My take on it went out as an op-ed on Bloomberg today. (I’m not responsible for the headline!). It’s quite similar to KOR’s and CMcC’s, which is hardly surprising since we have been ad idem on this for more than a decade, though my repeat of the phrase I used some months ago – coup d’etat – might strike some as excessive (though it came from paying attention to Garret FitzGerald). By the way, I see that Ciaran O’Hagan asked, in a comment on KOR’s piece, about the decision to sever the link with sterling. Patrick Honohan and Gavin Murphy have written on this. The final sentence of the abstract shows how prevalent was the mindset displayed by Stephen Collins in his article in last Saturday’s Irish Times. (I agree with Karl that this must be one of the least insightful articles to appear over the current debate). I emphasised to Kevin Myers on some radio show at the time of the single currency debate that there was no clash between my nationalism and my recognition of the continuing importance to Ireland of our economic links with the UK. In fact I argued that this was an indication of the maturity of political attitudes on our side of the debate.
The latest collection of briefing papers for the European Parliament’s Monetary Dialogue with the ECB are available here (click on 19.12.2011). Five papers (including one by me) discusses issues related to ratings agencies, prompted by the recent package of regulations proposed by the European Commission. Three other papers discuss the ongoing Euro crisis.
A recent post looked at total debt and interest payments in the household, non-financial corporate and government sectors using data from the CSO’s Institutional Sector Accounts. There were some unanswered issues relating to the “interest paid” figure given for the three sectors in the accounts.
A quick query to the CSO has resolved this issue. The interest paid figure in the ISAs is actually an adjusted amount where the adjustments is for Financial Intermediation Services Indirectly Measured (FISIM).
The interest amount in the ISAs is based on a "risk-free rate" or some variation thereof. The remaining interest is considered a payment for service and appears elsewhere. The CSO’s accounts include this adjusted amount as interest paid (D.41).
The actual interest paid (D.41g) is available from the Eurostat database and is used to create this graph.
In 2010, the total amount of interest paid was €16.2 billion. This was 10.4% of GDP and 12.6% of GNP.
As interest rates have fallen the interest paid by the household and non-financial corporate sectors have fallen. In 2010, the household sector paid €6.3 billion of interest (and received €1.3 billion). In contrast the interest paid by the government sector has more than doubled in just two years and is set to be the largest amount in the coming years.
Two tables of comparative EU27 data for 2010 are also provided.
- Financial liabilities of household, corporate and government sectors
- Actual interest paid by the same sectors (incomplete)
As with the earlier post the measure of debt is the sum of the following liabilities: currency and deposits (F2), securities other than shares (F3) and loans (F4).
As has been stated a number of times (and discussed here) in terms of total debt Ireland is the most indebted country in the EU. In 2010, the total for the household, non-financial corporate and government sectors is 430% of GDP or 525% of GNP. No other country is above 400% of GDP and the unweighted average for the EU27 is 245% of GDP.
However, when it comes to actual interest paid Ireland is not such an outlier. In fact even with incomplete data there are four countries in which the three sectors combined paid more interest than in Ireland. At 10.4% of GDP the interest paid in Ireland is one-fifth more than the 8.6% of GDP unweighted average for the 20 countries for which 2010 data is available.
The may be a number of reasons why we are paying less interest such as lower interest rates and impairment in the household and corporate sectors. While the government can try to continually roll over the debt, the household and corporate sectors will try to repay the interest and capital. The non-consolidated nature of the accounts means that the debt may not be actually owed to third parties. This may be particularly true of the non-financial corporate sector, the debts of which make up more the half of the total debt figure for Ireland in the usual analysis.
The tables themselves are below the fold.
The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank
A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.
It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).
There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.
This could have been a useful contribution to the discussions about Target 2 if it was tweaked a bit.
For instance, the following slight re-wordings may have helped to inform rather than mislead:
Involuntary money acquisition is what happens when your spouse wins the lottery and gives you loads of money. At some point it dawns on you that you’re rich.
Or this
The bottom line: Germany’s Bundesbank—BuBa for short—has quietly, automatically received €495 billion to the European Central Bank via Target2.
Ok, no big deal. Financial journalists in getting things wrong shocker!
However, the piece does address a new aspect of the question that was not discussed in earlier discussions about the Target 2 balances. What happens if the Euro area breaks up?
Mr. Coy from Bloomberg is pretty sure it will be bad for Germany:
If the euro zone breaks into sorry little pieces, Germany could possibly lose its entire €495 billion claim. That’s more than $650 billion. It is 60 percent bigger than Germany’s annual federal budget.
But let’s take a closer look. Who is this “Germany”? Will the German residents who got their accounts credited as a result of the Target2-facilitated transfers out of Ireland now lose their money? No. There will be no losses to private citizens. Despite all this misleading stuff about “enforced lending”, German citizens will be very grateful that they managed to repatriate their money to German via Target2.
So who loses? Well, the Bundesbank has a Target2 credit from the ECB, an organisation that used to be considered sound and a good credit because they have the power to print money.
If the ECB ceases to exist and the Bundesbank wanted its balance sheet to still balance, it could simply replace the “Target2 credit” by writing itself a big check and sticking it in the vaults. Call it “Sondervermögen Ersetzen Vermögensverwaltung Früher als Target2 Kreditkarten Bekannte“ (“Special Fund Replacing Asset Formerly Known As Target2 Credit” – blame Google Translate!) Just like that, the Bundesbank’s balance sheet is balanced again.
Now watch how many commenters will try to convince you that placing a piece of paper in an empty vault will unleash hyperinflation.