Thursday, March 11, 2010

Economics 11/03/2010: Debt figures confusion reigns at RTE?

Per RTE report yesterday (emphasis is mine, see original here)

“New figures from the Central Bank show that at the end of January Irish residents - mostly companies and institutions - had an outstanding debt
of €1.1 trillion. Figures for issued debt securities indicate that €790 billion worth of this debt is denominated in euro, while the remaining €270 billion is denominated in foreign currencies."

This, indeed, is misleading enough for the non-economist. While RTE choice of words ‘outstanding debt’ might imply ‘total debt’, in reality, of course, the Central Bank note (available here) is dealing only with securitized debt: bonds, notes and debt securities issued, plus equity issued. But it does not include non-securitized loans, mortgages, corporate loans, over drafts, credit cards, corporate invoice-discounting, and even massive volumes of
investment fund shares/units.

This, if course, explains how the figures issued today differ from our real total debt measure: the Gross External Debt of all resident sectors, published quarterly (with one quarter delay) by CSO. Q4 2009 is still due for release later this month, but per
latest CSO data, in Q3 2009, the gross external debt of all resident sectors in Ireland stood at €1,637bn or €51bn down on the Q2 2009 level – some €537 billion more than what RTE’s note mistakenly labelled to be Ireland’s outstanding debt.

The liabilities of Ireland-based monetary financial institutions (aka our financial system inclusive of IFSC) were virtually unchanged quarter on quarter at €691bn with their share of total debt rising from 41% in Q2 2009 to 42% in Q3.

Similar dynamic took place in Other Sectors – comprising insurance companies and other financial enterprises, plus non-financial companies – where debt as of Q3 2009 stood at €618 billion or 38% of the total, up from 37% in Q2 2009.

Virtually all of the quarterly decrease in our indebtedness came from the Central Bank funds changes. This is why excluding the Central Bank and Government liabilities, total economy debt rose from €1.513 trillion in Q2 2009 to €1.508 trillion in Q3 2009.

Since Q3 2007, the overall debt levels in Other Sectors rose by a cumulative of 15.6%, in Direct Investment sector by 9.3%, and our total debt rose by 8.33%. At the same time, our wealth - or assets side - have collapsed by over 60%.

Only banks have so far managed to de-leverage in Ireland (down 9.8% on Q3 2007) thanks to the taxpayers’s cash. Which brings us to a sad but inevitable conclusion – while banks use our money to write down their bad debts, is it any surprise that the real debt burden in the Irish economy is not declining?

Now, paired with Central Bank information note, if we subtract from the total debt figure in Q3 2009 the approximate IFSC-related debt of €850-900 billion (reflecting both securitized and non-securitized debt held, keeping in mind that most of the IFSC debt is securitized), this leaves Irish resident companies, households, banks, financial services providers and the public sector in the hole for roughly €730-790 billion.

Take this into a perspective: this number is equivalent to

  • €165,273-176,485 debt per every man, woman and child in this country – resident and citizen (per latest CSO population data, here)
  • Assuming paydown in the amount of our annual public deficit projected for 2010, this debt mountain will take us 41-44 years to pay down without any interest accruing on it (just think of 44 years of austerity and you get the picture)
  • At the current interest rate charged on Government borrowing, the annual interest bill relating to our economy’s debt mountain adds up to €36.85-39.35 billion or more than 50% of the total annual Exchequer expenditure (just a reminder, we are being offered a plan to borrow more by the Letter of 28 - here - because, apparently, we have not borrowed yet enough)
  • Given the average family size in Ireland (2.82 persons per household) and the latest average house price (€242,000 per Q4 2009 daft.ie report), this level of indebtedness is equivalent to 2 houses per every family in the Republic
Shall I go on? Sadly, reading RTE report one might conclude that things are ok: most of our outstanding debt is owed by the IFSC, so no need to worry, folks. Alas, that would be as wrong as calling today’s data release from the Central Bank a true reflection of our debt mountain.
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