The trouble with debt

NAMA has begun the process of buying toxic debt from our ailing financial institutions.  The first tranche sees €16 billion in loans being bought for a price of €8.3 billion – a ‘haircut’ of 47%.  This €8.3 billion is being borrowed to finance these purchases.  In essence, public debt is being created to buy private debt which may or may not be paid back.

Three years ago the amount of money being borrowed by Johnny Ronan, Liam Carroll, Bernard McNamara and their ilk had no effect on the ‘man on the street’.  With NAMA buying the loans issued to these developers with public debt it is not only Johnny Ronan who is taking a kick in the groin.

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Can we measure Private Sector Credit in Ireland?

One of the most commonly used measures of the “bubble economy” in Ireland was the expansion of private sector credit in Ireland.  This is the total amount of money lent to Irish residents from our financial institutions.  The pattern on this variable for the past decade is very clear.

Private sector credit rose continually from €100 billion at the start of the decade to break through the €400 billion mark towards the end of 2008.  This has been a fall back since then, and the most recent figure from February is €365.5 billion.  This has occurred because repayments on existing debt have been more than the issue of new loans and because the banks have begun to slowly write down the value of bad debts on their balance sheets.
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Is Eurozone inflation about to become an issue?

Eurostat today released a flash estimate of Eurozone inflation for March.  They estimate the annual rate of inflation to be 1.5% – a big jump from the 0.9% rate recorded in February.

From an Irish perspective the important thing is not necessarily the factors that determine the rate as we are a small proportion of the Eurozone (<2%).  Rather the issue is the impact the rate has on ECB interest rate policy.

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CSO Data from last week

The CSO were busy last week with a lot of key economic data released.  The data published included

• Quarterly National Accounts (Q4 2009)
• External Trade (Jan 2010)
• Balance of Payments (Q4 2009)
• Quarterly National Household Survey (Q4 2009)
• Construction Output Index (Q4 2009)

Below is a set of slides on some key indicators using the updated data series.  I may add commentary on some of the patterns at a late date but for the moment I will allow the reader to draw their own conclusions.

CSO Data March 2010

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Cooking the books

Today has been a tumultuous day on the economic front with public sector pay negotiations concluding, Quinn Insurance going into administration, and, of course, all the banking and NAMA related announcements.

The biggest of these is undoubtedly the latter of the three.  The numbers used in today’s analysis of the Irish banking failure are staggering.  The ‘Big Bang’ was that Anglo Irish Bank will require anything up to an additional €10 billion on top of the €8.3 billion it will receive “this week”.  With €4 billion given to the bank last year this is a total state contribution of €22.3 billion.

Yet, in interviews after today’s statement, the Minister for Finance, Brian Lenihan, said that today’s measures would not lead to any additional borrowing by the National Treasury Management Agency on behalf of the State.

The borrowing projections for the year were outlined in the Budget and are best seen from Table 10 of the Stability Programme Update (page 19).  The actual outturn for 2009 and the projections for 2010 are given below.  The table in the SPU also gives projections for 2011 to 2014 but the European Commission has already rubbished these as being based on overly optimistic growth predictions.  Anyway here’s my version of the table.

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