Deposits in the Covered Banks

The graph of total deposits in all banks operating in Ireland paints an alarming picture.

At first glance this would give rise to notions of a bank run.  We examined this in detail using last month’s figures and concluded that it was mainly due to a reduction in deposits from non-resident monetary financial institutions and about half of the decline could be attributed to non-domestic banks with operations in Ireland. 

It could be because these depositors have withdrawn their money from Irish banks or because Irish banks have not aggressively sought to extend these deposits, and instead have turned to the cheaper funding available from the ECB.  Most banks would prefer not be extensive and prolonged users of the ECB lending facilities because of the reputational damage this would cause, but the Irish banks have no reputation to lose.

Anyway, this month’s release from the Central Bank allows us to monitor the trends in deposits in the six covered institutions (AIB, BOI, Anglo, INBS, PTSB and EBS).

When looking at the drop in deposits that has occurred in domestic banks over the past six months we see that, by and large, this is a phenomenon that has affected the covered banks.  Almost three-quarters of deposits in domestic Irish banks are held in the six covered banks.  These banks had deposits of €414 billion last July.  By January, this had fallen to €319 billion, a drop of €95 billion. 

By contrast deposits in the non-covered banks (ACC, Barclays Ireland, Danske Bank A/S, Investec Bank (Ireland), KBC Bank Ireland, Northern Rock, Rabobank, Ulster Bank, Credit Unions) fell from €114 billion to €90 billion, a drop of €24 billion.  The proportionate drop in deposits in the covered institutions was 23%, with a 21% drop in deposits in the non-covered institutions.  Who has taken their money out of the banks?

Deposits from all sources have declined since August 2010, but the drop in deposits from non-eurozone residents (€59 billion or 40%) is greater than withdrawals by Irish residents (€25 billion or 10%) and other eurozone residents (€12 billion or 68%).

For total deposits in the Irish banking system the Central Bank provide a breakdown by depositor category for the above three groups.  These categories are monetary financial institutions, private sector and general government.  Here we update the graph for the deposits of non-eurozone residents in Irish banks. (Note that this relates to all banks operating in Ireland.)

It is pretty clear that it is other financial institutions who have undertaken the greatest reduction in their deposit holdings in Irish banks and that this has accelerated since the first guarantee expired last August.  What we do have is a breakdown of deposits by category for Irish residents.

General government deposits have been largely unchanged and hovered between €2 and €3 billion.  The €25 billion drop in Irish resident deposits in the covered banks can be split as €9 billion from financial institutions and €16 billion from the private sector.  For total deposits we get a breakdown of private sector deposits by household and business but this is not available for the private sector deposits in the covered banks.  Anyway, there has been some drop in Irish resident deposits in the covered banks it is not (yet?) at a rate to suggest a domestic bank run is underway.

It is non-eurozone deposits that have left the domestic banks and this €95 billion is the second reason that the covered banks have been turning to the ECB and Central Bank of Ireland for funding.  They needed the money to pay the bondholders and depositors back.

Bonds Issued by the Covered Institutions

When the December release of the Central Bank’s Credit, Money and Banking Statistics were released we examined the bonds issued by domestic banks in this post that garnered some attention.  The January release published today allows us to explore patterns in the amount of bonds issued by the six covered institutions.  This was previously not possible as a breakdown by covered and non-covered domestic banks was not provided.

Here are the total debt securities issued by the covered banks.  These graphs just give the total amount in issue by the covered banks.  It does not show the difference between guaranteed and unguaranteed debt.

After showing an alarming decline in the last six months of 2010, it seems that the amount of bonds issued by the covered institutions increased by about €17 billion in January.  Technically this is true but it doesn’t mean we have another €17 billion of bondholders to “burn”.

This see why, here’s a breakdown of who holds the €79.1 billion of total bonds in issue from the covered banks.

The big change is seemingly in holdings of covered bonds by Irish residents.   These figures now suggest that nearly two-thirds of the bonds are now held by Irish residents.  We estimated that this was just over one-half a month ago.  Have Irish residents suddenly got a new appetite for owning these bonds?

In general we cannot say who actually owns these bonds.  Some have tried to suggest that these bonds are owned by Irish credit unions and pension funds.  We cannot tell from the figures available.  However, we can make a fairly solid judgement on who owns the increased €17 billion in bonds that appeared in January.  It is the banks themselves!  See this report:

IRISH BANKS are issuing bonds to themselves under the Government guarantee to borrow cheaply from the European Central Bank and to avoid drawing more heavily on emergency lending from the Irish Central Bank.

Four banks issued bonds worth €17 billion to themselves last month under the Government’s extended guarantee, the Eligible Liabilities Guarantee, to use as collateral to borrow from the ECB.

All the bonds mature in April and May when the details of the banks’ plans to sell off assets and shrink the size of their businesses must be agreed under the EU-IMF bailout deal.

Bank of Ireland issued the largest amount, €9 billion, on four bonds on January 26th. AIB issued €2.63 billion on January 25th, Irish Life and Permanent €3.1 billion the following day and EBS building society €1.7 billion on January 28th.

So while this graph of the residency of the owners shows a huge jump in January it is due to some balance sheet acrobatics on the side of the banks.

One statistic that remains is the hugely reduced possibility of making external bondholders “share the burden”.  In August 2008 holdings by residents outside of the Eurozone (mainly London) held €68 billion in bonds issued by the covered banks.  The January 2010 figures show that this is now €19 billion – a reduction of €49 billion. Most of this money was repaid in full, including €750 million to bondholders in Anglo Irish Bank a few weeks ago.  The repayment of these bonds is part of the reason why Irish banks have turned to the ECB for emergency funding.  Next we turn to the other reason.

Balance Sheets of the “Covered” Banks

The Central Bank have released their Credit, Money and Banking Statistics for January.  We have looked at these before.  This month, however, for the first we are provided with a breakdown of some data for the banks covered by the Eligible Liabilities Guarantee.  The release from the Central Bank details this addition and some caveats about their interpretation.

In this release, a further subdivision relating to the six banks covered under the Government’s guarantee schemes, (described as the Covered Institutions) is presented for the first time in Table A.4.2. It is important to note that these Money and Banking Statistics cover banks’ operations within Ireland only. In line with the recognised international standards for Money and Banking Statistics - intra-group assets and liabilities, including those vis-à-vis group members both within and outside Ireland, are recorded in full, on a gross basis in these tables.

We present some of the new figures here.  First up are the total liabilities of the six covered institutions which are almost identical to the total when the original “blanket” guarantee was introduced in September 2008.

The next graph gives the breakdown of these liabilities by type and we see that they has been a change in the mix of liabilities on the covered banks’ balance sheets.

Deposits are by far the greatest liability the banks have but with the expiry of the original guarantee in August these have shown a rapid decline of nearly €100 billion since then.  We can also see the declining importance of Debt Securities (bonds) over the period, although there was a large jump in January (not shown on the diagram). 

The liabilities that have taken the place of the deposits and bonds are Eurosystem Liabilities which were €93 billion in January and Other Liabilities of €82 billion which includes the Emergency Liquidity Assistance from our own Central Bank.  We will look at these liabilities in more detail in subsequent posts.

2010 External Trade Figures: Dipped in Chemicals

The CSO have released the preliminary 2010 External Trade figures.  They show a record trade surplus of €44.7 billion.  This is up on the 2009 surplus of €39.2 billion and nearly €20 billion ahead of the pre-crash surplus of €25.7 billion recorded in 2007.  If one was to report a positive economic indicator for the Irish economy, our surging trade surplus would be it.

The trade balance is significantly ahead of the levels recorded at the end of the export-led Phase One of the Celtic Tiger in 2002.  As the construction- and credit-fuelled Phase Two of the Celtic Tiger took hold from 2003 to 2007 the trade balance fell.  However, since the onset of the current recession the trade balance has gone into a steep incline and this has made a substantial positive contribution to our growth figures (though one that has been swamped by the collapse of some sectors of the domestic economy).

So the prospects of the much-claimed “export-led recovery” must be good, right?  Not quite, I’m afraid.  The trade balance is the difference between exports and imports.  If we look at these we see that the current increase in the trade balance is not due to the same factors that drove the increases during the Celtic Tiger Phase One.

The period from 1995 to 2002 was characterised by rising exports and imports, with the faster rate of rising exports increasing the trade balance.   Irish export growth stalled in 2002 (and has not recovered) and in the period 2003 to 2007 the trade balance narrowed as imports rose.  Finally, it is pretty evident that since 2008 the huge increase in the trade balance has very little to do with a stellar export performance (strong, resilient, and robust are popular descriptors).  Instead, the trade balance increased because imports collapsed.

Imports are now back to a level last seen in 1999 and while some might be crowing about our export performance, Irish exports in 2010 were lower than they were in both 2001 and 2002.   While a growing trade balance is good for growth arithmetic, it does not have a significant real effect on the economy if it is based on falling imports.  For an analysis of this see our post on Ireland’s import performance from back in January.  This gives a different insight to the otherwise positive spin that has been put on our trade figures and why this drop in imports is actually bad for the economy.

Here, we will continue with some analysis of the monthly trade figures from the CSO release.

The drop off in imports since 2007 is self-evident.  The performance of our exports has been relatively stable for the five years shown, though the slight decline that was seen towards the end of 2009 has been reversed and exports in 2010 (€90.0 billion) were very slightly ahead of the those from 2007 (€89.2 billion).  A “export-led recovery” will need a bit more than a 0.9% increase in exports to make any dent on our employment crisis.

Here comes the good news again but this time in monthly figures.  Our monthly trade surplus is now up to around €4 billion a month.

As per usual it is important to consider the key sectors in our merchandise exports.  Of course, in Ireland’s case it’s actually just one sector.  With only preliminary figures available for December, data by category until November 2010 has been published and this is shown in the following graph.

Nearly 60% of Irish merchandise exports are accounted for by one category – Chemicals and Related Products – and this category itself is dominated by one sub-category – Medical and Pharmaceutical Products.  See a previous post for the the impact of the chemical and pharmaceutical sector on the Irish economy using Forfás data.

Here are our pharmaceutical exports since 2005.

It would be great if employment in this sector was also close to doubling since 2007 but it is unchanged – the same workers are generating nearly twice as many exports.  In fact, workers in the chemical sector make up about 1% of the workforce and generate nearly 60% of our trade exports.

If we take out the capital intensive chemicals sector from out export figures and see what has happened across the other sectors we do not see the “strong, resilient and robust” performance that is frequently referred to.

 

In 2007, exports excluding chemicals were €43.6 billion in the first 11 months of the year.  In first 11 months of 2010 the equivalent figure was €33.6 billion – a drop of 21.1%.  Not much sign of strength here.  The “recovery” in 2010 has seen a rise of 0.6% in these exports on the 2009 figures.

Irish export figures are been masked by the dominating effect of the high value chemical and pharmaceutical sector.  If we take this sector our (which is “booming” but has added zero jobs) our export performance is scratchy at best.  If we take this one sector out of the trade balance what do we see?

Yikes.  For the first 11 months of 2010 Ireland had a total trade surplus of €41.2 billion.  Take the impact of chemicals out of that and there was a trade surplus of only €268 million.  The trade balance in the chemicals sector is equivalent to 99.4% of Ireland’s total trade surplus.  Any chance of an extension on those patents??

Bank Liabilities and “Big European Banks”

As of the end of December, domestic Irish banks had total liabilities of €742.5 billion.  Here is the list of banks included in this total.

ACC Bank plc
AIB Mortgage Bank*
Allied Irish Banks plc*
Anglo Irish Bank Corporation plc*
Anglo Irish Mortgage Bank*
Bank of Ireland Mortgage Bank*
Barclays Bank Ireland plc
Danske Bank A/S
EBS Building Society*
EBS Mortgage Finance*
ICS Building Society*
Investec Bank plc (Irish Branch)
Irish Life & Permanent plc*
Irish Nationwide Building Society*
KBC Bank Ireland plc
Northern Rock plc
Rabobank Nederland
The Governor and Company of the Bank of Ireland*
Ulster Bank Ireland Limited
Credit Unions

55% of the banks on the list are covered by the bank guarantee scheme but the Central Bank do not provide data on what proportion of the total bank liabilities are due by the guaranteed institutions.  It could be more than 55%, but we don’t know.  The only thing we can really say is that 100% of the liabilities in these figures are not against the guaranteed (and likely nationalised) banks. 

To give some insight into this at the time the blanket guarantee was introduced in September 2008, the total liabilities of domestic banks was €787 billion.  We know that that guarantee covered approximately €440 billion of liabilities.  This suggests that 56% of the total banking liabilities were covered by the guarantee.  We do not know what has happened to this ratio since then and the scale of the guarantee was subsequently reduced.

Here is a breakdown of the current €742.5 billion of liabilities on domestic banks’ balance sheets.

The money owed to the Irish Central Bank under the Emergency Liquidity Assistance programme is under ‘Other Liabilities’.  The smallest liability category is ‘Debt Securities’ which includes the much maligned bondholders.  Here is how total liabilities of domestic banks have changed over the past three years.

What is also important is who is actually owed this money.  First up we can divide it between Irish resident, non-resident and Eurosystem liabilities.

Of the total liabilities of Irish banks, 63% are now owed to Irish residents.  There has been a number of claims that the “Irish bail-out” has been orchestrated to save “big European banks”.  Looking at the above does suggest that it is non-residents who are getting out (unscathed?) from the Irish banking market, with liabilities to non-residents dropping from around €406 billion in October 2008 just after the guarantee was introduced, to less than €190 billion now.   But how much of this was owed to European creditors?

We can breakdown deposits and debt securities into holdings by Other Eurozone and Rest of the World residents.  We cannot do the same for the capital and reserves or other liabilities categories but these only make up €21.5 billion of the total of €189 billion of non-resident liabilities in domestic banks.  So how is the remaining €168 billion distributed?  Is this the money that needs to be paid back to rescue “big European banks”?

Erm, it appears not.

Of the liabilities included only 15.6% are owed to other Eurozone residents.  The greatest bulk of it is due residents from the rest of the world (€26.3 billion versus €141.6 billion).  Liabilities to Other Eurozone residents have dropped by €32.3 billion since the €58.6 billion that was outstanding at the time of the guarantee. 

This is dwarfed by the €182 billion drop in liabilities to rest of the world residents since October 2008 this stood at €323 billion.  The accelerated decline since August 2010 is once again noticeable.  The inclusion of the €21 billion of capital and reserves and other other liabilities for which the Eurozone/RoW breakdown is not available is not large enough to change this.

Of course, this is not a firm conclusion and the money could be arriving here from “big European banks” via international markets and placed under the Rest of the World category.  As London is outside the Eurozone and classified as Rest of the World this could be an important consideration.

Disappearing Bank Bonds

The vernacular has seen phrases like “burn the bondholders”, “take a haircut” and “ordered default” enter into common use.   We have given some time to tracking the changing patterns of deposits in Irish banks since the guarantee came into force.  Here we will give some consideration to the quantity of bonds issued by Irish banks.

Again the Central Bank data we are examining relates to the 20 domestic banks in operation.  When trying to infer the relation to the guarantee and liabilities of The State it is difficult to draw exact conclusions as we do not know how much of these figures relates to the six institutions covered by the guarantee.  We may not be able to draw exact conclusions but can infer fairly broad patterns as the guarantee covers the biggest of the domestic banks.

The graphs here are of debt securities issued by domestic banks.  Here is the Central Bank definition of debt securities which includes more than just bonds.

Debt securities issued comprise funds received in exchange for non-equity debt securities issued by the reporting institution. Such instruments are usually negotiable and traded on secondary markets, and do not grant the holder any ownership rights over the issuing institution. All non-equity bearer securities which have been issued by resident credit institutions are included here, e.g., all commercial paper, certificates of deposit, notes and bonds which have been issued.

A breakdown by the type of securities is not provided but we will work with the numbers as they are.  Here are the total amounts issued with the period after the bank guarantee to the right of the vertical dashed line.

Prior to the guarantee in September 2008 the quantity of bonds was beginning to decline.  This continued up until the summer of 2009 after which there was a stabilisation, and even a slight increase, in the bonds in issue.  By April 2010 there was €111 billion of bank bonds (actually €6 billion more than in September 2008), but by the end of 2010 this had fallen to €64 billion – a drop of over €47 billion.  Most of this money was fully repaid.

So who got the money?  The Central Bank breaks the total down by Irish, Other Eurozone and Rest of the World residents.

The biggest drop has occurred for bondholders from the rest of the world which stood at €74 billion in August 2008 and has dropped (or been repaid) by such an extent since the guarantee was introduced that it is now down to €20 billion.  A drop of €54 billion since August 2008.  As late as last August there were €41 billion of bonds held by rest of the world residents but there was a reduction of €17 billion in September.
 
Irish residents have seen their holdings of Irish bank bonds rise from €25 billion at the time of the guarantee to €45 billion in April 2010.  Since then, these too have fallen and were down to €33 billion by December.  The proportion of bond held by Irish residents has been rising since the guarantee was introduced and now stands at just over 50%.  Are we going to burn ourselves?

Since the guarantee holdings of Irish bank bonds by other Eurozone residents has fallen from €17 billion to €10 billion.  This would hardly leave a ripple on the European banking system.  This would similarly apply to the €20.5 billion held by residents of the rest of the world.  Non-payment of the €33 billion owed to Irish residents would be far more significant.

As with the fleeing deposits the money to repay these bonds had to be found.  Again it is likely that the banks banks turned to the ECB (€94.5 billion) and the ELA of the Irish Central Bank (c. €50 billion).  This a different sort of liability and one for which any kind of default would prove difficult.  As time progresses (and more bonds are repaid) the mantra of “burn the bondholders” or equivalent becomes ever less relevant.  It still has some scope to play a role but pretty soon it will be the country they are setting on fire.  All the other fuel will be gone.

Liabilities with the ECB and Irish Central Bank – Is the hysteria fully deserved?

The liabilities of Irish financial institutions with the Eurosystem of central banks have been getting a great deal of coverage recently and there are lots of stories like this:

The latest data shows that Anglo Irish Bank and other lenders had borrowed €51bn (£43bn) from the Irish central bank by the end of December, under an obscure programme listed in the balance sheet as “other assets”.

This comes on top of €132bn in loans from the ECB itself, the figure normally tracked by analysts and itself 24pc of all ECB lending.

“This is a horror story: it shows the cataclysmic condition of the Irish banking system,” said Tim Congdon from International Monetary Research. “The banks have borrowed €183bn in total, or 110pc of Irish GDP. They have burned through all their capital and a lot of their deposits as well. This is going to end up on the national debt”.

People would want to be careful of the figures that are being thrown around.  The numbers are enormous but that does not mean that they have to be inaccurate.  We don't have a breakdown of the preliminary end-January figures reported on today which showed liabilities to the ECB declining to €126 billion, but we do have such a breakdown for the end-December figures.

Based on the end-December figures from the Central Bank, Irish banks had liabilities of €132 billion with the ECB.  Unlike, as has been suggested above, this is not necessarily a liability which could all fall on the State.  There are a couple of issues we must note.

First, we must make the distinction between domestic (Irish and Irish subsidiaries of international banks) and other (mainly IFSC banks and other banks who have operations or branches in Ireland).  The liabilities of Irish banks with the ECB was €94.5 billion.  Some €37.5 billion of the credit extended by the ECB to banks in Ireland was to banks who have virtually nothing to do with Ireland apart from having operations in Dublin 1.  Here is a graph we have used before.

Second, among domestic banks (of which there are 20) we must make the distinction between the six banks covered by the bank guarantee scheme (AIB, BOI, Anglo, IL&P, INBS and EBS) and the other Irish banks or banks with Irish subsidiaries which come under the heading of domestic banks.  A full list of the banks operating in Ireland can be seen here.  Unfortunately, the Central Bank do not provide data on this very important distinction, therefore we do not know how much of the €94.5 billion was consumed by banks under the guarantee.  We can assume that it is a lot, and maybe most, but we can do no better than that.

The same caveats also apply to the Emergency Liquidity Assistance (ELA) provided by our own Central Bank.  However, we have even less information about this (where did the get the money for a start?) and we do not even know the breakdown between domestic and non-domestic banks.  Also, we do not even know exactly how much ELA has been extended by the Central Bank.  Monies provided under this scheme are included under the catch-all heading of 'Other Assets' in Central Bank’s balance sheet.  This category has leapt up in recent months but we do not have a breakdown of it.  Again from a previous post.

We can see that the 'Other Assets' category was around €14 billion for the year up to August 2010 (though it was substantially lower before then). Since last August it has gone into a vertical ascent and jumped to over €50 billion.  Again it is likely that ‘lots’ of this is provided to the guaranteed banks, but in general we can only assume this.  However, from the financial results published during the week we do know that Anglo accounts for €28.1 billion of the ELA and that has justifiably worried some people.

Then, there is the national sport that has become estimating our 'National Debt'.  Much of this is ridiculous and sees numbers like €300 billion and more bandied about.  People are staggeringly selective in the figures they choose to include or exclude in these “sums”.

In most cased when adding the liabilities of the banks it is only monies owed to the ECB and Central Bank that are included? Is this some sort of special liability? And as we have seen the figures used are subject to some strong caveats that most people ignore.  Why are the rest of the liabilities of the banks omitted?  Total bank liabilities were €1,168 billion (€1.2 trillion!) at the end of December (or €742 billion if you limit it to domestic banks).  Do these creditors not count?  Of course they do, and like the other liabilities on our banks balance sheets there are assets, albeit of questionable quality in many cases, to match them (or some of them!).

Finally, the monies the banks have been taking from the central banks are not new liabilities.  They always had them, it's just that they owed them to someone else.  Since September 2008, Irish banks have shed €168 billion in deposits.  This has been driven almost entirely by a €152 billion collapse in deposits from monetary financial institutions from the rest of the world as shown here.

The banks needed money to pay back these deposits and also bondholders as we will see in a subsequent post.  As they had no one else willing to deposit the money (or perhaps didn’t look too hard to get it??), they turned to the ECB banks for funding to repay these deposits and then to the Irish Central Bank when the ECB stopped accepting the collateral (them dodgy assets again) being offered by the banks.

The money borrowed from the ECB and under the ELA isn't a new liability being heaped upon our ailing banks, it's just the liability moving around.  Obviously, it would be better if our banks were not turning to the lender of last resort. We already knew our banks were goosed. Whether they owe the money to depositors and bondholders or the ECB is interesting and does have some importance.  It is a serious development and the ECB is a more serious creditor, but it does not merit the hysteria that inaccurate use of the figures generates. 

Core Deflation Eases

This morning the CSO have released the January Consumer Price Index.  The overall rate shows annual inflation running at +1.7%.  We have been tracking a core measure of inflation that excludes the effect of energy and mortgage interest prices.  Although, core inflation remains negative, it did ease significantly in January.

The rate of core inflation increased from –1.1% in December to –0.5% in January.

The CSO provide prices indices for 13 commodity groups.  Here are the indices that are shown lower prices when compared to three years ago.

The price changes since January 2008 are:

• Food and Non-Alcoholic Beverages (-5.15%)
• Clothing and Footwear (-20.44%)
• Housing, Water, Electricity, Gas and Other Fuels (-14.36%)
• Furnishings, Household Equipment and Routine Maintenance (-8.43%)

Two other categories have shown small price drops but are not shown on the graph. These are Recreation and Culture (-1.97%) and Restaurants and Hotels (-0.77%).  Here the commodity groups that show rising prices since January 2008.

The price changes are:

• Alcoholic Beverages and Tobacco (+5.47%)
• Health (+10.47%)
• Transport (+2.39%)
• Communications  (+3.66%)
• Education (+14.04%)

Loans from Irish Banks

After a look at deposits it wasn’t much of a stretch to run the same graphs for loans.  Here is the total amount of loans issued by all banks.

This has fallen from the highs seen towards the end of 2008, and although not like the regime shift seen in deposits there was an accelerated decline in the last few months of the year with a drop from €868 billion in October to €812 billion in December.

Of the loans issued by banks operating in Ireland, nearly 70% comes from domestic banks.  See list here. 

We can see that the greater decline in the last two months(€36 million versus €20 million) has occurred in loans from non-domestic banks, though over an 18-month period the decline in loans from domestic banks is greater.  Looking at who domestic and non-domestic banks have been lending to.

Nearly three-quarters of the loans from domestic banks are to Irish residents and all the decline of loans by domestic banks has been in this category.  The stand-out feature of the breakdown of loans by other banks is the volatility jump in loans to other Eurozone residents in the last few months of 2010.

The final set of graphs present a breakdown of loans to Irish, other Eurozone, and Rest of the World residents by sector.

Credit Cards in 2010

The release last week of the Central Bank’s Money and Banking Statistics allows us to update an infrequent analysis of credit card statistics in Ireland.

The headline figure of total credit debt was 6.3% lower in December 2010 than at the same point of 2009. *

* As we will see below there is an anomaly in the December 2010 data which may affect the accelerated rate of decline seen in December.  Somebody may be able to offer an explanation.  See next *.

[UPDATE: I have an explanation! See bottom of post]

Total credit card debt has not shown any significant annual increase since the start of 2009, but it was in the latter half of 2010 that it actually began to fall.  The total number of credit card in issue peaked in January 2009 at 2.38 million.  Since then it has fallen and stood at 2.23 million in December 2010. 

Nearly 93% of credit cards issued are personal cards and all the fall of 150,000 has occurred here.  There are 156,000 business credit cards in issue in December 2010, only slightly down on the 158,000 that were in issue in December 2008.  Here are the monthly changes in the number of personal credit cards in issue since January 2007.  The largest monthly drop of 36,0000 occurred in the month just past.  We cannot tell what proportion of these are cancelled by the consumer or written down by the lender.

We will now looking in more detail at the actual amount of debt on these credit cards, and two of the key drivers of this statistic, monthly credit card purchases and monthly credit card repayments.

The total balance outstanding on credit cards in December was €2.9 billion, which is pretty much the level it stood at back in January 2008.  After sustained growth from 2002 to 2007, our total credit card debt has been largely stable over the past three years.

When we look at the monthly activities on credit cards we see that these have been trending down in recent years.  In 2010, the average monthly spend on credit card was €939 million.  Back in 2007, the equivalent figure was €1,047 million.  Our credit card balances mightn’t be coming down (until recently) but there has been a reduction in spending on credit cards.  This means that the ratio of outstanding debt to new expenditure has been getting larger and has increased from an average of 2.5 five years ago to 3.5 now.

This graph isolates the monthly new spending and repayments from the graph above that also included total debt.  The drop in monthly credit card activity is clearly evident. 

The two lines overlap extensively, but it is interesting to note that the quartic trend line for repayments has been above the trend line for new spending since the end of 2007.  We will return to this anon but here is the annual change in new monthly spending.

The most severe drops were recorded in 2009, but there was no month in 2010 when spending exceeded the equivalent amount from a year before.   Last month new spending on personal credit cards was €824 million.  Twelve months previously it had been €929 million, while in December 2007 it was €1,136 million (which was to be its zenith).  The fall over that three year period is 27.4%.

If we return to the monthly spending and repayment lines but isolate them for the past three years. 

For 29 of the past 36 months repayments on credit cards have exceeded new spending on personal cards.   Here is the gap between spending and repayments back to 2002

In the last three years total repayments on credit cards have exceeded total new spending by €1,091 million.  Over the same period, as we saw above, the aggregate balances on credits cards have declined from €2,938 million to €2,911 million – a fall of only €27 million.  So what happened to the other €1billion and change?

The reason for this difference is because spending and payments alone do not account for credit card balances - the extra amount is accumulated interest (and other charges).

The Central Bank do not give data on the amount of interest added to credit card balances but we can infer it given that the monthly change is approximately new spending plus interest added minus monthly repayment. The change may also be the result of some non-interest charges and duties. Looking at the approximate monthly interest payments and charges since 2005. *

*This graph also shows the anomaly with the December 2010 numbers.  The numbers suggest that interest and charges added to balances during the month were negative (-€48 million).  Per the data, there was €963 million of new spending on credit cards in December.  During the month some €939 million of repayments were made, €24 million less than spending.  However, that data also say that even though spending was greater than repayments, balances actually fell by €24 million during the month.  Is there any way of explaining this? Repayment of interest or other overcharges?

This accounts for the €1 billion that has been ‘repaid’ off credit cards yet the total debt has hardly declined at all.  The leaks occur in April of each year when the annual government duty on credit cards is charged which could have brought in about €150 million over the past three years.  Since January 2008 €1,011 million has been added to credit card balances through interest and charges and it appears that about €850 million of this is interest.

With balances averaging €3,000 million over the period it is pretty easy to infer that the average interest rate been charged on this money is in the region of 10%.  Credit card debt is expensive debt.  If we look at the average balance on personal credit cards we that even though repayments have exceeded new spending for most of the past three years the average balance has hardly moved at all.

In January 2008 the average balance on personal credit cards was €1,295.  At the end of 2010 the figure was €1,340.  As before our conclusion remains the same:

Our credit card balances are increasing not because we are spending more than we are paying (we do the opposite) but because of the interest on outstanding balances. Although we generally pay the equivalent of our monthly spend each month we do not pay down enough to cover the accumulating interest and reduce the outstanding balances.

UPDATE:  The reason for the strange patterns seen in the December 2010 figures can be attributed to the departure of Bank of Scotland (Ireland) from the Irish market.  Their outstanding products in December were transferred to Bank of Scotland (UK) and no longer appear in the Central Bank’s Credit Card statistics.  With this in mind, we will have to be careful about drawing inferences of changes in the credit card market based  on the December figures.