Monday, May 3, 2010

Economics 03/05/2010: World Debt Wish 6

Final part of the series presents two tables, which are largely self-explanatory.

The first table compares Irish Gross External Debt Liabilities to those of other 36 Most Indebted Countries, reporting these countries' GED as % of Irish GED. No adjustments for GDP etc are taken:
You can judge by yourself if Ireland is really economically mightier than Australia, or Argentina, or Brazil and so on...

The second table does two things:
First I reproduce the raw numbers for Ireland and for the group of 36 Most Indebted Countries across three categories of debt, total debt and GDP/GNP. I then compute the relative weight of Ireland in every one of these categories. Column 4 in the top part of the table shows the results as percentages. Thus, Ireland's General Government Debt accounts for 0.96% of the total General Gov Debt incurred by all 36 countries. Ireland's banks' debt accounts for almost 4% of the total banking sector debt for all 36 countries - a hefty weight for the country that has GDP share of the Group of 36 that is only 0.37% or GNP share that is just 0.30%. You can judge for yourselves if the private sector (other than banks) in Ireland is really that healthy to carry us out of the recession, but the figure of 5.88% representing the share of Irish real economy debt as a percentage of the real economy debt for all 36 countries is scary! Especially realizing that this makes our economy leveraged to the tune of 1960% compared to the rest of the world. Imagine having that level of LTV on your house?!

The second part of the table above shows Irish debt levels as percentage of Irish GDP and GNP. Our headline figure here is the level of absolute (not relative to other nations) level of leverage - that of 1,326% or x13.26 times if we are to continue imagining that MNCs-dominated sectors really do carry all activities billed through Ireland here in Ireland (in other words, if we are to use our GDP as income measure). Alas, were we to step down to earth and use our GNP as a metric for income, our level of leverage is reaching a frightening 1,617% or x16.17 times annual income. Compared to that, world's most indebted 36 nations have leverage of just 119%!

Still feel like sending some foreign aid to the Highly Indebted Poor Countries (HIPCs)? Or, for that matter, to Greece?

7 comments:

Anonymous said...

Great analysis.

A few questions and observations:

As you state the last time we lived within our means was 1999 and this was when debt started ramping up.
Why did it occur at that point in time?.Is it possible some policy changes like the repeal of the Glas Steagal act instigated the ramping up of debt.
Also your charts seemed to indicate a major step change from 2004 onwards re Irish debt levels.
Do you think the opening of labour market to the accession states in 2004 is the primary cause bearing in mind the fact that major immigration lead to a disproportionate level of economic activity directed towards construction from that point?

Also you point out the insanity of providing overseas aid at this time which is approx. 600 million euros.
About 80,000 non nationals are on the dole and many more are on long term unemployed who receive social welfare benefits ,more than half from the accession states.
Given some of these states have lower unemployment rates than Ireland (for example Poles are the highest number in Ireland yet Polish unemployment rate has been lower than Ireland for last two years) and that benefits are far lower in those countries, should transfers to unemployed non nationals which exceed tax and social protection payments by them be considered as overseas aid?

We are after all,in effect subsidising the Polish state by taking care of its unemployed citizens.

Sean.

Dr. Constantin Gurdgiev said...

Sean, I don't agree with some of your points. Debt ramp up happened for several reasons, in my view:
1) low interest rates set by the ECB;
2) bursting of the tech bubble setting off the initial demand - a pairing of the lack of real economic growth with available credit;
3) shift in development to credit-based growth model of construction sector etc.

I do not think 2004 accession of the Eastern European states had anything to do with the Irish willingness to pile on debt. Immigration did in the end come to reflect the unsustainable development patterns, but these patterns were in place before 2004. Furthermore, 2004 changes in immigration system did not push dramatically cost of labor in construction. Our construction workers remained grossly overpaid and unproductive. So it was not the supply of labour that drove up supply of housing.

In other words, I see immigration from Eastern Europe to be a response to the structural problems in the economy, not the causes of it.

The number of non-nationals on Live Register is large, but it is declining now. Back in 2004 referendum I advocated that we restrict non-nationals' access to welfare for the first 5-10 years of residency in Ireland. We did not - and that was a mistake. However, these workers have paid their taxes (though tax minimization by many construction firms meant that many of these workers were outside Irish tax net - either earning through Northern Irish contracts or in cash, or both) and have a legitimate access to welfare system here. We cannot and should not alter the terms of contract that we signed with them. But
a) we need to change these terms going forward, and
b) we should make certain there is no abuse of the system - workers who do not reside here should not be able to avail of welfare.

We also need to reform our welfare payments - levels and timing - to reduce the welfare trap effects of excessively high benefits. This should be done for all recipients - foreign and domestic ones alike.

You are correct - our system today subsidizes Polish state. But Polish state subsidized Ireland in the past by providing workforce for which previous generations of Irish did not have to pay (education, raising children etc). I am not sure where the net benefit/cost comes at, although there is no real reason for us to continue subsidizing anyone, let alone Poland.

Finally, I would also suggest that we should keep in mind that tens of thousands (might be even more) of Polish people are still working here, paying taxes and leading very productive lives. Many of them are moving up their careers ladders, attaining professional and educational qualifications and so on. So we should really be careful in distinguishing those who are here working and contributing to the improvement of their own lives and ours, and those who are now sitting out the crisis on welfare.

Jonathan said...

A sub of a foreign bank that borrows from it's parent to invest in foreign securities in its Irish sub should be excluded from the total debt stats.

These entities' debt is not repayable in any way by the Irish people and to the extent that they mostly buy international assets their activity does not affect the Irish markets either.

Anonymous said...

Hi Constantin

Insightful analysis as usual.

In the Euro Area are we looking at the prospect of ever widening yield spreads on spanish,italian and portugesse bonds causing capital flight and eventual debt auction failure?

Thus leading to a massive stimulus package from the ECB/IMF and resulting in a massive decline in the value of the Euro.

if so does the Euro have a future ?

Anonymous said...

Hi Constantin,

Very good series on Irish debt. Having read through them I would be interested to know what conclusion you draw overall. Can the private sector pull us out of recession? Are we in a downward spiral? Do you see Ireland heading for default?

Thanks,

Brian

Anonymous said...

Hello Dr Gurdgiev,

we are in a financial market panic at the moment. But when things calm down I hope your research is widely discussed. Please do not take offence when I say that I am hoping that, even excluding the banks, our level of indebtedness is not as extreme as shown. For the real sectors people have mentioned intercompany balances i.e. that multinationals could be in some way involved. If the level of debt is really that high I would second what Brian said above.
Are we in for a lost decade?

Kind regards,

Oliver

Anonymous said...

Also, could there be doublecounting? If our banks owe foreign lenders and the public owe the banks is this counted once or twice?

Oliver