tag:blogger.com,1999:blog-2826531655042170344.post881315674410639315..comments2024-03-26T11:29:52.986+00:00Comments on Economic Incentives: The Level of National IndebtednessSeamushttp://www.blogger.com/profile/15679299530222667673noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2826531655042170344.post-5355713312962797972012-10-23T13:07:37.347+01:002012-10-23T13:07:37.347+01:00"Brian hayes made a comment on front line las..."Brian hayes made a comment on front line last night that our intrest rate repayments are already reaching 20% of general taxation.<br />I think that would mean he thinks we have hit the 10 billion already?"<br /><br />Two points:<br /><br />1) Interest Bill for 2012 is estimated at 7bn<br />http://www.finance.gov.ie/viewdoc.asp?DocID=7397&CatID=14&StartDate=1+January+2012<br />(PAGE 9)<br /><br />2) General Tax Revenues = Exchequer Revenues = approx 36bn.<br />Actual Goverenment income is closer to 55bn.<br />http://www.finance.gov.ie/documents/publications/other/spuapr2012.pdf<br />(PAGE 49)Rob Snoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-19370943396711485862012-10-23T11:51:56.911+01:002012-10-23T11:51:56.911+01:00Hi Seamus
I respect that you always try to give p...Hi Seamus <br />I respect that you always try to give people the figures without a suger coating. Its a very rare quality in economics where many show us figures that fit their analysis and ingore the rest. Even though I disagree with your final analysis.<br /><br />"The general government interest bill was €5 billion in 2010 and is expected to €10 billion by 2015"<br /><br /><br />Brian hayes made a comment on front line last night that our intrest rate repayments are already reaching 20% of general taxation.<br />I think that would mean he thinks we have hit the 10 billion already?<br /><br />I have been thinking about the household part too.<br />Its true you are correct to point out that 1/3 or the intrest payments are fixed on trackers and I dont expect them to rise any time soon (infact i think they will stay below 2% for ever unless there is breakup in the Euro but thats another story.) but there have been large increases in the intrest rates charged by banks on the other 2/3s in the last while.<br />if one third stays flat but 2/3 increase then that will lead to an increase. <br />I take your point on restructuring. That will lead to some reductions but I think the reductions will be fairly modest. AIB bank can only afford to write down 5-7 billion and they have no intention of doing that much. The interest payments on 5 billion at 5% per anum is only 250 million. Add in the other covered Banks i am guessing you might get up to about 700 million. <br />eamonnmoranhttps://www.blogger.com/profile/18384511877299598757noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-7475622385234764012012-10-22T18:31:48.408+01:002012-10-22T18:31:48.408+01:00@ Seamus
Thanks for that. I am not in a position t...@ Seamus<br />Thanks for that. I am not in a position to share info here. However, suffice it to say that, on the non-covered side where I have some intimate knowledge, provisioning is still hugely inadequate on both business and mortgage books. Looking at some of the better business books, best provisioning level has been circa 50-55%. More independent analysis has shown that up to 70-75% is required.<br />The covered banks will come in much worse in due course (of course).<br />While I admire your article for its logic and analysis, every academic economist I read consistently underestimates how bad the situation really is (and still is). Insider economists clearly cannot disclose confi info.<br />Note though -it has been clear for some time that Patrick Honohan & co. at the Central Bank are highly concerned with the mortgage default trajectory. <br /><br />The overall point is that the current spin on bank capitalisation is just that. Fixing things will require large amounts of further retained earnings or direct equity capital.<br /><br />What would be really great to see would be a "break" model analysis to emphasise the room for manoruvre. In fairness, John McHale & co. at the Fiscal Council have done some work on this, as per their recent report. However, they 'diplomatically' avoided showing a realistic break analysis. I understand that from a Government and Ireland Inc. point of view...in line with current Govt strategy to talk up the economy. However, is it not time for a more open and realistic analysis?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-65396886899594415712012-10-22T18:00:34.648+01:002012-10-22T18:00:34.648+01:00@eamonnmoran
Good point. Clearly variable rate mor...@eamonnmoran<br />Good point. Clearly variable rate mortgage holders have been negatively affected by significant increases in variable rate rate mortgages since 2010. God help the country if ECB rates increase over the medium term (never strategically contemplated notwithstanding the potential for huge future negative disruption, outside Ireland's control...all we get is the short view "It should also be noted that around one-third of the household sector debt is in incredibly cheap tracker-rate mortgages"). <br /><br />Then, the impact of grindingly high unemployment on default rates and continuing, accelerating immigration is ignored in the overall snalysis and hiding of true unemployment levels. <br /><br />The increasing negative economic trajectory continues to be demonstrated in numerous, objective ways e.g. retail numbers issued today. So when will the economic 'turn' begin. Kenny's meeting with Hollande today indicates that it will be at least a year more before any discussion on debt restructuring can be "possible". Seamus et al can therefore continue to hope and deny in the meantime. <br /><br />While therefore Eddie Hobbs' numbers can of course be criticised, perhaps his message is a necessary one to counter the continuing unrealistic optimism (delusion) of the establishment. Despite all this misplaced optimism driving official strategy, the continuing negative variances versus budgets and projections, etc. are airbrushed over (as in Seamus' article above) in favour of 'hope value' rather than reality.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-23859574111591839432012-10-22T17:51:11.741+01:002012-10-22T17:51:11.741+01:00Hi eamonn,
Yes, the €16.2 billion interest total ...Hi eamonn,<br /><br />Yes, the €16.2 billion interest total is a 2010 figure but at least it is verifiable. Go back to 2008 and the total was €21.5 billion. However in June 2008 the ECB rate was 4.25%; it is hard to see that level being reached in the medium term.<br /><br />The general government interest bill was €5 billion in 2010 and is expected to €10 billion by 2015 (I would make the point that more than €1.5 billion of that is interest on the Promissory Notes which is paid to the 100% state-owned IBRC but that would get us down a siding we don't want to travel).<br /><br />Even if there are interest rate increases for the household and business sectors these will be offset by repayments and writedowns.<br /><br />In 2008, the household sector paid €9.7 billion of interest and the business sector paid €9.6 billion of interest. Interest receipts were €2.7 billion and €1.5 billion respectively.<br /><br />The interest bill of the household and business sectors may increase from the €4.9 billion and €6.3 billion figures recorded for 2010 but I can only see the increases being modest at best. With so much of the business lending concentrated in property-related sectors some repayments and write-offs are going to be the order of the day rather than interest payments.<br /><br />As the eurostat data is added to over the next few years I think it would be surprising if the interest bill for the economy got back to 2008 levels (€21.5 billion). Whatever way you look at it, it is a long way short of €39 billion.Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-26823248761249153932012-10-22T17:33:20.573+01:002012-10-22T17:33:20.573+01:00Hi Anonymous,
The provisions for the non-covered ...Hi Anonymous,<br /><br />The provisions for the non-covered banks are for their entire loan books and not just their business lending. Their full loans books added to €126 billion. While the provisions may appear low they are from March 2011 so they would have been increased since. Details of the provisions in the covered and non-covered banks can be seen <a href="http://economic-incentives.blogspot.ie/2012/02/reducing-debt.html" rel="nofollow">here</a>.<br /><br />The point about the provisions is that it is expected that a huge amount of loans issued into the Irish economy will never be repaid. I can't see that saying there will be massive loans losses in Ireland is optimistic. <br /><br />Between the NAMA transfers (c.€42 billion), the AIB/BOI/EBS/PTSB stress tests (c.€40 billion), the Anglo/INBS stress tests (c.€13 billion) and the original provisions in the banks it can be shown that more than €100 billion of loans losses in the covered banks have been accounted for (see <a href="http://economic-incentives.blogspot.ie/2011/06/over-100-billion-of-bank-losses-now.html" rel="nofollow">here</a>). As stated, the non-covered banks comprise around one-third of the Irish banking system and their losses are additional to that. <br /><br />Let's say they're not as bad as the covered banks and end up with €30 billion of losses. That would be €130 billion of loan losses on an aggregate loan book of €540 billion. <br /><br />A goodly portion of these loans were not issued in Ireland. For example the four banks in last March's stress tests had about €45 billion of mortgages in the UK. The loan losses will be mainly in Ireland so the €130 billion will be concentrated on a narrower portion of the loan book. <br /><br />The country is prepared for €130 billion of loan losses. I don't know what the final outcome will be and facing up to the debts that will never be repaid needs to be accelerated.<br /><br />Do you have an estimate of aggregate loan losses (with a covered/non-covered breakdown) you think the Irish banking system will have to absorb as the crisis plays out?Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-11182421539831705292012-10-22T17:11:14.227+01:002012-10-22T17:11:14.227+01:00Hi Seamus
The big problem I see with your 16 billi...Hi Seamus<br />The big problem I see with your 16 billion figure is that its a 2010 figure.<br /><br />Fair enough, if its the latest available but you are ignoring the very likely trend at least on government dabt.<br />We know that the interest as a % of GGD has risen rapidly and IS SET TO CONTINUE A RAPID UPWARD TREND. According to a report on Finfacts i found the NTMA in 2009 expected the interst payments as a % of geneal tax receipts to raise from 3.8% to 20% in 2013<br />We can see the massive actual growth in previous years below.<br />http://www.ntma.ie/business-areas/funding-and-debt-management/debt-service/<br /><br />Are the interestpayments for corporate and household debt set to increase also? <br /><br /><br /> eamonnmoranhttps://www.blogger.com/profile/18384511877299598757noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-75968719275205978362012-10-22T13:51:05.892+01:002012-10-22T13:51:05.892+01:00@ Seamus
"The non-covered banks comprise abou...@ Seamus<br />"The non-covered banks comprise about one-third of the Irish banking market and they have already made provision for close to €25 billion of loan losses."<br />Accepting your figure of €170bn corporate debt and that the non-covered banks hold 1/3 of that or €57bn. The €25bn provisioning /write-off level for the non-covered banks indicates only aggregate average 44% provisioning /writeoff, after 4 years of crisis and recession. That's shockingly low but isn't too far from what those in the know privately indicate (some of the non covered banks are well short of this %). Unfortunately, that is nothing to be optimistic about. There is a huge way more to go in writing down debt. Do you have any data for the covered banks' provisioning level?<br />Beyond that, the Irish central bank is right to demand quicker write off against the capital of the covered banks. Kicking the can down the road on provisioning is just adding to losses as property values fall, etc with more to come as the Budget and subsequent adjustments accelerate economic deterioration.<br />Your acknowledgement of the awfulness of the €500bn of debt and €16bn of interest is noted. However, the overall trajectory remains 'awful' also. Optimism /talking up the country's economy is all very well. However people like yourself and Mr. McHale & co. who have influence with the Government should be preparing the country for the worst rather than hoping for the best. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-84015222485175463832012-10-20T23:08:36.168+01:002012-10-20T23:08:36.168+01:00Hi Joseph,
The €170 billion figure is my estimate...Hi Joseph,<br /><br />The €170 billion figure is my estimate of the current debt of the non-financial corporate (NFC) sector. We know that at the peak banks in Ireland had issued €175 billion of loans to Irish companies. To this we have to add debt raised by issuing bonds and loans obtained from banks outside of Ireland. <br /><br />The Irish corporate bond market is quite small and it is likely that Irish businesses obtain most of their loans from Irish resident banks.<br /><br />The CSO put <a href="http://www.cso.ie/en/media/csoie/releasespublications/documents/economy/2010/isanonfinfin2010.pdf" rel="nofollow">the total debt of the NFC sector</a> in 2007 (year of GDP peak) at €213 billion. This can be used as an estimate of peak NFC debt for Irish companies (and only if we assume that MNC debt was zero at this time).<br /><br />From <a href="http://www.centralbank.ie/polstats/stats/cmab/Documents/ie_Table%20A.14_Credit_Advanced_to_Irish_Resident_Private-Sector_Enterprises.xls" rel="nofollow">the Central Bank data </a> we know that lending to non-property related sectors has dropped by €21 billion since 2008 (€60 billion to €39 billion). Lending to property-related sectors has fallen from €115 billion to €57 billion, but most of that can be explained by NAMA loan transfers out of the bank and the closing of Bank of Scotland (Ireland). The transaction data from the Central Bank shows a fall of €6 billion in property-related lending. It is hard to know what drop has happened to the NAMA and BoSI loans but repayments and/or writedowns could bring the total drop in business lending to around €35 billion.<br /><br />The €170 billion figure takes the peak bank lending figure to the NFC sector of €175 billion, subtracts the €35 billion reduction outlined above and makes allowance of directly issued debt and borrowing from non-Irish banks to reach the €170 billion figure. This isn't a science but it is a better reflection of Irish business debt than a figure of €467 billion!<br /><br />As to the sectoral issues you outline. I don't think any table from the Money, Credit and Banking Statistics are useful for that purpose. I would recommend the sectoral financial accounts of either <a href="http://www.cso.ie/en/media/csoie/releasespublications/documents/economy/2010/isanonfinfin2010.pdf" rel="nofollow">the CSO</a> or <a href="http://www.centralbank.ie/polstats/stats/qfaccounts/Pages/Data.aspx" rel="nofollow">the Central Bank</a>. They are largely compatible outside of a few coverage and definition issues.<br /><br />Using the CSO data the net financial position of the sectors for 2010 are:<br /><br />Household: +€117.2 billion<br />Non-financial corporate: -€192.8 billion<br />Financial corporate: -€3.6 billion<br />Government: -€77.6 billion<br /><br />The NFC figure might look bleak but liabilities are only offset by financial assets. Companies could have non-financial assets to offset the debt. In the Irish data aircraft leasing companies could have large financial liabilities (debt) and equally large non-financial assets (aircraft) that are not included above.<br /><br />Also companies don't need cash or assets to cover their debts. Firms with negative net financial position can be service and repay their debts from future cash flows. The Irish banks chased asset-based lending during the boom and now need to re-orientate to cash-flow-based lending.<br /><br />For the household sector the value of housing is not included so that the net 'wealth' figure of the household sector is much larger (maybe €300 billion) than the figure given above.<br /><br />The household sector is deleveraging. Again according to the CSO data loans to the household sector peaked at €202.6 billion at the end of 2008. In the two years after that it had fallen to €185.5 billion. The official 2011 data will released shortly and a further drop can be anticipated.<br /><br />We know that lending to the business sector is tight similar drops in the credit outstanding to private sector enterprises is recorded in the Central Bank data.Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-43049584344840773742012-10-20T22:15:14.054+01:002012-10-20T22:15:14.054+01:00Thanks artied,
I'm not sure about the Twitter...Thanks artied,<br /><br />I'm not sure about the Twitter machine. I've had that account for a couple of years but it was only this evening that I realised the importance of filtering emails from Twitter away from my Inbox. The above post has over 2,500 words (not all mine). I'm not sure I have the discipline for 140 characters!Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-292865092147230432012-10-20T21:48:56.071+01:002012-10-20T21:48:56.071+01:00Seamus
"At the peak, banks in Ireland had iss...Seamus<br />"At the peak, banks in Ireland had issued €115 billion of loans to property-related sectors. Most of this is still included in the €170 billion figure"<br />I don't fully understand where you get the €170 billion figure.<br />The Central Bank (latest) report(table A1) gives the NFC loans at ~86 billion at the end of July. What other figures are added to get to the ~€170 billion figure.<br /><br />Another question, if I may, again from the CB report (July 2012 Table A1). This concerns what I would refer to as 'sectoral financial balance', the three sectors being household, NFC, and Ins corp / other.<br />The loans-Deposits-Net figure for each are given below:<br />Household: Loans 106, Deposits 92, Net -14 billion<br />NFC : Loans 86, Deposits 31, Net -55 billion<br />Ins/Other: Loans 119, Deposits 43, Net -76 billion<br />Total Loans 311, Deposits 166 Net -145billion.<br /><br />I wonder have I got these figures right. Can they be interpreted as follows:<br />The household sector is neatly in balance, the NFC sector is heavily 'subsidised' in liquidity provision, and the 'Insurance' sector either has taken a hugely disproportionate amount of liquidity out of the country or is being heavily subsidised in terms of liquidity provision by 'official' funding.<br /><br />I find the NFC imbalance unusual. Could it be case that this sector is holding its deposits outside the country, or is hiding losses. i.e its loans will not be repaid.<br /><br />I would welcome as post on the entire subject, as from my own humble interpretation, it seems to me that householders are being rapidly deleveraged, while two other sectors seem not to deleverage or to be holding significant funds outside the country. <br />Joseph Ryanhttps://www.blogger.com/profile/07581632829548894401noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-35889443920434271452012-10-20T20:31:25.609+01:002012-10-20T20:31:25.609+01:00Many thanks for the depth and clarity of this post...Many thanks for the depth and clarity of this post, Seamus.<br /><br />Looking forward to the 'tweets'....!artiedhttps://www.blogger.com/profile/13045918375034490655noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-64157145068884524122012-10-20T18:09:23.586+01:002012-10-20T18:09:23.586+01:00Thanks Owen,
I'm not sure going through the n...Thanks Owen,<br /><br />I'm not sure going through the numbers makes much difference for anyone in Ireland. We're in a deep hole and all that is really happening here is a sideline argument over how deep it is. I think it is important as the gross figures can be presented in a way that makes our predicament utterly hopeless.<br /><br />Incredibly, the Eddie Hobbs article appeared exactly 52 weeks after <a href="http://dealbook.nytimes.com/2011/10/14/a-call-for-a-write-down-on-irish-debt/?hpw" rel="nofollow">this</a> appeared in <i>The New York Times</i>:<br /><br />Mr. Mathews estimates that if you include household and nonfinancial corporate debt, Ireland’s total debt burden is a shocking 490 percent of its G.D.P. — which, he claims, makes Ireland the most indebted country in the world.<br /><br />Peter actually misrepresented the answer to <a href="http://www.kildarestreet.com/wrans/?id=2011-09-14.922.0" rel="nofollow">one of his PQs </a> which was in terms of GNP. Even then the use of the gross figures is inappropriate and I made a limited attempt to reply in <a href="http://www.irisheconomy.ie/index.php/2011/10/14/nyt-a-call-for-a-write-down-on-irish-debt/" rel="nofollow">this irisheconomy.ie thread</a>. There is <a rel="nofollow">one interesting link</a> towards the end of the thread which provides the following quote:<br /><br />Combined Government, household and domestic non-financial corporations’ debt in Greece stood at 273% of GDP in January 2011. In Ireland the same figure was 400% relative to GDP and 494% relative to GNP.<br /><br />The inclusion of the word 'domestic' belies what the source data actually represents. We're in a mess but figures appearing in the NYT and WSJ that suggest the real level of debt in the Irish economy is something around 500 percent of GDP are not helpful. Any readers who are reasonably clued in but not familiar with the Irish situation would be left with little conclusion but that the position here is hopeless.<br /><br />We are in a deep hole but it can be worked through. Usually, it is possible to get a snapshot of the real gross indebtedness of an economy by adding the household, government and corporate debt levels. Financial sector debt is left out as that usually results in double counting of debts. However, the links between our government debt and the bad loans from the household and corporate sectors means that such double-counting will be a factor until the loan losses are recognised for the private sectors. Accounting for this is not easy but it should be pretty easy to acknowledge that the massive corporate debt figures attributed to Ireland (which give rise to the 500% figures) actually have little relevance to the real economy.Seamushttps://www.blogger.com/profile/15679299530222667673noreply@blogger.comtag:blogger.com,1999:blog-2826531655042170344.post-86882717637727201972012-10-20T14:30:35.675+01:002012-10-20T14:30:35.675+01:00Brilliant post Seamus. Using IMF or BIS data for I...Brilliant post Seamus. Using IMF or BIS data for Ireland is always dangerous given the lack of nuance on international sectors based here. Using this data suggests people either don't actually understand how to use the data, or they are deliberately trying to push an agenda.Owen Callannoreply@blogger.com