Non-Financial Corporate Debt (updated)

The excess level of debt in Ireland gets a frequent airing.  Frequent reference is made to graphs like the following published by McKinsey.

Ireland has an excessive level of debt but it is the figures attributed to the financial and non-financial corporate sectors that push us into the stratosphere.

Outside of some coverage issues in relation to the general government debt, there is relatively broad agreement about the excessive debt levels in the household and government sectors.

On the issue of Non-Financial Corporate Debt there was a useful session of the Joint Oireachtas Committee on Finance on the 7th of March.  The committee heard from Michael Connolly from the CSO and Joe McNeill led a group from the Central Bank. 

The transcript of the debate is here, and the intended text of the opening presentations as well as the slides used by Joe McNeill are here.  Michael Connolly also used slides but I have not seen them.  I will add a link if someone has it.

The debate meanders at times and a couple of misperceptions are persisted with by some of the Members but there are many useful contributions from the witnesses.  A couple of quotes are provided  below the fold but there was much more discussed.

The conclusion is straightforward.  The non-financial corporate debt burden is not as large as dramatic graphs similar to that above like to indicate.

UPDATE: Michael Connolly has kindly provided the slides he submitted to the Committee.  Slides 7 to 13 are particularly relevant and are very useful contributions on this issue.

Michael Connolly: “We referred to the numbers increasing dramatically after 2008. What we see is that the treasury companies in the IFSC are lending substantial amounts of money to their affiliates in the non-financial corporate area. They are managing the international cash management for the multinationals. The lending by the treasury companies to multinationals in this country is increasing each year, certainly after 2008. We also find that they are lending to each other. I refer to affiliate lending between affiliates in the same corporate group. We then also see that borrowing from abroad, which is listed on the top bars in the chart, is increasing too.”

“When we look at bank borrowing, we see that borrowing from banks has been decreasing since 2008. That is all I have to say. I am just trying to provide context and to shed light on the big macro numbers that come out for this sector.”

“What I am telling the committee is that when one looks at the detail of the overall scale of debt for this sector, it is nowhere near as serious for the real economy of this country as one might imply at first sight. When one looks at the detail, it is really about a globalised, internationalised economy which has very large debt but also has very large assets. The two are off-setting one another when we take a net view on it. Of increasing importance is the interlinkage between some of the multinational corporations we have in the sector and their treasury affiliates in the financial sector. It is difficult to look at numbers in isolation because everything is intertwined.”

Joe McNeill: “The first slide we presented shows that credit [to non-financial corporations] by the banks resident in this country fell from €171.3 billion in August 2008 to €87.7 billion at the end of January 2012. That is a huge fall but it is significantly impacted by transfers to NAMA and other non-transaction effects such as write-down of loans. The underlying fall, based on transactions only, is 6.2% per annum from the peak. Annual rates of growth on transactions peaked at 37.1% in July 2006. That is year-on-year growth and it has been falling since.”

53 replies on “Non-Financial Corporate Debt (updated)”

Briefly, I think it’s important to be reminded that mortgage debt is coercive – a home is an essential need; and rent was during the crucial period more expensive than mortgage repayments.
Outside commentators who might care to allege smoe outrageous profligacy on the part of the Irish population should be directed to the fact that three-bed semis in former council estates were costing 400K; an eightfold increase in a decade. Two bed flats in working class suburbs, a quarter mill (now 50K but still overpriced)….

On an unrelated note, a brief question – is there anything in the story about 1 trillion in german bad debt (landesbank & one other specifically mentioned), or is it just mischief. Appeared on a couple of blogs today.
( )

In most respects theres nothing there – but somehow these guys are turn this junk into real money claims.
Its a talent at least.
Adam Curtis & his recent blog post comes to mind.


Adam Curtis | 14:16 UK time, Thursday, 8 December 2011

Traditionally when analysts look at debt levels there is a sort of subconscious assumption that the debts of two (assumed to be) comparable entities relate in a similar way to the asset side – so it is kind of OK to ignore the assets. After all these are just metrics that should be used to feed into the overall analysis.

If you forget that, and start regarding the metrics as = to analysis, you can go quite a long way astray. Granularity in macro stuff can be annoying, but that is no excuse for ignoring it.

The assets are in the main Grot – they don’t do anything – they have a real negative value when you subtract the remaining little bits of commons & depleting energy ration holding society together.

Reading that McKinsey report………. it has that American Psycho quality about it – you might even think the author has his mind somewhere else.

Sweden & Finland deleveraged in the greatest 20 year global credit bubble in world History (1987 -2007)
You would think they could sell enough phones and Grot to pay off some debt.
The American Fed stuck every manner of credit junk into its balance sheet during QE 1 if I recall correctly – so consumer drones could delevarage a bit off that magic trick I guess.
Unfortunetly they stuck it into the worlds reserve currency externalising costs worldwide………..

Give me a break.
But I suppose its hip to be square.


“rent was during the crucial period more expensive than mortgage repayments.”

I find that remark problematic on more than one level.

Could you specify what “the crucial period” to which you refer was ?

I presume that by “more expensive”, you mean that the rent outlay on a property exceeded what a monthly mortgage payment on a similar property would have been.

@ Seamus Coffey

Many thanks! This contribution is invaluable. As with your other contributions, it helps return this blog to its true vocation; that of dispassionate consideration of facts insofar as these can be established.

It may be noted that Irish bond rates are below 7 (spread below 5), if I am not mistaken. This suggests that markets are unaffected by the histrionics in which many in the Irish commentariat are currently indulging.

The dye is cast on the debt matter. The levels are hardly relevant. Debt just grows, grows, grows, without limit, absent some paydowns. That’s your predicament. Where is the unfettered income to paydown? Its missing. There’s your predicament. And no amount of sophistry, spins, lies, statistics, whatever, will change that fact.

So, ‘how’ are you going to paydown a debt when you have insufficient income to do so? I thing some folk had better check that their Grounding Straps are actually connect to Ground. I have a bad feeling they are not so connected.

When I see and hear intellectually un-grounded critters wittering on about “morality”, “rewarding the greedy”, “unfairness to prudent folk”, I know that there is no meaningful intellectual engagement being attempted (with our overall debt predicament).

How, how, how, is it intended that we will get to a sufficient level of national income to deal with the debts? Does anyone (of an adult disposition) actually know? Apart from continuing to ‘roll over’ the debts. I mean, actually getting rid of the damn things – and staying out of further debt.


Genuinely confused by your post. A dispassionate consideration of the facts as presented in the McKinsey report would to me indicate Irish Bonds are overbought and should be well north of the magic 7% mark….yet you go on note that rates below 7% suggests the market is unaffected by (presumably negative-speak) histrionics of the Irish Commentariat. Are you suggesting therefore that the fact are not as bad as being protrayed and the market can see the wood for the trees….?

@ V. Barrett


As to the “facts” in the McKinsey report, those in respect of the level of indebtedness of Ireland need re-consideration in the light of the post by Seamus Coffey.

Thanks Seamas

It’s an interesting report, which highlights, inter alia, the UK’s financialised, London-centric economy, with consequent vulnerability to the Eurocrisis. Their 18th century industrialists and Tudor state-builders would not be impressed.

As for Ireland:

‘Implications for business executives……

Plan for increasingly uneven growth across nations and regions. The current divergence of economic performance across Europe and across different regions within the United States and the United Kingdom is not likely to disappear. As we have noted, in the United States we see that in states with lower debt overhangs, such as Texas and New York, real GDP has already surpassed pre-recession peaks.

In other states, where there are large populations of heavily indebted consumers and many homes with negative equity, output is not likely to rebound for another year or two. Business leaders will need an increasingly granular understanding of specific regional prospects to find pockets of growth’

Given our history in the British periphery, and our inability to develop an autonomous economic path, it is difficult to see growth in anything except emigration.

Slightly off topic but

Efforts to tackle Eircom’s debts have intensified in recent weeks. Secured lenders are preparing to seize control of the company through the examinership process.
Eircom has been in technical default since August last year, when it breached the ‘covenants’ setting out terms and conditions attached to its loans.
A ‘waiver’ from lenders that allows the firm to continue trading runs out on March 31.

A number of points:

1. Seamus Coffey deserves great praise for his sustained and numerically-rich (i.e. fact-based) analysis.

2. The precise McKinsey figures for Ireland may be debated but, as Seamus says, “there is relatively broad agreement about the excessive debt levels in the household and government sectors”.

For information, when Peter Matthews asked the Finance for this data the answer he got was that (as of 14.09.2011) “The Central Bank’s Quarterly Financial Accounts data show that households had outstanding loans amounting to €184.9 billion in the first quarter of the year, representing 147 per cent of forecast GNP for 2011. The stock of household loans has declined by €18 billion or 9 per cent since peaking in the final quarter of 2008. The same data source reveals that non financial corporations had outstanding loans of €264 billion in the first quarter of the year, or 210 per cent of forecast GNP. The stock of such loans has contracted by €62.5 billion or 19 per cent since peaking in the final months of 2009… Finally, my Department has forecast General government debt of €173 billion in 2011, which would represent 111 per cent of forecast GDP (137 per cent of GNP). This is up from debt of €148.1 billion in 2010. General government debt as a percentage of GDP is forecast to peak at 118 per cent in 2013 before moderating in the following years.”

3. A key problem is that Ireland has excessive debt in all three sectors (public, household and corporate). This significantly compounds the overall problem as – unlike in 1987 or 1997 – no sector has the capacity to take on additional leverage to permit other sectors to deleverage. This point was made by Dermot O’Leary of Goodbody Stockbrokers and Don Walshe of UCC, in their paper “Deleveraging, banks and economic recovery” where they examined the simultaneous attempt at public sector and private sector deleveraging and reducing the size of the banking system. The authors concluded that “the current policy course is inconsistent with the achievement of all three goals in a reasonable timeframe and sustainable way.”

4. The McKinsey data relates debt levels to GDP levels. It would be more appropriate to measure debt levels against GNP. Were that done, our debt figures would jump by 20-25%.

5. The published figures ignore the public liability represented by unaccrued public sector pension liabilities. When the European Central Bank asked researchers at the University of Freiburg to estimate what those liabilities might be they reckoned that German public pension liabilities are around 300% of national income. (They didn’t compute separate figures for Ireland).

6. In a paper delivered to the Federal Reserve conference at Jackson Hole last summer, “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.”

7. Constantin Gurdgiev has applied the BIS paper’s findings to Irish data. He concludes that the combined effect of our over-leverage across all three categories of debt is to reduce expected annual economic growth by 2.1% per annum.

8. The official forecasts for GNP growth for this year (2012) have been:
(i) December 2009 (Budget 2010) +4.1%, (ii) December 2010 (Budget 2011) +2.6%, (iii) December 2011 (Budget 2012) +1.0%, (iv) Fenruary 2012 (Central Bank) -0.7%. The steady pattern of downward revisions replicates the pattern we saw for economic growth in 2011.

I draw two conclusions from the foregoing. Firstly, Ireland’s debts are grieviously understated (by ignoring accrued pension liabilities and because they are compared to GDP rather than to GNP). Secondly, with economic growth likely to continue to “surprise” on the downside, Ireland’s debt levels are unsustainable: national bankruptcy is only being avoided because our creditors are unwilling to yet face the consequences.

There is banking and there is te shadow banking sector. Doesn’t surprise me we can easily pin down banking debt. When it comes to the shadow banking sector, of which our leading offshoot is IFSC. The smoke and the mirrors. So, we get the plain speaking Michael Connolly above/; “IFSC are lending substantial amounts of money to their affiliates in the non-financial corporate area. They are managing the international cash management for the multinationals. The lending by the treasury companies to multinationals in this country is increasing each year, certainly after 2008.”

You couldn’t be as open or more plain speaking and transparent as that, could you?

Well, actually, you guessed it, you can. Show me the money, Michael. Shrouded in a fog of concealment beneath the radar of ‘commercial sensitivity’ the books of the IFSC are a maze of schenanigans involving transfer pricing management of MNC debt.
IFSC is so covered up you can’t even see the slot machines.

Debt is investment money in the global market shunted around safely from A to Z in the flicker of an eye. How much corporate debt is shifted onto the Irish sovereign or instantly elsewhere to another sovereign, should form an investigation into B&B tax avoidance lending on a global scale, but the trade is sanitised with muffled equivocations and empty information, as in the Connolly piece.

There ought to be global, Glass Steagal, G20 backed legislation to force the operations of financial hubs that fed the FIRE economy to disatrous outcomes in the US and in Europe, to ‘show the money’. Perhaps open registration of all transactions that can be accounted for to give dynamically updated accounting even on a delayed 28 day basis, so that, instead of the Connolly waffle above, he could hand over the files data now subject to a new Freedom of Information Act requiring such date to be kept and provided to public scrutineers.

@ Cormac

” The same data source reveals that non financial corporations had outstanding loans of €264 billion in the first quarter of the year, or 210 per cent of forecast GNP. The stock of such loans has contracted by €62.5 billion or 19 per cent since peaking in the final months of 2009 ”

Are there tables/graphs anywhere that explain these figures on a unit by unit basis ?

Aware of the fact the IFSC through its MNC services presumably writes the debt of MNCs as a liability against the Irish sovereign, is it possible to get exact data detail of this if only to subtract out the real sovereign debt of Ireland Inc against the virtual smoke and mirrors debt ?

Seems to me the elephant in the room messing up everyone’s figures is the joker in the pack of revolving door debt of the IFSC ?

Then we might avoid the pejorative, binn beal i do thost, nod, nod, wink, wink of the ludicrously unhelpful data contained in the phrase from Connolly, “It is difficult to look at numbers in isolation because everything is intertwined.”

@ Colm

“Aware of the fact the IFSC through its MNC services presumably writes the debt of MNCs as a liability against the Irish sovereign”


@Cormac Lucey

Great piece of analysis, and indeed a vote of thanks to Seamus Coffey is long due.

The GDP/GNP anomaly (difference) in Ireland paints a misleading picture of the country’s health, one which the government keeps hawking about with talk of rocket growth next year. Michael Hennigan has pointed out numerous times the employment in MNCs is back at 1998 levels despite the export curve.

Because of the tax haven complexion of much of what happens, there is a reluctance at official levels to correct misconceptions that circulate abroad. even if Rehn, the ‘troika’ and so on grasp the anomaly, why would they defer to the GNP figure in debt calculations when the Irish government itself doesn’t?

Isn’t Spain’s debt in the region of 635 of GDP incidentally?

An asset/property has two values, the price you can get for it,or the net present value of it’s future cash flows. If somebody auctioneed a 5 euro note on Grafton Street and an unwise person bidded it up to 20 euro, then a surveyor would value all 5 euro notes as 20 euro notes. Now we know the net present value of a 5 euro note is 5 euro. Likewise if an unwise person paid 2 million euro for a house whose net present value was 0.5 million euro ,then a surveyor would value all other similar houses in that housing estate at 2 million euro.

The commercial property market was similar. If an unwise tenant on Grafton Street paid a world record rent for a shop, then all the other shops on the street would be obliged to pay this rent, and surveyors would value all shops on Grafton Street accordingly.

Almost all of the Irish banks reckless lending was done using surveyors/auctioneers valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.

The analysis may be simplistic but unfortunately it is not flawed. Banks
ask valuers to tell them what the market value/exchange price is at a
point in time and then lend vast amounts over time based on that simple
number. The surveyor gives them that simple number and do not think it
is their job to tell the banks that the question they have been asked is
stupid on its own and what they should have asked for is the underlying
value. It was obvious in 2005 and 2006 that prices in the property
market were higher than could be sustained by any rational cash flow
analysis. But in a culture that rewards individuals for short term
performance rather than longer term perspective, it was in neither the
bankers’ nor the valuers’ interests to stop it. I cannot see anything in
what the UK regulatory authorities have proposed that makes me think
they understand the role of property valuation in driving asset bubbles
and will prevent it all happening again sometime in the 2020s.

Neil C, Property Academic, UK
Professor of Real Estate and Planning
Reading University.

What do we mean when we say “excessive” debt?

Household total assets and household total debts increased dramatically since the 1970’s – relative to household income.

If we assume a closed economy – implying that this is all debt we owe to ourselves- then what do we mean when we say “excessive” debt levels?

What ratio of household debt to income is excessive? Surely it depends on teh net position – i.e. the larger the net positive difference between assets and liabilities he larger the amount of debt that households can carry. Clearly some households will be credit constrained as asset prices fall.

More fundamentally, is there a model that describes or provides a steady state debt to income ratio for the representative household?

If we “all agree” that household debt is excessive, what level of household debt is not excessive? – is there a mechanism / market force that is likely to push household debt levels down to some sort of equilibrium ratio? What is that ratio?

@Cormac Lucy

+1. Well said.

In addition the under accrued health disaster that awaits us all in terms of obesity levels and knock on Type II Diabetes care costs will knock us for six regardless.

The only firm conclusion to be drawn from most of the analysis is pretty simple.

Either we write the debts down to a sustainable level by agreement, or we leave the Euro and start again because sleep walking into debt hell and damnation for generations to come is a stupid policy choice. I for one don’t do stupid and I doubt I’m unique.

I tend to think of the RATIO of goverment money / debt relative to bank credit /deposits rather then as a % of GNP or GDP which I believe is a false metric.
Before 1987 /88 and the Basle changes in the banking system it was a more sustainable although still excessive 8 to 1 but during the boom it was over 40+ to 1 creating massive instability and misalocation of resourses as the businesses which developed especially over the last 20 years grew up & accumulated private debt in a false monetory envoirment.

The Goverment debt issue is a white Cat PD like elements wish to stroke every so often.
A sovergin country can CB defecit spend anytime it wishes if it feels the % relative to GDP is too high.
Goverment debt is merely the medium of exchange sometimes with a time component added called interest which was also a asset used by commercial banks.

Of course the almost fully privatised monetory system that is the Euro is a different Beast.
With the money masters fiscal pact effectivally taking any remaining power away from politicians and putting it in the hands of our nice banking friends.
What we have witnessed since 87 is a smooth transfer of remaining power from slightly dopey bog boy administrations to some very evil characters behind closed doors.
Despite appearances there is always a Bureaucracy

PS -The lesson learned is that in a closed debt based monetory system you cannot reduce debt unless deposits etc are defaulted on.
If the decision has been made not to default on anything (ECB ?) then they must produce base money to facilitate exchange.
If they are not prepared to do such a thing our Domestic CB must produce Euros regardless.
And if the Irish CB is one of them then it is the duty of the Exchequer to produce taxable Treasury tokens and cut the eurosystem off from the tax spigot.


On slide 9 of Michael Connollys presentation he calculates the net liability of Households, Govt, Financial Corporations, Non Financial Corporations and the ROW and he refers in the piece above to this analysis.

The ‘assets’ side and his calculation would be an interesting study particularly in relation to the ‘Household’ section.

I’d safely suggest that ‘assets’ in his analysis are primarily property based, although I can’t be absolute on this, particularly in realtion to households.

On the assumption that it is we know the CSO numbers in realtion to PTT house price falls are already a mile wrong relative to the market and we also know commercial property values in some parts are down 85% to 90% – given these known knowns I’d hazard a guess that these ‘asset’ numbers are a mile out.

It must be noted that the presentation references 2010 as a base year. Since Dec 2010 house prices have fallen the best part of 20% and something similar for commercial property if not more – so deriving any modicum of comfort from a net number where ‘assets’ are more than likely incorrectly valued based on whats gone on in the interim is a fools paradise. The +117 number for households could in fact now be Nil as this would imply a 37% correction in house prices from 2010 – in many parts of the country since early 2010 falls of this scale are commonplace.

@ YoB

there’s 80bn in Irish private sector pension funds, which have fairly minimal exposure to Irish property. And there’s 91bn in household deposits as well. You’d need to add on anything held abroad for both of these too though, and then any securities held in a person’s own name rather than via a pension. But you’re starting position is 170bn, or around 115% of GDP.

How do you value state pensions though, does their NPV reside as an asset on household balance sheet, or is it excluded?

Australia & S Korea deleveraging = China leveraging

Hello Hello anybody home ? – think Mcfly think.

Expansion withen a declining world energy system extracts wealth.
Countries need to increase their core capital base – exporting their wealth as Australia has a habit of doing is very very sad.

@John Corcoran
Has any of your post anything to do with anything in this thread?

@ Yields or Bust,

You will be surprised to know that residential property does form part of this calculation. Mortgage debt is included but the value of houses is not. It is entirely financial assets; cash, deposits, shares, pensions, life assurance and other assets.

Here is a summary that shows how the net €117 billion of assets arises.

@Dreaded Estates

Yes it’s got everything to do with the first Blog on this thread Mark. Mark mentioned mortgage arrears and paying 400,000 euro for a council house. The surveyors valuation model was the source of this sad situation.

There are some useful points raised in the thread. Just to add a few things to what Cormac’s excellent contribution above.

I agree that GNP is a better measure. But if we are going to use GNP as a measure of Irish income we must compare that to a measure of Irish debt. As Michael Connolly’s slides show, much of the massive debt in the non-financial corporate sector is not ‘Irish’ at all and his highlighting of the huge increase that has occurred since 2008 is important.

This is where the contribution from Joe McNeill is useful. The Central Bank data show that lending by all banks operating in Ireland to the non-financial business sector peaked at just over €170 billion in the third quarter of 2008. Since credit has tightened so this gives the extent of lending to Irish resident businesses by Irish resident banks. Irish businesses could also have obtained some credit from outside Ireland.

There is still little to suggest that “national bankruptcy” is an inevitable outcome (though I’m not sure I know what that actually is). There is a huge amount of debt in Ireland that will never be repaid. There will be defaults but there won’t be a Default Day.

Substantial amounts of business, property and mortgage lending will not be repaid. Ireland’s debt is high but it is not about to consume us. The figures showing the interest payments by sector verify this. Interest paid by the non-financial corporate sector in Ireland is below the EU average yet the total debt of the sector is measured at twice the EU average.

The level of debt in the Irish economy was probably somewhere close to €500 billion (4 x GNP) at the end of 2011:

Household Debt: €186 billion
Government Debt: €167 billion
Business Debt: €145 billion

Repayments will bring this down to ’safe’ levels but lots of it won’t be repaid. The €145 billion of business debt includes all the developer loans. Huge amounts of the loans transferred to NAMA will not be repaid and the non-NAMA banks will also have to absorb significant losses on the commercial lending.

There will be defaults in the household sector. It is hard to gauge but there are probably somewhere in the region of 10,000 to 20,000 unsustainable mortgages that need to be dealt with. The buy-to-let sector faces similar problems though the scale is more difficult to determine.

The government debt will be repaid (or more accurately rolled over) but as Stephen Kinsella said during the week it is how we repay that now matters.

We can all argue about the pace of adjustment and virtually everyone would like to see the debt overhang dealt with more quickly. The process is moving slowly but the debt that will never be repaid will be written off.

There is a reason that banks in Ireland have consumed €129 billion of shareholder, bondholder and government funds (slide 3). This is because lots of debt in Ireland will not be repaid. It won’t happen with a big bang like the Greek sovereign default but it will happen.

And there will be lots of debt in Ireland that will be repaid. In the past three years household debts have fallen by around €20 billion and non-property-related business debts have fallen by €15 billion. Most of this has been done through repayments. This rate of debt repayment is not necessarily healthy as the Walshe and O’Leary paper referenced above shows, but it does indicate that lots of the debt can be repaid.

If Ireland’s (or more precisely Irish) debt was 650% of GDP/800% of GNP we would be bust and this discussion wouldn’t even arise. But we’re still here; our heads are still above water. There is still no firm evidence that we are rising or that the water level is falling. I think this can happen but it will not be easy.


Itis difficult to form a judgement as to whether or not we are bankrupt until you have reliable data. The Matthews PQ answer from official sources does not seem to tally with Seamus Coffey cleanr looking data set which is more in line with the data from the CSO presented to the Dail Committee. Both sets of data are from official sources.

CL/PM series shows us beyond the point of no return. SC data puts us on the cliff edge. Interestingly, the only country to default so far had the lowest debt ratios.

Yield or Bust seems to think that all the collatoral backng the debt has been devalued by 80% but as EB points out not all the money has gone to heaven.
The bottom line is probably that many countries will default unless inflation picks up markedly reinforced by loose monetary policy. I would not mind betting that over the next ten years govt bonds returns in the major countries will be deep in negative territory.

@ Seamus Coffey,

I think your take on our debt situation is fueled with optimism.

“There is still no firm evidence that we are rising or that the water level is falling.” Actually there is plenty of research to show our debt levels are unsustainable, not only that, but it comes from the ECB itself.

But intriguingly, you assume large swathes of sectoral default. This has neither been agreed nor provided for in the banking sector. Those negative equity loans especially default in the buy to let sector will skew the stability of the banking sector even further. You don’t analyse at all our ‘bad bank’ NAMA. But you do say, “.. lots of debt in Ireland will not be repaid. It won’t happen with a big bang like the Greek sovereign default but it will happen….” So, I’m assuming that Ireland will need some version of a Greek default.

Your analysis that there is no firm evidence “the water level is falling” is incomplete simply because your assumptions are that our situation is not getting worse.

As lucidly stated by Colm McC and also by namawinelake amusingly here:

“And above we can see the scheduling of the payments with €3.1bn in cash being paid over by this nation each year for the next 12 years and then a further €2.8bn thereafter.

These IOUs comprise nearly half of the €64bn being used to bailout our banks, a bailout that, in total, amounts to 40% of our GDP with the promissory note component alone amounting to 20% of GDP.

By footing the bill for these bailout costs,Ireland is abandoning any notion of safe debt levels and allowing debt to rocket to 120% of GDP. Our debt would have gone from 25% of GDP in 2007 to 80% of GDP anyway to cover borrowing for the deficit, that is, the fact that we collect less in cash than we spend on public services and welfare. And 80% debt is bad enough, but what we have done and what we are doing is piling on more debt so as to bailout the banks. Now AIB, EBS, PTSB and Bank of Ireland still serve this economy, but the €34bn – comprising €4bn of cash and €30bn of promissory notes – that is being shovelled into Anglo/INBS or IBRC, will not serve the economy in any conventional sense.

Note the charts and the repayment schedules especially of the IBRC portion and let me try to focus on a future scenario.

A large part of the productive side of our economy related specifically to the generation of GNP, is under water. Any future growth will go to feed debt, rather than spend within GNP. That 70,000 in negative equity is tied to high mortgage, repayment levels will not kickstart the economy, it will drag the economy down. The owners of those mortgages should be the ones fueling the restart of our economic growth yet they are fallen before they start because of the debt load they carry.

The economy does not have the productive base to achieve growth to pay off debt that is old, never mind debt that is newly added to old debt.

With emigration and the end of the construction property boom went productive growth through increases in taxation and resulting curtailment of asset investment in the local economy. To pay for debt the economy is being bled. As I write, news is of proposals to cut allowances to public sector workers, more blood to be denied the economy that will instead be sent to fuel debt.

As we speak, these assets, businesses, the retail sector, are being stripped bare. Unemployment is eating away at the economy new charges and extra taxation braking the real economy.

The real bummer though is the IBRC ¢3.1 bn for the next 12yrs + that will be paid by falling employment levels making the burden for each share of this debt greater for each of those still in employment.

If debt appears to be sustainable now, this is delusory as we have yet to find a replacement for the so-called growth of the
property bubble. Plus debt has an incremental effect and we are only entering the early stages in absorbing its detrimental effects.

Debt is sustainable if there is growth to fuel both growth and repayment of debt. Debt is not sustainable if repayment schedule demand outstrips supply generated by jobs and taxes. If our expenditure outstrips our income due to excessive debt levels, unemployment, deflation, lack of growth, the game is up and default beckons.

The evidence is through excessive debt levels compounded by our ‘bailout’, our unemployment levels, emigration levels, growth outlook for Europe’s peripherals, lack of industrial and manufacturing base to replace the construction industry, repayment costs for the debt levels accounted for by the property bubble, that Ireland will default.

As long as there is not default or debt writedown across all the sectors mentioned by Seamus Coffey along with a form of sovereign default meaning a formal debt writedown/renegotiation of our debt,
it is an undeniable fact that the water level of sustainability will continue to fall. Numbers in negative equity and defaulting on repayments are rising as evidence grows to back this claim. Emigration has failed to lower unemployment levels stuck in the mid teens.

Strangely there is more outcry re ¢100 property tax than the ¢3.1 bn repayment end of March. But if these repayments are made, the evidence is, without growth in the economy, there will be a negative and corrosive damage done to our economy by our debt levels:

This is born out by recent research which reiterates a large body of research already done in this field:

“Conclusions and areas for further research

This analysis finds evidence for a non-linear impact of public debt on per-capita GDP growth rate across twelve euro area countries over a long period of time starting in 1970. It unveils a concave (inverted U-shape) relationship between the public debt and the economic growth rate with the debt turning point at about 90-100% of GDP. This means that a higher public debt-to-GDP ratio is associated, on average, with lower long-term growth rates at debt levels above the range of 90-100% of GDP. The long-term perspective is reinforced by the evidence of a similar impact of the public debt on the potential/trend GDP growth rate.”
Cristina Checherita Philipp Rother

Not only are the 2/3% growth rates that predicate the success of NAMA, that also predicate the success of DEBT SUSTAINABLIITY already breached and dropping to

“the bank says GDP will grow by just 0.5 per cent this year and by 2.1 per cent next year.” By the way, anyone betting on the accuracy of 2.1 for 2013, no takers?

Declining growth based on factors related to our debt levels plus our local situation described above, mean we’re on the Titanic and even the ECB know it !

@ Colm Brazel: “The economy does not have the productive base to achieve growth to pay off debt that is old, never mind debt that is newly added to old debt.”

This is what I mean by an adult comment. We DO NOT have the productive capacity (aka: surplus income).

Thanks for this real, honest public acknowledgement of our debt/income predicament. And if dopey folk think things can hardly get worse. Just wait until the next energy shock arrives. Its been despatched.

And Seamus: ‘Its the Ripple that Drowns’ [Cormac O Gráda]

The McKinsey summary says:

“…The private sector leads in debt reduction, and government debt has continued to rise, due to recession. However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.”

I have to say that I am deeply sceptical about the primacy of deleveraging over the need for economic growth. The report argues that “under the right conditions, private-sector deleveraging leads to renewed economic growth..”

The report adduces Finland and Sweden in the 1990s as ‘historical evidence’. But these countries were deleveraging in an environment of global and European growth, which is a far cry from where we are today.

@Seamus Coffey
“Repayments will bring this down to ’safe’ levels but lots of it won’t be repaid. The €145 billion of business debt includes all the developer loans. Huge amounts of the loans transferred to NAMA will not be repaid and the non-NAMA banks will also have to absorb significant losses on the commercial lending.”

Very good point. In fact a lot of this debt is probably ‘gross debt’ with a sizeable percent already ‘reserved’ for and already accounted in corporate losses, though not yet written off the books of the lender.

“You will be surprised to know that residential property does form part of this calculation. Mortgage debt is included but the value of houses is not. ”

Ireland’s household debt is definitely skewed by the ‘buy to let’ surge. There are assets underlying this excess borrowing which because they are not part of ‘financial assets’ would make Ireland’s position look less favourable than it really is.

@John Foody

‘… two people with direct knowledge of the matter.

Must be Herr Bund and Ms d’Estag!

@ Bond 9:55

Yes, it was a bit vague. Kathleen Barrington has done a lot of work in this area, eg

But I was referring to The Double Irish eg Google transfer pricing explained here:

“The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.”

Interesting relationship to share price based on the above. But I was alluding in a vague way to the contribution to our GDP of transfer pricing instruments ?

“However, history shows that, under the right conditions, private-sector deleveraging leads to renewed economic growth and then public-sector debt reduction.”

The past may not be much help as a guide to the future this time. The debt binge of the last 10 years involved taking growth from the future and going on a consumption bender. It happened all over the OECD. In the past there were places that escaped the madness. Ireland could export to the UK in the late 80s. Not now.

Last summer I flew from Knock to Bristol. Looking at the shite land around East Mayo it was easy to understand the lure of debt but even Bristol with its rich hinterland got suckered.

And even if economic growth returns, for how long will it last? What good did the last dose do ? Economic growth in practice means more resource consumption. For what ? The next crash will be even worse.

@Seamus & Bond

Thanks for the update on the household ‘assets’ definition. The fact that 126bn are in pension funds and effectively not available today to pay down todays debt suggests that its really a bit of red herring.

I am the owner of such private pension funds but would never describe it as an ‘asset’ – its untouchable earnings (ordinarily) and damn all use to me if I want to move but can’t afford to pay off the negative equity on my house – or maybe I’m missing something.

Theres no shortage of Uranium in the world – CastleIsland probally has the mother load underneath its fields.
However the European banking system found it more profitable to build 5 coal power stations a month in China then 1 Nuke a month in Europe.

The amount of capital destroyed in the North sea for almost zero return has been epic.
Capital needs to build more capital – but we have been in the rundown phase for a long long time now.
The seeds to this OECD energy crisis is in the 60s but it has its roots in the early to mid 1980s.

Its possibly too late to pull out of this terminal dive.

The black box will probally record that a mass of credit Pigeons flying out of Basle were sucked into the engines.

I guess thats why many of CBs use the term glide path now.

Up Cork and its soon to be busy Butter roads.

Sorry – banks don’t build anything …………..they finance stuff – mostly Grot.

I think we have to remind ourselves that all digital money is created with a corresponding debt. And indeed that repayment of debt to a financial institution removes both the debt and the money from the economy. The graphs refered to above

Concentrating on reducing our debts reduces the money supply by the same amount. A more long term solution to the debt crisis would be to introduce a second source of digital money.

Interesting article although a little confusing for my little Brain – I imagine there is a lot of cash flow from Frances fiscal 58 reactors although Its investments oversees leave a lot to be desired.
– no reactors have come on line since EDF became a limited liability corporation in 2004 – this is not a coincidence.
From wiki
“France’s electricity price is among the lowest in Europe,[5] however this figure should be treated with caution, since the stations were essentially built using French government sovereign debt, which is typically 3.5%. European Union rules now prevent this kind of indirect subsidy.”

It appears The European Unions reason for being these days is to subsidise credit Grot via the ECB Mammy
And people wonder why we are collapsing……….

French household electricity price : .1478 – cheapest in Western Europe (maybe Norway Hydro is cheaper)

German ” ” ” : .2781 – it has exploded recently

Denmark ” ” ” : .3078 – wind & stuff

The Fiscal stuff in the main creates the wealth – the credit stuff wastes this on fluff although you need a investment / consumption demand loop to remain intact.
early 1980s typically Fiscal 1 credit 8
2000s Fiscal 1 credit 40+……………. unsustainable me thinks.

The European “fiscal pact” rules will solidify the belief that goverment money does not create wealth – turning us into a 3 rd world continent where not enough people can sustain themselves even at the margin as our capital base depreciates into dust.

@Yields or Bust

“or maybe I’m missing something.”

No you have it right. It needs to stay in there for what seems like an eternity so that the provider and the guy who sold it to you can go out to lunch on charges and commissions pulled out of it for as long as possible. And of course, the tab for any downside due to bad investment management is for you to pick up too.

You probably wouldn’t want it linked to your mortgage anyway. Look at what happened to all those endowment mortgages that not only won’t pay the original mortgage back but give a double whammy when you have to stump up extra to pay off that mortgage when the house is also in negative equity. I recall taking a train journey in the UK once, a long time ago, with the marketing actuary who invented endowment mortgages. He described them to me as: “it’s just another way of selling life policies.” His implication being that it was for the benefit of the product manufacturer, not the end customer.

@ Seamus

Your analysis depends on the write-off of large amounts of debt. As per CB……”you assume large swathes of sectoral default. This has neither been agreed nor provided for in the banking sector.”
How exactly do you think these write-offs will be funded? It must come from Govt….or growth.

JR makes the same assumption “In fact a lot of this debt is probably ‘gross debt’ with a sizeable percent already ‘reserved’ for and already accounted in corporate losses, though not yet written off the books of the lender.”

However, this is not correct. Kicking the can down the road in terms of banks’ provisioning over time has not made any meaningful headway. The banks are woefully underprovisioned. And not just the Irish banks but also the foreign banks in Ireland.

As for the prospects for growth, SB has dealt with that. However, for completeness, the Central Bank’s latest report emphasises the point.

Optimism is one thing. However, the trends are ominously negative. How long does Ireland continue before changing tack….? Do you need to see “blood on the streets” before taking action? The consequences of being right or wrong on this are not academic.

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