10/9/2012: Irish Households Debt Overhang: IMF note

IMF published today three papers relating to Ireland's economy. Each of interest on its own merit and I intend to blog about them.

However, here's a chart that actually summarizes pretty well both the extent of the Irish crisis and the sorry state of affairs expected as we exit it:

Here's IMF's explanation for the household deleveraging process out of what is - by the standards of the chart above - a historically unprecedented debt overhang.


"Under the current forecast, households would reduce debt gradually from about  210 percent of disposable income to 185 percent by 2017. Building on the forecast of the
savings rate, the debt path is calculated based on the IMF desk forecast for a muted recovery
of disposable incomes at below GDP growth. Further, the debt path assumes that households use about half of their savings to retire debt, and new lending growth remains moderate, increasing from 1.6  percent of GDP in 2012 to 5.3 percent by 2017."

Now, give it a thought, folks.

1. Irish crisis in mortgages is well in excess of anything represented in the above chart;
2. Irish deleveraging over 9 years (2009-2017) will yield mortgages debt reduction of just 25 percentage points even if we use half of our entire savings to pay down the debts;
3. This painful deleveraging will still Ireland's mortgages markets in wore shape in 2017 than the second worst peak  of the crisis (the UK) back in 2007.

And here's the chart showing that all the debt paydown to-date has had zero effect on arresting the degree of Irish households leveraging (debt/asset value ratio) as underlying asset values of Irish properties continue to fall:

It is clear from the above that the Irish Government is out to lunch when it comes to dealing with the most pressing crisis we face - the crisis of severe debt overhang on households' balancesheets.