Friday, October 30, 2009

Economics 30/10/2009: Assets/Liabilities data - How IFSC beats domestic investment sectors

See as ever entertaining press release from Ryanair below.

Per CSO release today:
End-December 2008, Ireland’s international investment position (IIP) was:
  • stocks of foreign financial assets of €2,194bn - a drop of €76bn on the end-2007 level of €2,270bn
  • liabilities were down by almost €7bn from €2,307bn to €2,300bn
  • Irish residents therefore had an overall net foreign liability (or deficit) of just over €106bn at the end of last year, up over €69bn from 2007 figure of €37bn.

Now, decomposition of these net liabilities is telling:
In overall commercial financial sector:
  • Monetary financial institutions (MFI - i.e. credit institutions and money market funds) had assets amounting to €1,065bn at the end of 2008. On the liabilities side, the MFI sector accounted for €1,146bn so total net liabilities of MFI sector in Ireland were at €81bn.
  • Other financial intermediaries (OFI i.e. investment funds, insurance companies and pension funds, asset finance companies, treasuries, etc) accounted for €980bn of foreign assets. OFI liabilities were €921bn, implying net assets (not net liabilities) of €51bn.
Thus, our commercial financial sector at the end of 2008 had foreign assets of €2,045bn (or over 93% of total foreign assets) and liabilities to non-residents of €2,067bn (or almost 90% of total foreign financial obligations), resulting in a net foreign liability of €21bn.

But the real gem is in the bottom section of CSO report. For months now CSO and Ireland’s CBFSAI were at pains to distance themselves from the IFSC. Every time someone pointed to a massive debt mountain Ireland Inc is bearing on its (private sectors’) shoulders, our Central Bank shouts ‘Foul – it’s all the fault of the IFSC’. Few (including myself) made arguments that this is too simplistic: IFSC is both an asset and a liability to our economy, and thus one cannot simply ignore its debts when one wishes to do so.

Well, CSO’s data actually shows that IFSC is hardly a culprit in the All-Ireland race to become a leading sector in net liabilities: “At the end of 2008, IFSC assets abroad amounted to €1,663bn or over 81% of the sector’s foreign assets (and almost 76% of Ireland’s total foreign assets).” IFSC liabilities stand at €1,646bn (nearly 80% of the commercial financial sector aggregate and over 71% of Ireland’s total foreign liabilities).

Yet IFSC recorded a net asset position at the end of 2008 of almost €18bn. While much smaller in size relative to IFSC, non-IFSC commercial financial enterprises (17% of total foreign assets and 18% of total foreign liabilities) have managed to run up a net liability of €39bn. That is a swing of €57bn between IFSC’s healthier books and non-IFSC’s sicker ones.

Think non-IFSC guys are now firmly on track to win the leading position in that All-Ireland race to highest indebtedness? Nope. The monetary authority, general government and non-financial enterprises had end-2008 foreign assets of less than €149bn (about 7% of the total) and liabilities of almost €234bn (just over 10% of the total). So the public sector net liabilities were a whooping €85bn, a swing against IFSC position of €103bn.

Scary stuff? Well, not yet - look at the following charts:
Chart above shows assets side of our International Investment Positions (IIP). All point to clear declines in 2008, except for 'Other' (aka derivatives written by our speculation-prone folks) and 'Direct Investment' (aka completion of Bulgarian and Romanian property syndicates)...
Chart above illustrates liabilities side of our IIP. All liabilities are up except for FDI into Ireland (which is falling - more on this below), and Portfolio Investments - which were hammered by global equity markets meltdown.

So net positions next:
Clearly, comments in the charts are self-explanatory. Good stuff (FDI) is falling, bad stuff is rising (Portfolio Investment Liabilities, Other Liabilities and Total Liabilities)... But take a closer look at Foreign Direct Investment (FDI) into Ireland, and our Direct Investments out of Ireland:
No more comment needed.

The last standing is the pesky IFSC issue - is it a problem for clean Ireland Inc, or is it actually an asset for lagging Ireland Inc? Take a look:
Conclusion - obvious. Can we get the IFSC guys to run our domestic financial services sector? Please!

Why one has to love Ryanair? Because it does what it promises on the tin:
No comment needed. As always.
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