911 The discussion on this blog re ELA/PN has teased out 3 here (one of the comments to above), so I’ll just add the comment for reference 3 Central Bank Liquidity Funding This money actually earns us interest. It is not secured on assets, so we could lose it if all the banks go bust. But the same people who argue this, argue that the NPRF money invested in AIB and Bank of Ireland will not be recovered. This investment was to supercapitalize the banks to provide a buffer against future losses. It is very unlikely that this money will not eventually be repaid to the Central Bank 5 The EU-IMF funding of €66 billion This does not show up in the above table as it’s in the future. €40 billion relates to funding our exchequer deficit over the next three years. €26 billion will be used to replace maturing debt and pay the Promissory Notes which are included in the General Government Debt figure at 2 above. @ S Coffey “Irish Loans in NAMA: c. €50 billion” NAMA more like ¢30 bn RE Household Debt: €186 billion Government Debt (ex Prom Notes): €139 billion Credit extended to Irish Private Sector Enterprises: €99 billion Bank of Scotland (Ireland) commercial loans: c. €15 billion Irish non-financial corporate bonds: c. €10 billion Irish Loans in NAMA: c. €50 billion Obviously, it would be good to have a detailed account of the makeup of the above items on a loan by loan basis, not possible; though stats should go deeper into these. But, the problem is confusion is made between good and bad assets upon which above debt is based; also loans which are toxic, and loans which are not. For example, the figure ‘credit extended to Irish Private Sector Enterprises’ to me is a fascinating figure I’d be very interested in lots of more data upon. IT should be possible to separate out from all these figures lending which is funded on a good asset base that will make a return on investment, or lending that will make a return on investment even though the asset upon which is based is eroded; from lending whose asset base has disappeared and will never be repaid. It appears easy enough for the Greeks to identify a debt write down of ¢100 bn, good luck to them this week. But for us it seems impossible to even come to agreement on a figure for debt writedown. So, we have the ridiculous and ludicrous situation of Noonan meeting with Ollie et al today and its on debt writedown, but we have no figures on what we want on the table. I’ve posed a figure of bn 42 bn based on a writedown of ELA, I’ve seen other figures go to ¢50 bn and ¢75 bn I, for one, would like more data substantiating the view that the figure of debt writedown is a minimum figure total based solely on verifiable evidence that this figure represents what cannot be repaid 🙂 @ Seamus Coffee It seems the big difference between your figures and those produced by the Dept of finance for the minister is mainly the amount you are allowing for business debt. This is outlined in the following article on Constantin Gurdgievs blog. http://trueeconomics.blogspot.com/2011/09/26092011-irelands-debt-overhang.html Your “Credit extended to private sector enterprises of €99 billion” and the departments “Non Financial corporations had outstanding loans of €264 billion” Is it the case that the department are including non financial MNC Debt and you are not? If that is the case I think you have a point. However even using your figures it would put us in a similar position to Japan in 2000 and worse than any other listed country on the same blog post. Only Portugal comes close. It should Also be noted that Greece had a mere 273% (not sure if the figures were taken before or after the Greeks fessed up to hiding debt) Still I think there is a general case to be made for the idea that smaller economies are probably less able to carry as large burdens as bigger countries. Also the general trend of rapidly increasing mean debt levels over 10 years for the countries listed is quite shocking. It is almost as though the Financial industries have increased levels of debt approaching the levels in japan so the global economy is in a state of permanent paralysis. Even with a long stint of Austerity Japans debt levels have also increased in the last 10 years. @Zhou 4. We are in an dire economic crisis which demands more dramatic actions to get recovery in motion. Accordingly, a shorter bankruptcy period is required than would otherwise be the case. + 1 Maybe an amnesty period of one year or even 6 months before returning to a 3 year bankruptcy period with stronger conditions to help deal with tsunami of meltdown. ‘Growth Watch’ – an occassional posting covering meaningless statements about ‘growth’ in the EZ. Dutch Finance Minister Jan Kees de Jager (last night): “There was an emerging consensus that time is running out. Greece must now finally move decisively with structural reforms and generate growth…” By/How…? Getting the money fairy to sprinkle her sparkly magic dust on the country? @ Zhou You are 100% correct and it is 100% not going to happen. Because many of those in and around government are the same people who “will look first to their self-interest and the high esteem in which they hold themselves, and who will thereafter happily cut off their own nose rather than see their next door neighbour escape decapitation.” @ Eamon Moran From your link “The authors argue that although debt can be used to drive growth and development, “…history teaches us that borrowing can create vulnerabilities. When debt ratios rise beyond a certain level, financial crises become both more likely and more severe (Reinhart and Rogoff (2009)). This strongly suggests that there is a sense in which debt can become excessive.” The authors set out to answer a simple question: When does the level of debt go from good to bad? ‘Bad’ as in producing the effect of lowering long term economic growth in the economy.” Debt becomes bad when it can’t be paid back; also when it becomes a drag on growth. But this is not true in every case, so care must be taken in regard to global formulae applicable in every instance, for example, levels above 80% are therefore inherently bad. Consider Japan above, its level of debt is funded largely from within Japan. “Japanese Yen Even though the Japanese yen has a huge sovereign debt problem, with the country’s current debt-to-GDP ratio standing at 200% it is considered to be the best safe-haven currency. This is because Japan is funding its own debt, so the demand for bonds is mostly internal. It has had a consistent current account surplus since 1988 and is steadily benefiting from the repatriation flows, as Japanese companies and investors bring funds home. One hurdle in the yen’s growth is the intervention by the Bank of Japan; however, this is not going to affect the yen in the long-term.” http://bit.ly/z4Bj4R A small economy might discover oil and require investment needing borrowing to rise to eg 200% of gdp levels. If you are a Keynessian, you would invest in a downturn and save during a boom. So a more subtle understanding of the Rogoff analysis is required than at first may appear to be the case 🙂 For us, if we wrote off the banking debt alone, particularly the Anglo disastrous mistake, we have an infrastructure that is still intact with opportunity to build out our economy to levels 3/4 times what we see now. This would be a good time to invest to provide jobs for young people. Savers will spend their money if the debt overhang is properly addressed; and a forward looking 5 year economic investment plan built involving all sectors of the economy. The German model of wage restraint would have to be strictly adhered to and present unsavoury levels of public pay a la Croke Park said goodbye to 🙂 The problem is gombeens in the Department of Finance, NTMA, useless leadership….so I have to continually guard myself against my own optimism 🙂 @ Colm Brazel, I included the nominal amount that is owed on the Irish loans in NAMA rather than the amount NAMA valued/paid for them. If we write down the value of the NAMA loans then the Promissory Notes would have to be added to the government debt as it is largely these that will make up the difference. There is little impact from doing one or the other on the final total. Either the developers repay the full €50 billion of loans or they repay €20 billion and the State pays €30 billion. And we know which one is going to happen. @ Eamonn Moran Yes, the non-financial corporate sector is the main difference. The Sector Accounts figures provided by the Central Bank and CSO are gross and non-consolidated. I think the Credit Advanced to Irish Resident Private-Sector Enterprises data provided by the Central Bank gives a better idea of the debts of the corporate sector. This spreadsheet contains a lot of useful figures. I would point out that Bank of Scotland (Ireland) left this series in December 2010 when it pulled out of the Irish operations. Its loans still exist but are in a recovery vehicle called Certus rather than a bank. NAMA accounts for much of the drop seen since the middle of 2009. I’m not suggesting Irish debt is not excessively high. It is. Rather we should try to get a handle on just how high it is. Zhou, My contention is that there is going to be insufficient debt foregiveness from “thar lear” so the losses are going to have to be distributed among other Irish citizens. At this point, you should spell out who is going to benefit from your debt jubilee and also who among this society is going to pay. @Tull If I may interject on your conversation. Refer to my various posts about the fundemental difference between goverment money & bank credit deposits. So who pays in a PRIVATE debt jubilee ? So lets say all mortgage contracts are no longer valid. Ownership is transfered from commercial bank to the former mortgage holder Credit Deposits become goverment money (post offices stuff & the like). At the moment credit deposits are subtracted to pay mainly external sov debt holders interest. Bond holders would have taken the entire loss. If there is no credit deposits where does the money come from to pay the sov debt holders ? The CB just prints whats needed to cover interest. But what happens to inflation / trade balance if all this private debt / money is released on the domestic scene ? To prevent malinvestment there must be higher taxes on waste ? Where is the waste in Ireland ? Its chiefly energy & consumer durable imports(cars etc) So taxes for cars & oil, both for transport & heating rise to fill the debt void. What do you think happens to the price of houses out in the sticks which are dependent on both cars & oil central heating ? The country would become rapidly more effiecent in its entire resourse allocation chain , from post offices to public transport to electric utility provision – pretty much everything while maintaining the value of money and thus their contract. But don’t expect this – this debt artifice will eventually collapse and they will be forced to massively defecit spend out of this to cover the CAPITAL Losses & socialise the losses through raw inflation as the bank bond holders have escaped. Unfortunetly this is what will happen as they break their social contract to remain on top. Its is essentially the same trajectory although in the second the Irish will have very little wealth to rebuild our capital base Go to 15.45 to 21.10 http://www.youtube.com/watch?v=hGl3QPfB084 “Settlement is a function of bankruptcy” “The whole system is running toward bankruptcy which is a way of settlement” “what they are doing is DETERMINING WHO THE LOSERS ARE” @ Colm Brazel Your argument seems to be that once the debt is owed to people within your own country the size of the debt is not very important. Can you not see that a massive debt even if owed to a small number of people/financial institutions within the country is a huge chain around the ankles of the productive economy. If Businesses and people are spending significant parts of their income on repaying debt it is a massive transfer of wealth from the productive economy to the Financial sector. In the US in 2010 half of all profits in the Sand P 500 went to financial related institutions. Now if it was a socialist utopia where every individual in the country had an equal amount to invest and it was all invested in the domestic economy you would have a point. But that is not the case. Excessive levels of debt once funded domestically may not matter currency traders who are mainly interested in the sustainability of the country as a whole but it matters a great deal to the general population. Are you genuinely suggesting that the poor growth rates in japan over the last 20 years and their massive and increasing levels of debt are not related or significant? In Ireland we have similar problems where massive earnings in the productive economy are siphoned off to landlords. Rents were much too high companies were all paying way more than was affordable. Is it any wonder that the majority of companies in Ireland do not make a profit? I will repeat that as it is not said enough. The majority of Businesses in the Irish Economy do not make a Profit. Even in the good times we relied massively on MNC’s to create profit collected in Corpo Tax. The government badly needs to take on this powerful group and are failing in the task. @Eamonn There is a huge difference between commercial banks kept alive by cheap ECB money that then go out and buy goverment debt at a large margin to cover their bad credit judgements & giving the money to the people & writing off private debt. The banks are shearing us without providing any social utility worth a damn. Its this intense symbiotic relationship of banks & the state which has destroyed the west. We could be witnessing the end of Cromwellian like republics. Eamonn, can you not see in a closed system if A debt is written off then B assets are written down by a similar amount. A is better off and can move on while B now finds his savings/income reduced. How is society better off? Now if A get to keep his assets and get out of his debt he is even better off. If however, B now has assumed A’s debts but not his assets, B is rightly screwed. You and Zhou are operating according to a model where someone else will always pays. Sensible Money is an organisation attempting to remind economists how money is created and what happens as a debt is repaid. The existence of all this debt implies the existence of a creditor. A creditor who most of us imagine is lending existing money. However new money is created through the bank loan process and with it a corresponding debt. This is the root of the debt crisis problem. Any future money which the economy needs will also have a debt. Restricting debt, and hence money, arbitrarily to some ratio of GDP won’t solve the debt crisis. @Tull IF Bs savings become goverment money how is his savings reduced ? Only the interest on savings / goverment debt is reduced because of this collective action – not its immediate value. A goverment monies value is based on the productivity of the state – if the productivity of the state is dramatically reduced to pay back private loans – how is that peserving Bs savings ? I took most of my savings from the Post Office when I witnessed the NAMA / Bank Bond Holder wealth transfer operation. “THEY ARE DETERMING WHO THE LOSERS ARE” DETERMINING even. This stuff is easy – its a wealth extraction excercise , pure & simple. In open sight. @ dork “& giving the money to the people & writing off private debt.” When does that happen? Its not what I was suggesting. I agree with your other point. @ Tull Where did i suggest debt should be written off? Eamonn, If debt not written off, how does one get your debt reduced? @Eamonn Its not going to happen until all or most of the wealth is extracted – then they will give the money back to the people – but by then it will be nearly worthless. Its all so predictable , the people running this operation cannot be allowed to take a loss – since we don’t run this kip………………. The deliberate confusion (?) of the nations money supply with its private credit (loans) is the mark of a colony. PS witnessed the female(socialist) PM of Denmark on Euro news – I was shocked. Not because she is a good looking woman & all but her Invasion of the body snatchers response to Euro questions………… Google this & you should get the video Danish PM: What’s good for euro is good for Europe euronews – 19 hours ago @Seamus These figures put the total amount of debt in Ireland that is almost 2.5 times that of Greece. However, in 2010, households, firms and government in Greece paid the equivalent of 12.1% of GDP on interest. In Ireland the figure was 10.4% of GDP. If our debt levels were so high surely the interest burden would match. In 2010, the EU average was to spend 8.6% of GDP on interest. Ireland is above that but not by much Could the lower Irish interest be due to more variable rate mortgages in Ireland than other countries? @Tull You are equating bankruptcy/insolvency procedures to debt forgiveness. The difference in my mind is that an insolvent person loses all assets and must start from scratch. If they are allowed to keep their house then it is only with the consent of the bank and on the basis that they will have to start from scratch to pay market value or more for it. If they have any equity it must be sold to pay their creditors. My suggestion is that they should be allowed start from scratch more quickly and should spend less time as bonded serfs. Let’s be very clear, people are already living as bankrupts under the control of their banks because our bankruptcy system does not function for creditors or debtors. Ultimately, I don’t think shortening the bankruptcy period will cost the state or the taxpayer anything. I believe that much as the Germans need to support the recovery of the rest of Europe out of enlightened self interest, so must the prudent Irish support the recovery of the insolvent Irish out of enlightened self interest. I believe that a shorter insolvency period will lead to greater tax revenues through a quicker recovery. A shorter insolvency period will also stop people carrying their capital losses and business losses forward forever and a day, paying no tax on new income and remitting their money to banks and foreign creditors. Who will pay? We’ll all pay dearly if we follow your logic. (you will also note that the IMF have pointed out that debt relief for americans in negative equity is critical to american recovery.) @ Tull By paying it off? Comments are closed.