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.

6/6/2014: Credit to Irish Resident Enterprises: Q1 2014

Since time immemorial (ok, since around 2009) Irish Government after Irish Government has been promising the restoration of functioning credit markets. Targets were set for the banks to lend out to non-financial (aka real economy) enterprises. Targets were repeatedly met. Banks have talked miles and miles about being open for lending, approving loans etc etc etc. And credit continued to fall and fall and fall...

And so the story repeats once again in Q1 2014. Central Bank latest data on credit advanced to Irish resident private sector enterprises attests to the lifeless, deleveraging-bound, zombified banking sector.

• Credit advanced to financial intermediation companies is down 3.63% in Q1 2014 compared to Q4 2014. This marks 9th consecutive quarter of declines. Since Q4 2008, credit has fallen in 11 quarters, and actually it has fallen in 12, since Q4 2011 rise was down to reclassifications being factored into the equation for the first time. Worse than that, majority of declines came since the current Government took office, not before. 
• Credit advanced to financial intermediation and property sectors fell 4.05% q/q in Q1 2014. The fall was steeper than in Q4 2013 compared to Q3 2013 and also marks ninth consecutive quarterly decline in the series or 11th if we are to control for 2011 reclassifications.
• Excluding financial intermediation and property, credit advanced to Irish resident non-financial companies ex-property sector has fallen 1.31% q/q in Q1 2014. This marks fourth consecutive quarterly fall. Credit to the real economy is now down in 20 quarters since Q4 2008. Since the current Government came into office, credit to these companies is down in 10 quarters out of 12.
• Total credit advanced to Irish resident enterprises was down 3.49% q/q in Q1 2014 - steeper than the decline of 3.07% recorded in Q4 2013, and marking ninth consecutive quarter of declines (11th, if reclassifications are ignored).

So keep that hope alive... one day, some day... things will be better. Do not forget to give credit to the Government and the Central Bank - they predicted this 'betterment' years ago and like a stopped clock, one day they will be proven right...

20/5/2014: Irish Credit Supply to Non-Financial, Non-Property Sectors

We keep hearing about banks lending to enterprises and the recovery in the banking sector in general. And we keep watching credit supply in the economy shrinking and shrinking and shrinking. The reality, of course, is simple: our banking system continues to deleverage and alongside, our companies continue to deleverage. This means that legacy debts relating to property investments and development are being washed off the books. Which, of course, accounts for property-related credit. But…

Take a look at this chart, plotting credit advanced to Irish private sector enterprises.

The property deleveraging story is in solid orange. And not surprisingly, it is still heading down. With all the fabled foreign and domestic property buyers reportedly killing each other on their hunts for bricks and mortar assets in Ireland, there is less and less and less credit available for the sector. In part, some of this decline is now being replaced by foreign funding (lending and equity, including private equity). But the credit story is still the same: property related lending is down 6% y/y in Q4 2013 (latest for which we have data).

Deleveraging in financial sector is also there - the sector credit lines have shrunk 15% y/y in Q4 2013.

But what on earth is happening in the 'healthy' (allegedly) sectors of the economy - those ex-Property and ex-Financial Intermediation? Here, total credit is down 4% y/y in Q4 2013.

In fact, from Q2 2009 onward, Irish financial system registered not a single quarter of y/y increases in credit supply to non-financial and non-property enterprises in Ireland. That's right: credit did not go up even in a single quarter. Worse, between Q4 2011 and Q4 2013, average annual rate of decline in credit to real economy was -4.0% which is exactly the same as in Q4 2013. In other words, even in terms of growth rates, there is no improvement. 

9/5/2014: Irish Credit Conditions Worsened in Q1 2014

Latest data on interest rates (covered here: http://trueeconomics.blogspot.ie/2014/05/952014-cost-of-credit-in-ireland-kept.html) and credit outstanding in the Irish banking system shows continued deleveraging in the economy:

At the end of Q1 2014,
-  Total volume of loans outstanding declined 5.6% y/y,
-  Loans to Households were down 1.54% y/y and
-  Loans to NFCs were down 9.29%.
-  Loans for house purchases were down EUR1.46bn,
-  Households' overdrafts rose EUR1.39bn, while
-  Consumer credit loans were down EUR1.43bn.
-  NFCs overdrafts fell EUR2.81bn and
-  Non-overdraft NFCs credit fell EUR5.2bn.

So credit available to enterprises and households in Ireland is still falling. More significantly, households are accumulating overdraft liabilities. And the cost of these facilities is rising.

Not a good sign, suggesting households and corporates are being squeezed on both ends of the debt deflation pump.