Some insights from the ISAs

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Last week’s release of the 2011 Institutional Sector Accounts has not attracted much attention.  The thread on it only generated one (seemingly misplaced) reply.  The addition this year of consolidated tabled for the financial accounts is useful and gives this table of debt liabilities for the household, government and NFC sectors.

The impact of netting out intra-sectoral balances is small on the household and government sectors.  The consolidation nets out about €45 billion of (domestic intra-company) liabilities in the NFC sector.  All liabilities of the NFC sector with the rest of the world are still included so there is still a significant impact of MNCs in the 168% of GDP figure given for the sector.

One notable feature of the loan liabilities of the household sector is the decline that has occurred in the past three years.

In 2011, the net financial wealth of the household sector increased by €3 billion to €120 billion, driven mainly by the reduction in liabilities.  The increases in the debts of the government sector go without saying. 

The non-financial accounts are equally useful.  The government accounts give a cash-based view of the general government sector which is more complete in scope than the Exchequer Accounts.  The general government accounts used for the EDP are accrual-based.

Below the fold are the current accounts of the general government sector since 2007.  The value of output figure used is based on the inputs used rather than prices as most government output is non-market.

The current cash-deficit of the general government sector is declining (slowly).  Here are the capital accounts for the same period.

The largest item in the capital account in recent years has been “other capital transfers” which reflects the direct capital injections into the banks.  In the second part of the capital accounts it can be seen that once depreciation of existing capital is accounted for, net capital formation by the government sector in 2011 was just €1.8 billion.

27 Responses to “Some insights from the ISAs”

  1. Robert Glynn Says:

    How is it the IMF shows a much worse debt position vis Non Financial Corporations in 2012. It shows NFC debt as rising to 358% of GDP in 2012 (according to C. Gurdgiev). Housholds and Govt debt down a bit but overall debt as percentage of GDP up to 524% and GNP as 650%. The worst of any country. Financial sector debt when added in puts us off the charts. Have I missed something?

    It seems that the obsession with reducing Govt debt at the expense of the private sector is irrational at least and suicidal at worst. Gurdgiev states “we have the perverse situation that the economy is dealing with a debt overhang in Government debt that is more benign than the debt overhangs in the sectors the Government is obliterating.”

    https://www.evernote.com/shard/s256/sh/e7af1f9a-4b97-4b0b-a1fa-69036859ac50/58076ef821bd7d49d5172835c16c7698

  2. Joseph Ryan Says:

    While I no doubt that the data presented makes sense to those familiar with it, I am struggling to make any useful sense of the data.
    When spending ‘Gross Disposable Income’ how is individual consumption and how is collective consumption defined.

    But a few comments:
    It looks, using this format, that transfers to the banks are lost completely to the ‘national account’. I appreciate that this is largely true but it is not entirely true.
    It seems a bit unfair to ‘caption’ the NFC liabilities as being those of the State, particularly as many MNCs will borrow on an intercompany basis to fund their local operation. More to the point they will then hold their liquid assets outside of Ireland. The end result is that Ireland ‘captures’ the liabilities but does not capture the assets.

    One final point that is very clear for these accounts.
    Employee compensation, which I presume includes pay and pensions, fell by 1% between 2010 and 2011 and overall by just 5% from 2007 to 2011.
    It seems a lot of people have left the public sector, causing huge disruption to services but for little impact on payroll cost.

  3. Seamus Coffey Says:

    @ Robert.

    There has been repeated discussion on the appropriateness of those figures for Ireland. The estimated provided by the IMF are for gross non-consolidated liabilities. As you say they do reflect the situation in the household and government sectors.

    However, for the NFC sector the non-consolidated nature of the data means that intra-company balances will be included. If one part of a company owes money to another part of the company via affiliates/subsidiaries then the net debt for the company from such balances is zero but such balances are counted in the figures used by the IMF.

    In most countries this isn’t significant but in Ireland the relative size of the MNC operations here relative to the economy means that they can have very distorting effects on Irish national accounts data.

    The consolidated accounts published by the CSO last week net out intra-sectoral balances but they only do so between Irish-resident entities. The Irish NFC figure still includes the debt of affiliate and subsidiary branches of MNCs in Ireland to non-resident parts of the same company. The CSO don’t publish the exact numbers but they have said on a number of occasions that:

    “A significant proportion of the consolidated loan liabilities of NFCs are to the Rest of the World – predominantly the borrowings of foreign multinational corporations resident in Ireland.”

    The piece you linked to suggested that each year the business, household and government sectors in Ireland are spending the equivalent of 25% of GDP on interest. That is €40 billion per annum. Official figures show that this is an exaggeration of the actual interest expenditures by a factor of two. This point is repeatedly made but is repeatedly ignored.

  4. Rob S Says:

    @Robert

    Just to reiterate what Seamus said.

    The CBI/CSO made various presentations to the Oireachtas Committees on this recently enough.

    Many companies in Ireland are MNCs rather than SMEs. Such companies do not have to borrow credit from local Irish banks – many of them are large enough to either (a) borrow on international markets or (b) borrow from their HQ as Seamus said.

    Therefore, if they cannot pay back this money it matters very little to the Irish lenders (unlike say if an indiginous firm defaults on a huge loan owed to BoI).

  5. Seamus Coffey Says:

    @ Joseph,

    There are some useful notes on individual and collective consumption on page 87. In essence we consume things like healthcare and education as individuals but policing, defence and the environment as a group.

    On the bank transfers I would point out that the one included here are just the pure capital transfers. These are the non-financial accounts.

    There were other transfers such as the purchase of preference shares, ordinary shares and subordinated bonds. These would be included in the financial accounts. As you point these will be completely lost as the transfer has resulted in the acquisition of an asset (however valued). In the 2012 financial transactions accounts for the government there was a €9.5 billion increase in F.512+513 “Unquoted shares and Other equity, excluding mutual funds shares”. The non-financial accounts reproduced above represent the money that is completely lost.

    100% agree re NFC debt liabilities!

    At the end of 2007 there were 304,500 FTEs in the public sector. At the end of 2011 it was 302,100. (Page 14) As you say total pay (which includes pensions) is down 4.9% on 2007; but numbers are only down 0.8% over the same time.

  6. Paul W Says:

    @ Seamus
    Where are the PNs reflected?

    As JR has indicated, while many have left the public sector, the public sector bill has not fallen at all (minimally).

    Unfunded pension fund liabilities are not included here; nor are any future, further ‘holes’ in the capital levels of the banks (beyond that already provided).

    The increased interest charge is still very serious for the country, particularly given continuing borrowing (at €20bn for 2011).

    Personal taxation has held up….Despite increased social welfare. Thanks be to God that mass emigration flatters the situation (but what about future growth?).

    The fact is that the country is technically insolvent i.e. incapable of covering its own obligations as they fall due from own resources, exacerbated and emphasised further by the very substantial refinancing risk for the country (bar Official support) i.e. continued inability to access the markets.

    Little to be optimistic about, particularly given the deteriorating external environment.

  7. dearg doom Says:

    @Joseph Ryan any calculation in the change in pay and pension costs which does not count the pension levy as either a pay cut or a reduction in the cost of pensions is not a proper calculation. Such Indo style obfuscation abounds. There have been problems with some particular public services, but the general level of service has been maintained and increased in some cases, for instance there are now 7.7% more students in the education system then 2007.

  8. Yields or Bust Says:

    @Seamus

    The reduction in the stock of household debt (on these numbers) is welcomed but the bigger question is at what cost?

    The ongoing private sector deleveraging coupled with reductions in capital spending have meant only one thing i.e. falling VAT and transaction related consumption tax receipt flows at a pretty amazing clip namely a cumulative c€26bn compared to receipts in 2008. This is the effect of Govt not replacing lost houshold spend as everyone (who can) seeks to pay down debt at the same time with no new replacment credit or Govt to offset on the other side.

    The economic effects are all too easy to spot i.e. boarded up retail units up and down the country with zero chance of replacement any time soon and the lost employment opportunities as a result. So a good news story at one side has had a significantly greater social impact on the other and of course these numbers do not capture the hundereds of thousands unable to pay or save anything.

    Just to note the rate of deleveraging has, on these numbers, nearly halved from 2010 to 2011 compared with 2009 to 2010 and this is despite ECB base rates falling over the most recent period which suggests that the scope for futher deleveraging is coming to an end – this should not be mistaken to mean however that consumption will suddenly reignite again, it simply means that falling Household Debt to GDP will mostly likely start to rise again as GDP contracts, which in my view it most likely will in 2012 and 2013.

  9. Paul W Says:

    @ Seamus

    I presume also that any contingent liabilities (soft or hard) associated with NAMA are not included in the debt totals?

    Then I remember reading recently that John Moran from the DoF allowing for the possibility of more than €3.5bn being taken out of the economy in the forthcoming budget. In the absence of a pick up internationally (although the US might just keep going in the right direction and I would accept that this will be good for Ireland, provided our tax, cost, etc advantages remain intact…I however also notice the British and Germans getting more exercised in the tax area), 2013 is likely to be a piviotal, with risks very fimly to the downside. To be followed by subsequent, more damaging budgets (again assuming that things continue on the current trajectory).

    All that and no prospect in the short to medium term of any debt restructuring deal. Again, as I have said before on this site, culturally your Northern European will never forgive debt so long as Ireland can and does continue to service its obligations (albeit with Oficial help). As I have mentioned before, I say this with most of twenty years’ of experience working with and for them.

    Or is the country still living in ‘hope’ that something will turn up. As we move forward and things deteriorate further, the odds become even more negative. From afar (I am US based), it certainly is looking like the Titanic slowly sinking, with no Captain, and those better off (mainly middle-aged, middle-senior management, and then some less active ‘fortunate’ groups like public service pensioners) scrambling to salvage and take what they can, while they can.

    To Ireland’s credit, it has successfully managed to spin, to buy time and get itself out of the international headlines (less mentioned when the other PIIGS are being covered). However, that doesn’t change the facts.

    I suppose, Seamus, my overriding question to you and other senior economists there is what type of solution do you see and envision for the future? What is the economic recovery plan? Is there one? Or is it still day-to-day crisis management, without ability to manage the economy properly, as one Minister (forget his name) put a couple of years ago ?

  10. eamonn moran Says:

    @Paul W
    Go into the report and look through pages 9-14
    @ Seamus
    Thanks for re posting I missed this and it is very informative, especially in relation to PS pensions.
    Its very clear that it is the pension provisions that are completely unsustainable in the Public sector. Pay is actually down nearly 14% from 2008-2011 even though numbers are down only 2%

    If you look on page 13 the pension provisions for education are just under double that of health even though there are more employees in Health!

    I also wasnt aware of the massive increases in numbers of employees in health and education between 2006-2008.

    Thanks again

  11. Paul W Says:

    @ em
    Thanks, yes I was remiss /lazy in not giving it a quick read. So the PNs and NAMA are included although it worries me when I see statement such as “In the current publication all liabilities are measured at market value. Substituting this market valuation for the face value used in the calculation of GGDebt gives rise to a somewhat lower figure of 104% of GDP.” [as opposed to the official 106%]. The incessant need to make official numbers look better than they are is understandable but fools nobody. Also, there is still a big question mark over contingent liabilities in the covered banks and NAMA also i.e. real net book value vs. real market value has proven to be a mirage, moving negatively not positively on revisions over the last years. Future values are notoriously difficult to estimate in this economic environment, but all revisions to primary economic indicators and performance measures (can one name any exceptions?) have been to the downside.

    My other comments and questions remain though.

    Maybe all is not lost though and that “lotto win” will happen for the country:

    http://www.independent.ie/business/irish/one-billion-barrels-of-oil-found-off-the-southwest-coast-3291870.html

    I hope so.

  12. seafóid Says:

    For how long more can the status quo endure? If the country is running a deficit and the household sector is marginally positive then government will be in deficit. And the debt capacity of the government is at its limit.
    In theory the private sector could expand activity to cover reduced govt spending but the banks are FUBR. So how can the fairies ensure that demand be maintained ?

  13. Seamus Coffey Says:

    @ Paul W

    The Promissory Notes are in the 2010 capital account under “other capital transfers”.

    @ Yields or Bust

    The household sector had gross capital formation (investment) of €26 billion in 2006; last year it was less than €5 billion. There simply is no way for the government to engage in “replacing lost household spend”. It was spending on 90,000 new housing units.

    @ Paul W

    NAMA is classed under “other financial intermediaries” so is in the financial corporations sector. The liabilities of the NFC sector to NAMA are included in the first table above.

    You are looking for an “economic recovery plan”. The economy is not an ocean liner that can be turned around in almost any weather by following a defined set of procedures. Paul Seabright says it better:

    “Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.”

  14. Paul W Says:

    @ Seamus
    Nicely put. However the ship has too many unresolved holes and is clearly taking on further, increasingly serious damage in an international economic storm that is getting worse. It would take little for the ship to sink. When does one call Emergency Crisis Management versus the incremental tinkering? Must the system blow up (social unrest, long term social and economic damage, etc) before advocation and pursuit of an alternative management strategy(ies)? That call seems to be one of individual perspective and circumstance in Ireland at present. Lack of Strong Leasership is as fundamental an issue as the hard figures in the present equation.

    Carribean Economic Ireland beckons on the other side of this particular path, I think. What a shame is all I can say.

  15. David O'Donnell Says:

    @Paul W

    ‘… culturally your Northern European will never forgive debt so long as Ireland can and does continue to service its obligations (albeit with Oficial help).’

    Agree. Opposition from Juncker, Schauble et al to Greece receiving some ‘official’ (i.e. EZ) write down on its debt, as argued by IMF, tends to support this.

    Hence, some form of UDI on the PNs before March becomes necessary …. a simple declaration of intent to #postpone# indefinitely should suffice for the mo …

    @all

    v. informative …

    local demand appears to be a slowly evaporating mirage ….

  16. paul quigley Says:

    @ Seamas Coffey

    Many thanks for another set of illuminating data

    ‘The household sector had gross capital formation (investment) of €26 billion in 2006′

    That was largely malinvestment, as it transpires, and very likely to cumulate to a huge private sector loss overall, on top of the banks losses. It’s also highly questionable as to whether private housing should be treated solely as fixed capital formation.

    There is of course a contribution to the national productive capacity, but its opaque. Private housing can be defined equally as a form of consumption, sometimes ostentatious, with ‘fixed’ heating/commute energy costs which are almost certain to escalate over time.

  17. Patrick Says:

    @ paul quigley

    The thing is Paul that you’re thinking like too much of an economist!! What we’re looking at is essentially a set of accounts. From that perspective private housing defintely does constitute gross fixed capital formation. However, I’m not really sure if you could apply the concept of depreciation to the HH sector, whereas applying it to the NFC sector could tell us interesting things the capital that the sector is holding. Given the absolutely ridiculous amount of international flows in and out of the Irish economy its hard to know what to make of the NFC accounts though. If debts are being financed by parent companies, or the like, its not really going to be a large cause of concern. But who knows, it would be amazing if someone gave an analysis of net international flows in Ireland, though I doubt you’d be able to find any clear data.

  18. tullmcadoo Says:

    Paul W,
    “The fact is that the country is technically insolvent i.e. incapable of covering its own obligations as they fall due from own resources, exacerbated and emphasised further by the very substantial refinancing risk for the country (bar Official support) i.e. continued inability to access the markets.”

    If access is as described above, bar official support, is a litmus test for solvency then most Developed World Sovereigns are “insolvent”? The FANGS look to be the exception but there are other factors at work there.

    I find it amazing that it took only 17 posts for SC balanced analysis to be turned into doom porn.

  19. David O'Donnell Says:

    CARTOON OF THE DAY

    Greece
    Crossing the desert
    13 November 2012 I Kathimerini Athens

    http://www.presseurop.eu/en/content/cartoon/3026751-crossing-desert

  20. paul quigley Says:

    @ tull
    Maybe we are not doomed, but what’s that knocking noise ? Could it be gold bars in transit ?

    Figure 4
    Employee compensation
    ‘The other main component of value added (B.1g) is compensation of employees (D.1 Uses) (wages and salaries) which declined from €36.2bn in 2010 to €35.5bn in 2011.

    Figure 5
    Investment
    ‘The rate has fallen from a high of almost 18 per cent in 2005 to 8 per cent in 2011.’

    Figure 6
    ‘The rate of return on equity investment has continued to improve in 2011 to 15.3% up on the 2010 result of 13.2%. This improvement is due to the increase in profits earned by foreign owned multinationals operating in Ireland’

  21. grumpy Says:

    @seamus

    “You are looking for an “economic recovery plan”. The economy is not an ocean liner that can be turned around in almost any weather by following a defined set of procedures. Paul Seabright says it better:

    “Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.”

    Not sure Seabright knows that much about the sea. The Fastnet inquiry actually found that the actions of skippers had significant influence over which boats sank / capsized / broke-up and which did not. The most common tactic that worked was maintaining about a sixty degree angle to the waves but rounding up into breakers. Many of the boats had fancy modern designs [enter unusual economic characteristic here] that relied heavily on form-stability and would respond differently to very large waves. This was often not appreciated by skippers who didn’t modify their tactics appropriately at the time because they didn’t understand the unusual characteristics of their boat properly. Just battening down the hatches and disengaging was a bad move.

    I note Kevin Cardiff used this dodgy boat-in-a-storm-skipper-therefore-blameless analogy recently.

    The basic question of choosing which tack to be on is, of course, fundamental.

  22. Paul W Says:

    @ tull
    My insolvency definition is a banker’s one. A combination of the accounting definition plus refinancing risk. Refinancing risk is not the only determining factor, obviously.
    Interesting though to see BOI get its securitised issue away. NTMA now up. Haven’t had time to look at in detail, but what term is the BOI debt (another critical banker benchmark, but still ‘refinancing risk’ centric).

  23. David O'Donnell Says:

    The distinguising metric here, in comparision to other EZ members in a spot of bother, is the very very high level of household debt. Certainly more Boston than Berlin …..

  24. Tullmcadoo Says:

    PW,
    3 year at swap plus 270. No doubt more expensive than ECB but longer term. Would anybody overseas buy it if they did not believe in a PN fix.

  25. Paul W Says:

    @ Tull
    Who did buy it, I wonder?

    PN fix will be maturity elongation not debt write off and will be dressed up as a ‘restructure’, so more interest to pay over the longer run….continued can-kicking. BOI looks more like a simple market proxy bet i.e. based on Ireland being the best of the worst, issue likely to be back-stopped by Ireland /EU if the credit risk doesn’t work out as planned, so implicit guarantee as opposed to previous explicit guarantee. Extra yield for little risk on the front end of the curve…..no doubt the dealers will regard themselves as profit making ‘geniuses’ deserving of mega-bonuses!

  26. Shay Begorrah Says:

    @grumpy

    Not sure Seabright knows that much about the sea.

    And macroeconomics is not his area of expertise either.

    One could go on and point out that the skippers of small boats are typically careful about the weather they sail into and that nothing they do makes storms more likely, and that storms lake agency.

    This article of his in Foreign Policy does not really work for me either:

    http://www.foreignpolicy.com/articles/2011/1/02/the_imaginot_line

    Though the sentiments are laudable there is something missing – I think it is politics. It is as if the global financial crisis was a natural disaster of capitalism when the whole thing was decidedly man made.

  27. Shay Begorrah Says:

    Spoonerism alert.

    and that storms lakelack agency.

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