A Consolidated-by-Nationality Approach to Irish Foreign Exposure

Andre Sanchez Pacheco (Trinity College Dublin)

How exposed is Ireland to foreign shocks? Relying on residence-based measures of foreign holdings to answer this question can be challenging. These statistics are obscured by the vast presence of Special Purpose Entities (SPEs) in the country. In residence-based statistics, foreign assets and liabilities are sorted according to the residence of the immediate counterparts. Consequently, the cross-border positions held by these Irish-resident financial intermediaries appear in Ireland’s external balance sheet. However, these entities frequently have no economic ties to Irish agents. Lane (2019) notes that the large size of these holdings imply that the positions of Irish agents are not visible in the headline data. Such opaqueness poses an obstacle for policymakers when assessing the exposure of the Irish economy to foreign shocks.

Consider a foreign-owned SPE resident in Ireland whose sole purpose is to raise capital from international investors and transfer these resources to the company’s headquarters located abroad. Suppose this Irish-resident company sells one billion Euros in bonds and lends one billion Euros to its parent company. Under the residence-based approach, the bonds issued by this entity and purchased by international investors will be recorded as Irish foreign liabilities. Similarly, the loans sent to its home country will be booked as Irish foreign assets. As a result, the presence of this SPE in Ireland will increase the sum of Irish external assets and liabilities by two billion Euros. However, the activities conducted by this company have virtually no relation to Irish agents. In line with this example, Galstyan et al. (2021) provide evidence of cross-country financing happening through Irish-resident SPEs.

Alternatively, one could rely on consolidated-by-nationality statistics to provide a more accurate description of Irish foreign exposure. Its key principle is to sort foreign assets and liabilities according to the nationality of the ultimate counterparts. In this example, such approach would imply leaving the holdings of the SPE out of Ireland’s consolidated foreign balance sheet as these holdings do not have Irish agents as their ultimate counterparts. By not incorporating such holdings, the consolidated-by-nationality balance sheet would provide a more accurate description of the foreign exposure related to Irish agents.

In Sanchez Pacheco (2021), I construct the Irish consolidated-by-nationality foreign balance sheet for the period between 2011 and 2019. The balance sheet is constructed using a novel methodology that builds on firm-level data.

Figure 1 shows the size of Ireland’s balance sheet measured by the sum of its foreign assets and liabilities using both methodologies. The key stylized fact that emerges from this analysis is that Ireland’s consolidated-by-nationality foreign balance sheet is on average 46.7% smaller when compared to its residence-based analogue. Devereux and Yu (2020) show that international financial integration increases the degree of cross-country contagion. Therefore, I interpret this finding as indicating that Ireland is less exposed to foreign shocks than what is captured by residence-based statistics.

Figure 1: Sum of Ireland’s foreign assets and liabilities

Note: This figure shows the evolution of the sum of Irish foreign assets and liabilities. The blue line shows such sum when calculated using the consolidated-by-nationality approach in Sanchez Pacheco (2021). The black line comes from Lane and Milesi-Ferretti’s External Wealth of Nations database and shows the sum when calculated using a residence-based approach.

The role of multinationals

Ireland’s consolidated foreign balance sheet expanded over the past ten years. What were the key drivers behind such expansion? Figure 2 shows the evolution of Irish consolidated foreign liabilities according to different categories. It shows that affiliates of foreign non-financial multinational enterprises (MNEs) were the key contributors to such expansion.

In general, foreign non-bank MNEs represent the main source of Irish international financial integration. In 2019, their activities are associated with EUR 923.2 billion in Irish foreign assets and EUR 2,172.1 billion in foreign liabilities.

Figure 2: Ireland’s consolidated foreign liabilities

Note: This figure shows the evolution of Irish consolidated-by-nationality foreign liabilities related to each category. Foreign companies that have changed their domicile to Ireland are excluded from the sample.

The outsized presence of U.S. MNEs in Ireland

Of that amount, U.S. MNEs are the most relevant ones as their activities account for over half of the Irish foreign liabilities related to foreign non-banks. Figure 3 shows Ireland’s consolidated foreign holdings related to the activities of foreign non-banks MNEs according to the nationality of their ultimate owners. U.S. firms are followed by German and U.K. firms in distant second and third places.

This result suggests that Ireland is particularly exposed to shocks in the U.S. that affect the global decision-making of these MNEs.

Figure 3: Ireland’s consolidated foreign assets and liabilities related to foreign non-banks MNEs

Note: This figure shows Irish consolidated foreign assets and liabilities related to foreign non-banks operating in Ireland for 2019. Foreign holdings are sorted according to the ultimate counterpart countries that own these companies operating in Ireland. These holdings are estimated using data from Bureau van Dijk’s FAME data-set.


Residence-based measures of Irish foreign holdings are obscured by the vast presence of financial intermediaries in the country. Alternatively, I construct an estimate of the Irish consolidated-by-nationality foreign balance sheet for the period between 2011 and 2019. I find that Ireland’s consolidated-by-nationality foreign balance sheet is on average 46.7% smaller than its residence-based analogue over the sample period. This result indicates that Ireland is significantly less exposed to foreign shocks than what is typically suggested by residence-based statistics.

This paper is part of the Consolidated Foreign Wealth of Nations project that seeks to create publicly available estimates of consolidated-by-nationality foreign assets and liabilities for multiple countries. This dataset will complement the seminal External Wealth of Nations work by Lane and Milesi-Ferretti which provides estimates of residence-based external holdings for all countries.

Contact email: sanchean@tcd.ie. The author would like to thank the Irish Research Council for the financial support provided.

Central Bank Quarterly Bulletin 4, 2020

A guest post by Enda Keenan from the Central Bank, highlighting some of the key messages from Bank’s latest Quarterly Bulletin.

Today the Bank published its fourth and final Quarterly Bulletin for 2020. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in July as well as our latest macroeconomic forecasts out to 2022.

The forecast for GDP growth has been revised upwards to -0.4 per cent in 2020 reflecting more positive developments in consumption, strong export performance and an enhanced level of fiscal support arising from the July stimulus package. Growth prospects for next year and 2022 are more subdued compared to the previous Bulletin due to the implications of a WTO Brexit. As outlined Box A, a disruptive transition to a WTO trading relationship would frontload associated output and employment losses. In this baseline scenario, the growth rate of the Irish economy is 2 percentage points lower in 2021 relative to a Free Trade Agreement due to the introduction of tariff and non-tariff barriers. The ILO unemployment rate is projected to average 5.3 per cent for this year, rising to 8 per cent in 2021 following the closure of income-support schemes at the end of the first quarter (Box D in the Bulletin discusses the challenges that arise for measuring unemployment in the time of COVID-19).

Since re-opening from a period of lockdown, the recovery of the Irish economy has been uneven as levels of domestically focussed economic activity remain well below pre-pandemic levels. In particular, consumer-facing services sectors, such as tourism, hospitality and retail services, which are also more labour-intensive, have been slower to recover contributing to a projected decline in underlying domestic demand of 7.1 per cent this year. The strong performance of exports, which are expected to decline by just 0.3 percent in 2020, is the main factor driving an upward revision in the baseline projection for GDP. Box C details the relative resilience of high-value exports such as computer services and pharmaceuticals during a period of declining trade-weighted world demand.

The Central Bank’s Business Cycle Indicator (BCI), a monthly summary indicator of overall economic conditions estimated from a larger dataset of high-frequency releases, fell sharply during the months of March and April reaching a historical low (Figure 1). The latest estimates show that economic conditions continued to improve into July and August, but the rate of recovery has slowed down. Despite the improvement over the four months to August, the overall level of the BCI remains substantially below that observed prior to the emergence of the COVID-19 crisis.

Figure 1: Business Cycle Indicator (BCI) for Ireland’s Economy

The outlook remains highly uncertain, depending not only on the economic consequences of COVID-19 and its containment, but also on the nature of the trading relationship between the EU and the UK. Recognising this uncertainty, Box E analyses the impact of a ‘severe’ COVID-19 scenario as an alternative to the baseline forecasts in which there is a strong resurgence of the pandemic, leading to the restoration of widespread and stringent containment measures for a more prolonged period. Underlying domestic demand is projected to fall by 8.5 per cent in 2020 in this case with a continued contraction of -1.3 per cent into 2021. While the economy does not begin to recover until 2022, underlying domestic demand remains 6 percentage points below 2019 levels. In the ‘severe’ scenario, the unemployment rate rises to 12.5 per cent in 2021 before moderating to 10.1 per cent the following year.

The bulletin also contains analysis on the latest income tax developments and measurement difficulties for the unemployment rate arising from COVID-19.

Central Bank Quarterly Bulletin 3 2020

Guest post by Stephen Byrne, Central Bank of Ireland

Today the Bank published its third Quarterly Bulletin of the year. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in early April as well as our latest macroeconomic forecasts out to 2022.

Given the scale of uncertainty surrounding the economic impact of Covid-19, two different scenarios for the economic outlook are outlined in the Bulletin (see featured image above).

In the “baseline” scenario, the economy reopens in line with the Government’s phased plan, allowing for a rebound in economic activity in the second half of the year. Some containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period. Beyond the initial rebound, recovery is expected to be gradual, in line with a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers. The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022.

The baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the outbreak of the pandemic.

In the “severe” scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before, based on an assumption that there would be a resurgence of the virus at some point over the next year. In this scenario, there is a subdued economic recovery with a larger permanent loss of output. Unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year. In this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of GDP in 2022 about 5 per cent below its pre-crisis level.

Both of these scenarios assume that a Free trade agreement in goods between the UK and the EU, with no tariffs and quotas on goods, takes effect in January 2021. If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021. Box D of the Bulletin discusses the implications of such an outcome.

The bulletin also contains analysis of the impact of Covid-19 on debt dynamics and sustainability, as well as a detailed examination of the regional labour market impacts of the pandemic.

Finally, an accompanying signed article explores alternative long-term recovery paths for the economy and assesses the impact of fiscal and monetary policy supports. The Article considers how hysteresis – or scarring ­­– effects could influence the pace and nature of the recovery. The paper shows that, as a highly open economy, Ireland benefits from the positive effects of monetary and fiscal policy measures implemented abroad. The assessment of the combined effects of domestic and international policy supports indicates that the actions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.

Wir brauchen nicht noch mehr Offenheit

The NZZ interviewed me last week in Zürich. I made the case that we live in a world that is already astonishingly open, and sufficiently so that it is allowing poor countries to grow rapidly; and that Davos Man and Woman should therefore seek to preserve existing levels of openness, rather than pursuing a permanent pro-market revolution that will inevitably provoke a political backlash (and  indeed is already doing so). The interview is here.

Rewriting the rules

From an Irish perspective the most significant announcement made yesterday by Commissioner Vestager was in relation to Amazon not Apple.  The Commission announced that Luxembourg had granted €250 million of illegal sate aid to Amazon.  The structure used by Amazon in Luxembourg is close to a replica of that used by US companies in Ireland.  It is a double-luxembourgish.  Here is the Commission’s description of the Amazon structure: