Wednesday, September 30, 2009

Economics 01/10/2009: External Debt - still a problem

As of 30 June 2009, per CSO’s today release, “the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households) amounted to almost €1,689bn. This represents a drop of €7bn or 0.4% …compared to the level shown (€1,696bn) at the end of March 2009.”

“…the bulk of Ireland’s external debt arises from the liabilities of IFSC financial enterprises and also that most of its overall foreign financial liabilities are offset by Irish residents’ (including IFSC) holdings of foreign financial assets.” Hmmm… again this over-emphasis of IFSC. One note of caution - we do not actually know if these 'assets' are valued at fair rates (we do not know what percentage of these assets is valued at mark-to-market, and what percentage is valued at hold-to-maturity bases), so some questions to the quality of the assets can be raised.

“Liabilities of monetary financial institutions (credit institutions and money market funds) consisting mostly of loans and debt securities were almost €691bn, a drop of almost €27bn on the 31stMarch 2009 stock level and down €117bn on the June 2008 level.” In other words, our banks are de-leveraging… as in charts below… but at whose expense?

The reduced liabilities of MFIs “are broadly reflected in the significantly increased Monetary Authority liabilities of €103bn, up by over €98bn since June 2008. These obligations are to the European System of Central Banks (ESCB)...” Aha, de-leveraging by loading up on those ECB loans, then?

But wait, there is more: “The liabilities of other sectors including those of insurance companies and pension funds, treasury companies and other relevant financial enterprises, as well as non-financial enterprises were €624bn, remaining relatively flat compared to end-March 2009. However, compared to end-June 2008, these liabilities had increased by €28bn.” Yeeeeks – banks de-leveraging is pushing ‘other sectors’ – aka the real economy – deeper into debt.

But wait, there is more: “The level of general government foreign borrowing increased by €10bn to €72bn between March and June this year and was €29bn up on the June 2008 level.” Ooops, banks are costing us here too (as do our social welfare rates and public sector wages bills).
Pull one end of the cart up, the other end sinks?

Some details on top of CSO’s release:
Table above shows percentage increases in debt levels across sectors and maturities. Pretty self-explanatory. The Exchequer is borrowing short and increasingly so. But the Exchequer is borrowing long as well, and rather aggressively as well. Monetary Authority is truly remarkable. Incidentally, MA borrowings are mostly short-term (higher than 3:1 ratio to long-term).

Banks (oh, sorry, MFIs) are cutting back debt more aggressively this year than in 2008. And, strangely enough, they are cutting more long-term debts than short-term debts (in proportional terms). Of course, this in part reflects bad loans provisions and pay downs of Irish subsidiaries debt by foreign parents.

Other sectors are rolling up accumulated interest and amassing new loans. Short-term liabilities net of trade credits are up over two years, trade credits flat over last year. What does it tell you about importing activities?
Shares of MFIs in total debt thus are falling across the years, as are FDI shares, but everything else is rising.

Looking at short vs longer term debt issuance by sector:
Monetary Authority is now almost all short-term, Government is increasingly short-termist as well. Maturity mismatch risk is rising as is, but with Nama (a rolling 6-months re-priced bond against 10-20 years work out window on loans) maturity mismatch risk on Government balance sheet will go through the roof.
MFIs short term debt is now also declining, while long term debt has been declining for some time. It would be interesting to have this broken down by foreign vs domestic lenders, but there is no such detail in CSO figures, despite CSO's constant repeating that the figures include IFSC. If IFSC is so important to this analysis - why not report it separately?

Other sectors are relatively flat, which is bad news. Trade credits flat as well.

Overall, lack of significant de-leveraging and in some cases, continued accumulation of liabilities, in the real economy.
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