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

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.

Bogtec

Yesterday, Pat Rabbitte and Ed Davey signed a Memorandum of Understanding. The MoU is crafted in terms of the Renewables Directive, which allows EU Member States to pool their targets. Essentially, the MoU gives the UK an exclusive claim on any excess (wrt target) renewables that Ireland may have. A monopsony is good for the buyer, but less attractive to the seller. Either the Irish government has little faith in the emergence of a market for renewable obligations, or perhaps Ireland felt it needed to do the UK a favour, for instance in return for the bailout.

The MoU does not specify any project, but there is an expectation (see here and here) of large wind farms in the Irish midlands, transmitted to England and Wales via a dedicated grid.

This is intriguing. Midland winds are not particularly favourable, and definitely cannot compete with the winds of England and Wales once the costs of long distance transmission, including an undersea cable, are accounted for. This project only makes sense when you consider the difficulties in building wind turbines in the England and Wales. Ireland’s comparative advantage is the weakness of its planning regulations.

There have been some exaggerated claims about the benefits for Ireland. Few jobs would be created here. There is no reason to assume that wind turbine manufacturers would set up shop in Ireland. Even the more lucrative parts of construction may well be done by specialist teams flown in from abroad.

Export earnings depend on the price. In England and Wales, feed-in tariffs are about 25 c/KWh for small, domestic suppliers. It is unlikely that large, foreign suppliers will be offered similarly generous conditions.

Profits are likely to be taxed in Ireland, but need not benefit Irish shareholders. There are no royalties on wind (and EU competition law prevents the introduction of royalties on wind-for-export only).

The wind power companies would need to lease land, but as the name of Bord na Mona is often dropped, this may be at a concessionary rate.

From an English perspective, this agreement makes sense in a narrow way. The choice is between yet another conflict with Brussels (if the renewables target would be ditched — the sensible thing to do), a reform of planning regulations, or a deal with the Irish.

From an Irish perspective, it is hard to find anything to commend this plan.

Call for Papers 2013 FMC2 Finance Conference (May 1st 2013)

The Financial Mathematics and Computation Cluster (FMC2) is pleased to announce that the 2013 FMC2 Finance Conference will be held in Dublin on May 1, 2013.


The FMC2 Finance Conference is a high-quality conference covering all areas of finance. Previous speakers at the conference (which replaces the Global Finance Academy annual conference) include Douglas Breeden, Michael Brennan, Julian Franks, Maureen O’ Hara, John McConnell, Stewart Myers, Matthew Spiegel, Hassan Tehranian and Raman Uppal. The format of this year’s conference is for six selected papers to be given 1 hour each for presentation. The FMC Scientific Advisory Board (see below for membership) will be present at the conference with the objective being to provide a setting that produces the kind of in-depth participation of a smaller conference.

PAPER SUBMISSION PROCEDURE: The submission deadline is Sunday March 3, 2013. Please submit papers under the subject heading ‘FMC Annual Conference’ to Irene Ward (irene.ward@ucd.ie). There is no submission fee.

EU/IMF Policies for Troubled Banking Systems

The debate about imposing losses on uninsured depositors in some Cypriot banks is the main story in today’s WSJ here.

Olli Rehn elaborates on bank recapitalizations here.

Public Lecture on Regulatory Purpose and the Rationale for Intervention in Capital Markets

Professor Justin O’Brien, University of New South Wales,  will give a public lecture Back to the Future: James M. Landis,  Regulatory Purpose and the Rationale for Intervention in Capital Markets on Monday 28th January at 6pm, in Newman House, St Stephen’s Green, Dublin 2. This lecture addresses contemporary problems of regulatory design through exploring the history of financial markets regulation. Attendance is free but booking is required at http://www.ucd.ie/law/events/title,159217,en.html.