Sunday, July 13, 2014

13/7/2014: Deflating That Corporate Debt Deflation Myth


This week, the IMF sketched out priorities for getting Spanish economy back onto some sort of a growth path. These, as in previous documents addressed to Irish and Portuguese policymakers, included dealing with restructuring of the corporate debts. IMF, to their credit, have been at the forefront of recognising that the Government debt is not the only crisis we are facing and that household debt and corporate debt also matter. As a reminder, Irish Government did diddly-nothing on both of these until IMF waltzed into Dublin.

But just how severe is the crisis we face (alongside with Spanish and Portuguese economies) when it comes to the size of the pre-crisis non-financial corporate debt pile, and how much of this debt pile has been deflated since the bottom of the crisis?

A handy chart from the IMF:
The right hand side of the chart compares current crisis to previous historical crises: Japan 1989-97; UK 1990-96; Austria 1988-96; Finland 1993-96; Norway 1999-05; Sweden 1991-1994.

So:

  • Irish corporate debt crisis is off-the-scale compared to other 'peripherals' in the current crisis and compared to all recent historical debt crises;
  • Irish deflation of debt through Q3 2013 is far from remarkable (although more dramatic than in Spain and Portugal) despite Nama taking a lion's share of the development & property investment debts off the banks.
Now, remember the popular tosh about 'debt doesn't matter for growth' that floated around the media last year in the wake of the Reinhart-Rogoff errors controversy? Sure, it does not... yes... except... IMF shows growth experience in two of the above historical episodes:

First the 'bad' case of Japan:
 So no, Japan has not recovered...

And then the 'good' case of Sweden:
Err... ok, neither did Sweden fully recover... for a while... for over a decade.
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