Friday, December 19, 2008

Ireland's Debt Mountain(s)

The latest CSO data merely confirms what we have known all along: Ireland is now by far the leading country when it comes to overall external debt held by its corporates, consumers and the Government. Our gross external debt has risen precipitously since the onset of the latest crisis from €1.537 trillion on January 1, 2008 to €1.671 trillion as of September 30, 2008. Some €21bn of this increase is accounted for by the State borrowing its way out of the need to reduce the runaway train of public spending. Roughly €25.3 bn came from the Monetary Authority.

Most worrisome were the increases of roughly €45 bn in the liabilities of the Other Sectors. This line of liabilities (up 4.13% between Q2 and Q3 2008) should have been rising at a much slower pace than the Gross External Debt (up 3.16%) if the households and firms were actually de-leveraging. Alas, this is not the case, suggesting that declines in households' incomes and corporate revenues are forcing the real side of Irish economy deeper into debt-dependency. This will have two implications on 2009 economic environment in Ireland:
(1) 2008 consumers' strike - leading to a precipitous collapse in retail sales - will continue as Irish households attempt to play catching up with de-leveraging that is well underway in the US and UK;
(2) Income tax hikes and VAT rates increases passed in the Budget 2009 will further exacerbate excessive debt burden problems, leading to slower, more painful de-leveraging of corporate and household balancesheets and prolonging the current crisis.

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