Central Bank Publishes Research on Irish Non-Financial Corporations Debt Levels and Housing Equity Withdrawal Trends

This post was written by Philip Lane

Information Release 28 January 2013

The Central Bank of Ireland today published the signed articles Why are Irish Non-Financial Corporations so Indebted and Housing Equity Withdrawal Trends in Ireland from the Quarterly Bulletin 1[1] for 2013.

The research found that Irish Non-Financial Corporations (NFC) are the second most indebted in Europe after Luxembourg when debt is measured as a percentage of GDP[2]. However when debt is measured as a percentage of their balance sheet size, NFCs in Ireland are relatively less indebted and fall below the eurozone average[3]. Results show that aggregate indicators can mask some underlying problems within particular NFC sub-sectors and therefore the use of a single indicator for the sector as a whole, in isolation from other data, can be misleading.

Irish NFC debt increased from 147 per cent of GDP to 204 per cent between Q3 2008 and Q2 2012 despite the economic downturn. The rising levels of Irish NFC debt reflect the large and increasing activities of multi-national corporations (MNCs) in Ireland in recent years.

While NFCs have significantly reduced borrowing from credit institutions through net loan repayments and loan write-downs, their borrowing from non-residents has increased substantially by 160 per cent between Q1 2008 and Q2 2012[4]. This latter trend largely reflects the substantial increase in MNCs in Ireland.

The research into equity withdrawals uses a unique data set to track changes in aggregate housing equity withdrawal between 1978 and 2012 and found that prior to the recent housing boom, aggregate equity injection was the norm for Irish households, mainly through the repayment of mortgage debt over time.

However, the property boom saw households move from aggregate equity injection to aggregate equity withdrawal.  It is estimated that aggregate equity withdrawal reached a peak of €8 billion, or 10 per cent of disposable income, in 2006. This trend was driven by an increase in the number and value of top-up loans, an increase in the number and value of transactions during the boom and a relaxation of credit standards leading to lower deposits, longer loan terms and increased number of interest only loans.

The decline in the property market has led to a reversal of these factors with housing equity withdrawal collapsing and reducing to its lowest levels, driven mainly by the decline in the number and value of housing transactions.

14 Responses to “Central Bank Publishes Research on Irish Non-Financial Corporations Debt Levels and Housing Equity Withdrawal Trends”

  1. Seamus Coffey Says:

    These are two useful and valuable contributions. At the “Ballyhea 100″ meeting in Charleville on Saturday night Peter Mathews based a lot of his contribution around Cechetti, Mohanty and Zampolli and their implied aggregate threshold of 260% of GDP above which Household, Corporate and Government debt becomes a significant drag on the economy.

    Ireland has an excessive level of debt which is a drag on the economy but the debt is not approaching 500% of GDP as is commonly claimed using gross, non-consolidated figures.

    As is widely accepted household and government debt are around 120% of GDP. The Cussen and O’Leary article is required reading for anyone who tries to say that business debt in Ireland is more than twice that level.

  2. OMF Says:

    As is widely accepted household and government debt are around 120% of GDP.

    I don’t beleive you, and I don’t think that figure is widely accepted by any definition of the term.

  3. DOCM Says:

    Harry McGee of the IT tells it as it is!

    http://www.irishtimes.com/blogs/politics/2013/01/28/ministers-bark-but-ecb-leash-still-holds/

  4. Eureka Says:

    ..but this debt doesn’t matter. The Irish citizenry will never have to pay. It’s not important.

    What’s the point of this?

  5. Robert Glynn Says:

    Firms that go bust or re-locate to more competitive regions cost us jobs.
    So we do pay.

  6. Tullmcadoo Says:

    DOCM,
    More correct to state that Harry is channeling the “continuity Troika” in Frankfurt.

  7. DOCM Says:

    @ TMD

    No matter how the situation is parsed, the present leadership and commentariat in general in Ireland is out of sync with what is actually happening.

    http://www.ft.com/intl/cms/s/0/f4d5d468-6969-11e2-9246-00144feab49a.html#axzz2JIfNYsOP

    As to “catastrophe”, as adverted to by the Tánaiste, it may be threatening the Labour Party but it certainly is not threatening Ireland.

  8. DOCM Says:

    @ TMD

    The Russians, coincidentally, are coming to the assistance of Cyprus (or, perhaps, of certain of their big depositors in Cypriot banks).

    http://de.reuters.com/article/economicsNews/idDEBEE90R03U20130128

  9. Seamus Coffey Says:

    @ OMF,

    What do you accept as the levels of household and government debt?

  10. Tullmcadoo Says:

    Seamus,
    U meant 120% each?

  11. DOCM Says:

    Herewith another link which helps explain why Germany is world champion in the exporting business and in the build up of credit balances abroad which in turn help fuel credit binges which in turn lead to the subject of this thread.

    http://www.ft.com/intl/cms/s/0/cae25f0e-695b-11e2-b254-00144feab49a.html#axzz2JIfNYsOP

    Notably;

    “In an apparent concession to the opposition, Mr Altmaier proposed that energy intensive industries start paying “a minimal” surcharge. Sectors such as chemicals are currently exempt from payments.”

  12. Seamus Coffey Says:

    @ Tull,

    Yes. By using “are” I was intending to imply a plural rather than a singular context. Perhaps I should have put a ’s’ on the end of “debt”.

  13. Paul Ferguson Says:

    I had a letter published in the Irish Independent recently which was in response another issue but it’s equally relevant to the question of ‘Why are Irish Non Financial-Corporations so indebted?’

    Basically I point out that the vast majority of euros are created with an even higher debt so no wonder the economy is over indebted.

    Reducing our debts doesn’t leave is in a better position either since the money used to repay the debt no longer exists after the repayment is processed.

    The letter can be read at;
    http://www.independent.ie/opinion/letters/money-talk-3367324.html

  14. Paul Ferguson Says:

    @ Paul Ferguson

    I’ve been thinking about some of the points you’ve been making, particularly about mortgages having nowhere to go once they hit pretty much life-long duration taking as high a portion of future income as they can.

    I rather gloomily think that the work-around for this will be ever increasing student loans, such that young people enter the work-force with mortgage-sized debts.

    Also putting students in debt for life discourages inventiveness and political agitation.

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