Debt and Interest

There has been a lot of focus on the level of debt in Ireland.  The household sector is suffering from a debt overhang as a result of the excesses of the previous decade, the government sector has seen its debt level soar as it tried to cover the losses in the banking sector and continues to run huge deficits, while the level of debt in the non-financial corporate sector appears enormous but seems to require a closer examination.

Using the CSO’s Institutional Sector Accounts it is possible to come with charts like the following (starting from when the dataset begins).

The lines in the chart represent the non-consolidated sum of the liabilities of each sector under three headings.

  • AF2: Currency and Deposits
  • AF3: Securities other than Equity
  • AF4: Loans

The government is the only sector to have liabilities in all three categories as it had retail debt, government bonds and outstanding loans (mainly Promissory Notes) summing to €141 billion at the end of 2010.  The corporate sector has both loan and outstanding debt securities, though loans make up 97% of the €347 billion total.  The household sector has €185 billion of loans outstanding and is the only sector showing a declining level of debt.

The total of these is €673 billion which is equivalent to 430% of GDP or 526% of GNP.  There has been much speculation about where these aggregates are headed over the next few years and whether a default of debt in any or all the sectors is imminent.  A debt level in excess of 500% of GNP does suggest that only one conclusion can be drawn.

However, before declaring that the debt is “unsustainable” and can never be carried it is worthwhile to consider the actual burden that this level of debt is creating rather than simply focussing on the size of the debt.

Again we can turn to the CSO and this time to the Non-Financial Accounts and the interest expense in the Primary Allocation of Interest Account (item D41). 

Two of the lines here appear to make sense.  Household interest expenditure rises with interest rates and debt accumulation and peaks in 2008 at €8.1 billion and then falls as interest rates fell and debt was repaid and was €4.2 billion in 2010.  The interest expenditure of the government begins to rise from 2008 due to well-known reasons and was €4.9 billion in 2010.

The pattern on interest expenditure by non-financial corporations does not present itself to such a straightforward analysis.  This peaked in 2008 at €7 billion but in 2010 had fallen to just €712 million.

At 2.3% of the liabilities from the first chart, the interest for households appears low but the figure for non-financial corporations is startling given that we have just seen that they had €347 billion of potential liabilities requiring interest payments.  Surely firms paid more than €712 million of interest in 2010?

One thing to note is that these accounts are non-consolidated so there could be intra-company loans in the total.  Secondly, firms did make substantial payments in 2010 as distributed income of corporations (€18.0 billion) and as reinvested earnings on direct foreign investment (€14.6 billion).

The interest expense of government is set to increase over the coming years but lower interest rates and continued repayment will reduce the figure for households.  The total for businesses remains an anomaly.

In total in 2010, the three sectors allocated €9.8 billion to interest.  This is equal to 6.3% of GDP or 7.7% of GNP.  Under neither measure does this look like an impossibly large burden but perhaps the discussion will unearth a deeper understanding of these figures.

Mortgage Arrears Data

The latest set of mortgage arrears data has been released by the Financial Regulator.  There are now 8.1% of mortgages in arrears of 90 days or more. 

There have been some suggestions that there is an increased number of “won’t pay” as opposed to “can’t pay” borrowers in the recent increase because of the debate about debt forgiveness and bankruptcy last August and September.  If someone decided not to pay at this time it is unlikely that they would have been 90 days in arrears when the data were collected. 

Most of the current quarterly increase is still likely to be as a result of those in the “can’t pay” category.  This may be different in subsequent updates.  Any change in bankruptcy law is not going to make provision for someone to be declared bankrupt because they won’t pay their debts.

Taoiseach’s article in The Irish Times

Enda Kenny’s article in today’s IT can be read here.

Patterns of Investment

For the past four years domestic economy has been in freefall, which has resulted in nominal domestic demand falling from €172 billion in 2007 to €126 billion last year.  This massive drop has been spread unevenly across the three components of domestic demand:  consumption expenditure is down €11 billion; government expenditure on goods and services is down €2 billion while investment in fixed capital is down €30 billion.

The fall in the domestic economy has been led by the fall in investment, which in just four years has fallen 63% from €48 billion to €18 billion in nominal terms.  The real decrease has been 52%.  There is nothing in this snapshot that we don’t already know.  The pattern of the four components of nominal GDP since are shown here.

 

Investment rose strongly up to 2006.  It was largely unchanged in 2007 but the rapid fall since then is clearly shown.  Table 15 in the National Income and Expenditure Accounts provides a breakdown of the investment by type.

In 2006, investment was €48.3 billion and €38.0 billion of that was accounted for by the construction and property sectors; dwellings (€22.6 billion), roads (€2.0 billion), other construction (€8.8 billion) and also costs associated with transfer of land and buildings (€4.5 billion) which makes up the bulk of the ‘other’ category in the above graph.  By 2010 these four categories made up €10.7 billion of the €18 billion total. 

The domestic economy has seen a nominal fall of around €46 billion – unsurprisingly 60% of this is due to the collapse of the construction and property sectors. 

The Non-Financial Institution Sector Accounts gives an insight into the breakdown of investment by sector.

The household sector has gone from the largest source of investment as recently as 2008 to the smallest in 2010.   If we use the figure for Consumption of Fixed Capital as provided in the Non-Financial Accounts we can get a measure that could be considered a form of Net Investment.

For the economy as a whole gross fixed capital investment exceeded consumption of fixed capital by less than €2 billion in 2010, with firms having an outturn of negative €2 billion. 

We will get revised macroeconomic projections from the DoF as part of the forthcoming budgetary process.  Their most recent projections are from April’s Stability Programme Update.  Investment is expected to continue to decline in 2011 with a real drop of 11.5%, but minor growth is forecast for 2012.  This growth is expected to quickly accelerate with real growth in investment of 4.5% projected for 2013 increasing to more than 5% for both 2014 and 2015.

There is little sign of this.  The Q2 National Accounts show that real investment in the first half of 2011 was down 11% on the same period last year.  This is in line with DoF projections but there is little to indicate that a turnaround in investment will occur in 2012.  The collapse in household investment has eased but that was all that could occur as the overall drop now exceeds 80%.

The scope for further declines in investment is limited but absent both a willingness to borrow and a willingness to lend the scope for a return to 5% growth rates also appears limited.

Selected Unemployment Rates

Although there are some problems with the aggregate figures estimated by the CSO from the Quarterly National Household Survey, the percentages provided by the survey have continued validity.  In these cases we can expect that the ‘missing’ 97,000 people who were ‘found’ by the Census will affect both the numerator and denominator. 

Here are some unemployment rates from the first quarter of 2006 up to the second quarter of 2011.  The rates are provided by gender, age, region, education and nationality.  When making overall judgements the size and the labour force participation rate of each group should also be considered but those are not the focus here.

1. Overall unemployment rate

2. Unemployment rate by gender

3. Unemployment rate by age

4. Unemployment rate by education

5. Unemployment rate by region

6. Unemployment rate by nationality