Tuesday, February 28, 2012

No more money?

There are bound to be lots of issues raised over the course of the referendum campaign announced today.  Some will undoubtedly have nothing to do with the 11-page treaty but of those which will relate to the treaty will be Ireland’s access to support funds after 2013. 

Under the current programme the plan is that Ireland will be fully-funded in bond markets from by end of 2013.  Given the scale of the funding required in 2014 and 2015 this is still far from certain. 

The second-last provision of the preamble of the treaty (on page four) says:
STRESSING the importance of the Treaty establishing the European Stability Mechanism as an element of a global strategy to strengthen the Economic and Monetary Union and POINTING OUT that the granting of assistance in the framework of new programmes under the European Stability Mechanism will be conditional, as of 1 March 2013, on the ratification of this Treaty by the Contracting Party concerned and, as soon as the transposition period mentioned in Article 3(2) has expired, on compliance with the requirements of this Article,
This clearly states that no funding will be available to new programmes under the ESM unless the treaty is passed.  However on the 21st of July last, the statement issued by EU leaders at that summit in point 10 said that:
We are determined to continue to provide support to countries under programmes until they have regained market access, provided they successfully implement those programmes. We welcome Ireland and Portugal's resolve to strictly implement their programmes and reiterate our strong commitment to the success of these programmes.
This clearly states that funding will be provided under the existing programme (not a new programme) until that country has regained market access.

If we exit the current programme it is obvious that entry into a new programme funded by the ESM would require ratification of the treaty first.  That is a longer-term issue.  Of more immediate concern is which provision takes precedence for Ireland as long as we remain in the current programme? 

Monday, February 27, 2012

The recent bond swap

A recent look through Bank of Ireland’s preliminary report for 2011 revealed the following nugget of information on page 64:

On 25 January 2012, the National Treasury Management Agency offered bondholders the opportunity to exchange their existing holdings in respect of the 4% Treasury bond 2014 for a new 4.5% Treasury bond maturing in February 2015. The Group converted €1.3 billion of its Treasury bond 2014  into the new 4.5% Treasury bond 2015.

The NTMA announced that €3.53 billion of the Janurary 2014 bond was switched to the February 2015 bond.  Bank of Ireland accounted for 37% of the total amount swapped.

At the 31st of December  2011 BOI held €5,149 million of Irish government bonds on its balance sheet.  This is 6.0% of the total outstanding government bonds of €85,317 million.

BOI: An insight into mortgages

The annual results for 2011 published by Bank of Ireland earlier in the week provide a interesting insight into the detail of the mortgage market in Ireland.  The detail from pages 67 to 82 is something that has rarely been made available.

The Q4 2011 update of the Financial Regulator’s Mortgage Arrears Statistics showed that there was €113,477 million of owner-occupied mortgages in Ireland and that 12.3% by loan amount are in arrears of 90 days or more with 5.4% also by loan balance having been restructured in some way and not in arrears.  The figure for arrears under 90 days are not provided but it is likely that somewhere close to 25% of owner-occupied mortgages by balance have experienced some difficulty.

Here are the equivalent figures for Bank of Ireland’s Irish owner-occupied mortgage book.

BOI Mortgages

Bank of Ireland has 18.4% of all owner-occupied mortgages in Ireland.  We can see that the levels of distress of significantly below those seen for the market as a whole.  In BOI, 7.4% of mortgages by balance are in arrears of 90 days or more compared to 13.4% for all other lenders in the market.

The restructured mortgages includes mortgages which may be less than 90 days in arrears so about 85% of Bank of Ireland’s mortgages are currently being repaid according to the original terms of the mortgage.  There are huge problems in the mortgage market in Ireland but BOI is still in the position of having 17 out of every 20 mortgages being repaid on time.  And it is also noteworthy that the bank says that among all restructured mortgages

“98% of this balance are paying interest only or greater on their balances.
16% are paying full principal and interest having had their mortgage term extended.”

A mortgage will be in arrears if a monthly payment is partially or fully missed.  A mortgage that is 90 days in arrears is the equivalent of three monthly payments in arrears, i.e. it would take the payment of a lump-sum equal to three monthly payments to bring the mortgage back on schedule. 

A mortgage can be 90 days in arrears if 75% of the agreed monthly payment has been made each month for a year.  The mortgage has not had a full payment made in 360 days but is the equivalent of three monthly payments or 90 days in arrears. 

A mortgage will also be 90 days in arrears if three full monthly payments are missed at any stage.  For example, if a mortgage had nothing paid on it between January to March 2011 and has had every monthly payment made in full since then it will be 90 days in arrears even though full payments have been made for the past year.

It is likely that there are very few mortgages on which nothing is being paid.  The majority of mortgages are likely to be in arrears because only partial payments were made or a number of payments were missed in full for a period.  There are likely some mortgages which are classed as being in arrears but full payments have resumed but the arrears continue to be outstanding.

The report also provides some useful insights into these figures.  Of the €2,405 million of owner-occupied mortgages that in some form of arrears, €582 million are impaired and have some loss provision made against them up from €440 million at the end of 2010.  Somewhat interesting is part of the explanation given for this increase in non-performing loans.  At the start the report says that “this increase is primarily attributed to the general economic downturn in Ireland and affordability issues including falling disposable incomes and high unemployment levels” but then adds:

In addition to the factors mentioned above, the increase in past due and impaired since August 2011 appear to have been impacted by the implementation of the new code of conduct on arrears and the considerable public speculation about potential Government policy measures regarding customers in arrears.

Of the €1,823 million of mortgages which are more than 30 days in arrears and not impaired, Bank of Ireland estimates using initial values and subsequent CSO and ESRI house price data that €778 million of the delinquent loans have properties that are not in negative equity.  This indicates that if these mortgages do default, the capacity for them to generate losses for the banks is limited as the secured collateral exceeds the size of the loan.  The current trajectory of house prices suggests that this will likely deteriorate.

There is €1,045 million of non-impaired mortgages in arrears and negative equity.  BOI estimate that the total negative equity on these loans is €261 million.  The loan-t0-value of these loans is 133%.

BOI has €582 million of owner-occupied mortgages that are impaired and estimates that these mortgages have €171 million of negative equity.  The loan-to-value of the impaired mortgages is 142%.

If all the €1,627 million of the owner-occupied mortgages which are impaired or both in arrears and negative equity were defaulted on then BOI estimates that the value of the properties secured against those loans would leave a shortfall of €432 million.  With costs and other issues it is likely that BOI would be looking at a loss of around €500 million if all mortgages currently in danger were to default.

As it is BOI has made a provision of €489 million against its owner-occupied mortgage book in Ireland.  This seems appropriate given the current level of arrears, impairments and house prices.  With most of these measures set to deteriorate it is likely that this provision, and subsequent actual losses, will increase.

The banking stress tests from last March provided for €2,075 million of lifetime loan losses on BOI’s owner-occupied mortgage book in Ireland under the stress scenario with €1,115 million of those projected to occur in the three-years from 2011-2013.

The annual report does not tell us the level of actual losses BOI incurred on its owner-occupied mortgage book in 2011.  Bank of Ireland has a policy of no debt write downs for mortgage holders

During 2011, BOI repossessed 90 owner-occupied homes.  The number of owner-occupied homes on its balance sheet increased from 65 to 99 during the year (up 34) and there was 56 disposals of repossessed owner-occupied homes during the year.  It is not clear what level of shortfall was left on these repossession (an average shortfall of €200,000 would leave a total of €18 million) or if the borrower is still liable for the shortfall. 

It is pretty clear that the level of owner-occupied mortgage losses in BOI is still significantly below the levels allowed for in the stress tests.  This will change as the 12 month moratorium for borrowers in the Mortgage Arrears Resolution Process will end in many cases but it could be 2013 until the measures in the Draft Personal Insolvency Bill become active. 

The report also gives an insight into the origination of the loans in BOI’s mortgage book.  This table includes the €21 billion of owner-occupied mortgages and some €7 billion of buy-to-let mortgages.  Click to enlarge.

BOI Mortgages by Year

Although mortgage arrears are clearly concentrated in loans that were issued between 2004 and 2008, there is arrears right across the loan book.  This means that the increase in Mortgage Interest Relief did not benefit all those who have fallen into arrears.  At a minimum around 27% of BOI’s mortgage accounts which are in arrears will not benefit from the increase in MIR as they did not originate between 2004 and 2008. 

The measure also excludes non-first-time buyers from between 2004 and 2008 so it is likely that only a fraction of BOI’s mortgage arrears accounts will benefit from the increased MIR.  It is also likely that many of those who gained were not in arrears and are now benefitting from increased interest relief and lower interest rates.

We also get an insight into negative equity and arrears by equity from this table.

Loan to Value

In total, the loan-to-value of BOI’s owner-occupied loan book is estimated to be a rather convenient looking 100%.  The negative equity of the €10,567 million of loans with LTVs of greater than 100% is estimated to be €2,474 million.  The aggregate loan-to-value of the loans in negative equity is 131%.  On the other hand the aggregate loan-to-value of loans not in negative equity is 81%.  The final columns give the spread of arrears and impairment across the different LTVs.

Unsurprisingly, arrears and impairment are more likely amongst those loans that are in negative equity though almost one-third of those in arrears are not in negative equity.  The portion of the loan book that has a loan-to-value of more than 181% has arrears of 15.5% by loan balance compared to just 4.8% for all loans which are not in negative equity.

If the €2,474 million of negative equity on mortgages in BOI’s owner-occupied Irish mortgage book is representative of the overall market then, being 18.4% of the total market, this would imply that the level of negative equity in the residential mortgage market is around €13,500 million.  As BOI’s loan book is better performing than the rest of the market, and also has loans from before 2002 that newer entrants to the market do not have, this is likely to be an estimate from the lower range.

Wednesday, February 22, 2012

Joint Committee on EU Affairs

I am attending the Oireachtas EU Affairs Committee on Thursday.  The meeting will examine the Fiscal Compact, the updated Stability and Growth Pact, and the recently concluded second bailout agreement for Greece. 
A set of notes I prepared in advance of the meeting can be read here.

  1. Budgetary Rules in the ‘Fiscal Compact’
    1. The Debt Brake Rule
    2. The Structural Deficit Rule
  2. Could Other Rules Have Prevented the Irish Crisis
    1. The Expenditure Rule
    2. The Macroeconomic Imbalance Procedure
  3. A Greek Deal for Ireland
UPDATE:  The transcript of last week’s session can be read here.

Tuesday, February 21, 2012

Banking Share Prices

The share prices of the two ‘pillar’ banks have been attracting a bit of attention recently as they have moved in tandem upwards for the past few weeks.  The share price of Bank of Ireland has increased from around 8c to 14c over the past month with the share price of Allied Irish Bank going from 6c to 13c over the same period.

This co-movement would make sense if the outlook for both banks was similar and the close share prices would make sense if the number of shares in issue for both banks was similar.  However, neither of these is true.

Bank in 2008 both banks had about 1 billion shares in issue.  After swaps, splits, issues and other events there are now about 30 billion shares in BOI and a massive 513 billion shares in AIB.

The market capitalisation of BOI is now around €4,300 million.  This means the government’s 15% shareholding has a market value of around €650 million.  If the number of shares in BOI had remained constant the 1 billion shares that were in issue in 2008 would now be worth around €4.25 each.  These shares hit a peak of around €18.  Of course, the holding of the original shareholders have been hugely diluted so the comparison is not valid.

The primary reason BOI has a market capitalisation of over €4 billion is because of the net €3.5 billion that has been provided by the State, the €1 billion that the Wilbur Ross group of investors has provided, €4.5 billion of Liability Management Exercises (“haircuts”) with subordinated bondholders and holders of residential backed securities, and €1.5 billion from debt for equity transactions.

All told BOI has taken a company that was worth €18 billion at the peak, consumed over €10 billion of funds from various sources and turned it into a company worth a little over €4 billion.

We could so a similar analysis for AIB but with 513 billion shares trading at around 13.5c, AIB had a market capitalisation of around €70 billion.  With a 99.8% sharesholding this puts the State’s stake at that same number.  Aren’t we supposed to believe that markets are efficient?

Monday, February 13, 2012

Bloomberg yield goes below 7%

Apropos of nothing in particular the Irish government bond 9-year yield as calculated by Bloomberg finished the day at 6.93%.  This is the first time it has finished below 7% since the 1st of November 2010.

Bond Yields 6M to 13-02-12

Of course, actual yields on trades performed through the Irish Stock Exchange have been below 7% for more than a week.

Monday, February 6, 2012

Reducing the debt

A previous post showed that total debt in Ireland is probably around 325% of GDP or 390% of GNP.   This is an unsafe level of debt and, at a minimum, the aggregate amount of debt should probably be no more than 250% of GNP with any amount over 300% considered unsafe.  We cannot expect economic growth to change the denominator significantly so repayments and deleveraging will have to do the heavy lifting to bring the numerator down.

However, repayments will not be the only way to bring the debt down.  There will be some defaults.  The government’s debt will be rolled over and not defaulted on.  Actual repayment of the debt is unlikely and the  hope is that in time growth and inflation will bring the public debt ratio down.  A lot of the private debt will be repaid but there will be defaults.  Lots of defaults. 

The State has provided €64 billion to cover loan losses in the covered banks (AIB, BOI, PTSB, EBS, Anglo and INBS).  This is not so much an outright default as a transfer of the liability from one sector of the Irish economy to another.   There are investors in the banks who have covered losses.  This is a graph from page 42 of the Nyberg Report.

Capital Resources

Before the start of the crisis in 2007 the capital resources of the covered banks was estimated to be around €47 billion.  Since then the subordinated bondholders in the six banks have provided about €15.5 billion to meet loan losses and defaults in the covered banks.  The contributions across the covered banks are neatly summarised in this recent parliamentary question to Minister for Finance, Michael Noonan. 

The €25 billion of shareholder equity has been almost completely eliminated by loan loss provisions by the banks’ over the past three years.  The provisions have been made but it will be over the coming years that the loans will be written down.  The banks will try to obtain as large a repayment as they can but many of the loans made into the Irish economy over the past few years will never be repaid.

It is not only the covered banks that will suffer defaults on their loan books.  The covered banks make-up about two-thirds of the Irish banking sector and the State will make good losses in excess of those not covered by the capital resources wiped out above (as well as providing an adequate capital base for the banks).

One-third of the Irish banking sector is foreign owned and the State has accepted no responsibility for defaults on the loan books of these banks.  Some of  the loans books of these banks were very large.  The loan books and loss provision to March 2011 were neatly summarised by Simon Carswell in this Irish Time article.

Non-covered banks loan books

These banks have allowed for the fact that almost one-fifth of the money they have lent into the Irish economy will not be repaid.   The banks’ owners have provided the capital to cover these losses.  For example RBS (82%) and Lloyds (40%) are both part-owned by the UK government.  Between them they have received €18 billion from their parent companies to cover loan losses in Ireland.

The details provided by Simon Carswell also show that the covered banks had made loss provisions of €75 billion from 2008 to the end of March 2011.

Covered banks loan books

Although the figures here include loans in other countries (particularly for AIB, BOI and Anglo) it is likely that most of the loss provisions relate to their Irish loan books.  The largest part of the provisions (€42 billion) are for the loans transferred to NAMA but there are still large provisions on their remaining loan books, and it is likely that these will increase.  Last March’s stress tests projected €43 billion of lifetime loan losses under the adverse scenario which is greater than the stock of provisions in the banks.  See here for more details of the NAMA transfers and projected losses.

There was more the €350 billion of bank loans issued by Irish banks into the economy at the end of 2008.  The banks have already provided for defaults of almost €100 billion on these loans.  It is not clear what the final losses actually will be but it is expected that there will be a lot of loan defaults in Ireland.  This won’t happen in a big bang but will be steady stream over the next few years.  There has also been repayments over the past three years which will continue in most cases.

If we assume that this €100 billion of loan loss provisions translates to €100 billion of loan defaults then Ireland’s private debt mountain will be reduced to about €230 billion.  This will not be a painless process but last week’s draft Personal Insolvent Bill provides some details about how this can be achieved.

In this hugely hypothetical scenario private debt is €230 billion, and with a general government debt of €166 billion at the end of 2011, that would out total debts at just under €400 billion.  That would be 256% of GDP or 312% of GNP.  This is not far from the “danger” threshold of 300% of national income.

Getting there won’t be easy and even at 300% of GNP, Ireland’s debt level will be excessive but it won’t be terminal.  It will take much longer to get the debt below 250% of national income level which could be considered “safe”.  Once the loss provisions have worked their way through the system into actual write down the process of deleveraging will accelerate.  Ireland has a large and excessive level of debt but we are not likely to fall over a cliff face.

Friday, February 3, 2012

Repaying the Debt?

A lot of attention recently has been given to the fiscal rules that formed the basis of the recent EU treaty (inter-governmental agreement?).  One that has attracted significant attention is the Debt Brake or “One-Twentieth Rule”.  The balanced budget rule allowed a structural deficit is no more than 0.5% of GDP is probably more important but some of the commentary on the Debt Brake is worth considering.

On last night’s Primetime, Miriam O’Callaghan introduced a question to Kieran O’Donnell by saying:

“People are talking about €6 billion needed to take out on an annual basis”

On the previous night’s Vincent Browne, Stephen Donnelly said:

“To pay down €100 billion in five years you’ve got to pay down €5 billion a year, that’s what the treaty says.”

I have read the treaty and I don’t know where this is coming from.  The opening report on Primetime suggested that if our debt peaks at 118% of GDP in 2013 we would then have 20 years to reduce the debt and that we would have to “dramatically pay down this debt”.  The prospect of repaying debt is not an attractive one given the current state of the Irish economy.  However, it is not a prospect we are are not likely to face.

Ireland is currently in an Excessive Deficit Procedure which is largely about getting the annual fiscal deficit below 3% of GDP.  For 2012, we are targeting a deficit of 8.6% of GDP, and the current plan is to get that down to 2.9% of GDP by 2015.  As long as a country is in the EDP it is that annual deficit rather than the total debt that is key metric. 

And then once the country gets the deficit below 3% of GDP it enters a three-year transition period before the debt rule becomes effective.  This was explained in this Council Regulation:

"For a Member State that is subject to an excessive deficit procedure on 8 November 2011 and for a period of three years from the correction of the excessive deficit, the requirement under the debt criterion shall be considered fulfilled if the Member State concerned makes sufficient progress towards compliance as assessed in the opinion adopted by the Council on its stability or convergence programme. "

The implications for each country are more clearly detailed in this press release.  The last line confirms that Ireland will not be subject to the "numerical debt reduction benchmark", the one-twentieth rule, until 2018.  This is likely to be the earliest.  The three-year transition period does not begin until the excessive deficit has been corrected.  In this three-year period a country has to show is “sufficient progress towards compliance”, which is rather woolly.

It is also important to note that the “one-twentieth” rule does mean the debt has to reach the 60% of GDP target in 20 years.  It specifies that about one-twentieth of the gap between the current debt level and the 60% of GDP target must be closed each year.

Under the rule a country with a debt of 120% of GDP has 20 years to get the debt down to 70% of GDP, with the one-twentieth improvement getting so small that it can take another 20 years to bring the debt down to the 60% of GDP level.

Debt Brake

The required reductions in the debt ratio appear large at first but do moderate significantly as the debt converges on the 60% level.  This is not a linear projection that will require €x billion to repaid each year.

Given our deficit problems, the focus until 2015 and beyond will be on bringing down the deficit rather than repaying debt.  There is no requirement to repay debt and bringing down the deficit will stabilise and, in time, reduce the debt ratio.

So what happens in 2018?  Will we have to start “taking out” money from then?  Debt projections out to 2018 are unlikely to be very reliable.  In its last published review the IMF projected a General Government Debt of 111% of GDP in 2016.  With the planned reduction in the deficit that could be down to 105% of GDP in 2018.  No one can be sure.

If the debt brake is applied for a country with a debt of 105% of GDP they would have to reduce the debt ratio to 101% of GDP the following year. [Technically they only have to budget to achieve the required debt reduction rather than actually achieve it.]

A country with a balanced budget would achieve that with a real growth rate of 2% and an inflation rate of 2%.  There would be no necessity to make any debt repayments.

In fact, once the debt ratio gets below 90% of GDP, a country with 2% inflation and growth rates would be able to run (small) deficits and still meet the debt reduction requirements.  The debt brake does not eliminate the potential to borrow additional money but it does substantially limit the rate at which this money can be borrowed.

From an Irish perspective (and the perspective off all other countries) the balanced budget rule  is far more significant.  This requires a structural deficit of no more than 0.5% of GDP (1.0% of GDP for countries with a debt of below 60% of GDP).  If by 2018 Ireland has a structural deficit of less than 0.5% of GDP it is likely that we would satisfy the conditions of the “one-twentieth” debt brake rule without the need for any additional measures.

If the budget has been brought into balance by 2018 (a big if but we have the luxury here of just having to assume it) it is likely that growth and inflation would do most of the heavy lifting for the debt ratio reduction.  With a balanced budget an inflation rate of 2% and a growth rate of 2% would be enough to bring the debt ratio down from 105% of GDP to 101% of GDP and all the way down to the 60% target.  We would not have to make any debt repayments but could choose to do so.

As stated above it is the balanced budget rule which will potentially have a greater effect .  The conditions and effect of the debt brake are fairly objective and clear.  There is no consensus on how a structural deficit should be measured so the precise implications of the balanced budget rule cannot be objectively assessed.  The 3% limit on the overall budget deficit remains.

All yields now under 7%

Here is a snapshot from yesterday Daily Outstanding Bonds Report from the NTMA.

Outstanding Bonds 02-02-12

At there closing prices in trades put through the Irish Stock Exchange yesterday all Irish government bonds were yielding less than 7%.

Thursday, February 2, 2012

Debt in Ireland in 2011

A previous post showed the increase in private sector loans from 2003 until its peak at the end of 2008.  This showed that the level of private sector loans to Irish residents from banks in Ireland was around €350 billion in December 2008. 

Since then consumer loans from the banks have fallen to about €20 billion.  Residential mortgages have increased to €114 billion while buy-to-let mortgages have fallen to €33 billion offsetting the increase.  Loans to the business sector excluding the property sector have fallen to €40 billion.    Here is a summary table which updates the table from the earlier post.

Loans to Irish Residents 2011As a result of the NAMA transfers and the exit of Bank of Scotland (Ireland) from the market it is hard to tell what has happened to the €112 billion that had had been lent to the property sector by the end of 2008. 

In the Central Bank data loans to the construction sector have fallen from €9 billion to 2008 to €3 billion now while loans for land and development activities have fallen from €103 billion to €56 billion.   Most of this fall is as a result if transfers to NAMA rather than repayments.

The “transactions” data provided by the Central Bank which accounts for the NAMA transfers and bank exits rather then the “volume” data which doesn’t.  This shows about a €5 billion drop in construction loans and no change in land and development loans because of transaction (draw downs and repayments) over the past three years. 

We don’t know what has happened to the loans that went to NAMA or what has happened to the loans in Bank of Scotland (Ireland) that are now being handled and wound-down by Certus.  We will just assume that there has been a €5 billion drop in property sector loans over the past three years based on the drop in construction loans.

Summing these changes means bank loans into the Irish economy are down to around €315 billion.  By adding in credit union loans and loans from other sources it is likely we would get up to €330 billion, give or take.  This is the total extent of private sector loans in the Irish economy.

With 2011 GDP likely to around €156 billion and GNP around €128 billion the loan to national income ratios will be around 210% for GDP and 260% for GNP.

At the end of 2011 the General Government Debt was around €166 billion.  Around €46 billion of this is to cover losses the covered banks made on the above loans.  Most of these losses were in land and development loans but the losses will by no means be confined to that category.  In our €330 million private sector total we have counted these non-performing loans but it is money from the government that will pay them (though only for losses in the covered banks).

The extra debt from the government sector is around €120 billion, about one-third of which is the debt the government brought into the crisis in 2007 and two-thirds the debt the government has accumulated by running huge deficits since 2008.  This €120 billion of government debt onto the earlier €330 billion of private sector loans gives a total of €450 billion of debt in Ireland. 

If we want to sure to be sure that this is the total amount of debt in Ireland we can make an allowance for some other loans such as those sourced from outside Ireland.  All in, it is likely that the sum of household, business and government debt accumulated by Irish residents is something under €500 billion.

At €500 billion it would put the debt ratios at 320% of GDP or 390% of GNP.  This is an excessive level of debt.  The next post will consider how this can be brought under 300% of national income though a reduction to well below that will be necessary to return to “safe” levels of debt.

Wednesday, February 1, 2012

Who “went mad borrowing”?

The following quote has generated a lot of response in the past week:

“What happened in our country was that people simply went mad borrowing.  The extent of personal credit, personal wealth created on credit was done between people and banks - a system that spawned greed to a point where it just went out of control completely with a spectacular crash.  The country borrowed over €60 billion at excessive rates and the IMF eventually came in with the Troika."

It is of course the answer Taoiseach Enda Kenny gave at a panel session at the World Economic Formum in Davos last week when he was asked “what went wrong in Ireland?”.  I’m not sure what the last sentence is referring to but here we’ll focus in the extent to which “people simply went mad borrowing”.

Here is a graph of loans to Irish residents from January 2003 to January 2009.  The data can be extended to December 2011 but the actual fall in loans is exaggerated in this data because of the impact bank exits and NAMA have on the Central Bank’s banking statistics.  In January 2009 this factors were not at play and this is widely accepted to be around the time when total loans peaked in Ireland.  It can be seen that the rate of increase began to ease in late 2007 and had plateaued by the middle of 2008.

Total Loans to Irish Residents

The blue line represents total loans to Irish residents.  This increased from €110 billion in January 2003 to €350 billion by December 2008.  A rise of 220% in just six years.  Total loans went from being around 90% of GDP in 2003 to nearly 200% of GDP in 2008.  This would satisfy any criteria for going  “mad”.  The red and green lines represent total loans to Irish residents excluding two categories.

The red line excludes loans to businesses in the construction sector and for real estate, land and development activities.  The green line further excludes loans to households for buy-to-let mortgages.  The green line is thus total loans to Irish residents excluding loans for investment and speculation in the property sector.

Excluding these loans, loans to Irish residents rose from €83 billion in January 2003 to €195 billion by the end of 2008.  This is still a rapid rise but is an increase of 135% rather than the 220% increase seen for all loans.

As a percentage of GDP loans outside of investment in the property sector rose from 66% of GDP in 2003 to 108% of GDP in 2008.  This is a large increase but not catastrophic.

Loans for investment and speculation in the property sector rose from €27 billion at the start of 2003 to €150 billion at the end of 2008.  There was an increase from 25% of GDP in 2003 to 83% of GDP in 2008.

There is no doubt that borrowings by Irish people increased dramatically from 2003 to 2008 but a lot of the increase was concentrated in the construction, property and development sectors.

Loans to Irish businesses outside of the property-related sectors was €29 billion at the start of 2003 and reached €60 billion by the end of 2008.  This rise from 20% of GDP in 2003 to 33% of GDP in 2008 has not put us in the position we are in now.

Excluding buy-to-let investment mortgages loans to households rose from €52 billion to €140 billion.  Residential mortgages increased from €40 billion to €110 billion and other consumer borrowings rose from €13 billion to €30 billion.

With property-related loans perceived as being the source of our ills it is worth noting that household residential mortgages rose by €70 billion while investment and speculative loans in the property sector rose by more than €130 million.  Both increases are excessive but it must be realised that one is almost twice as large as the other and also that the increase in mortgage debt was spread over hundreds of thousands households rather than being concentrated like the property loans.

Here is a summary table and an annotated version of the graph used above is here.

Loans to Irish Residents

The stand-out figures are the 350% increase in buy-to-let mortgages and the 490% increase in loans to the construction and property sectors.

[Note: The data here are taken from the Central Bank’s Money, Credit and Banking Statistics.  This includes data from all banks operating in Ireland.  For the period in question this excluded the credit union sector which was added to the data in 2009.  Total loans in the credit union sector have not exceeded €8 billion so their inclusion would do little to alter the conclusions.  The data also exclude loans that may have been obtained from banks outside of Ireland but it is not clear now prevalent this was in the household and business sectors.]

Croke Park Presentation

Here is a screencapture video of a presentation I gave at a conference that was held in Croke Park last Friday.  The presentation looked at investment in the Irish national accounts data and the breakdown between current and capital expenditure in the government accounts.

The conference was a Dublin Economic Workshop meetings held in collaboration with the UCD Geary Institute and UL.  Liam Delaney, Colm Harmon and Stephen Kinsella were the organisers.  The full programme can be seen here while audio podcasts and copies of the slides used in all of the presentations can be accessed here.

There is a thread on www.irisheconomy.ie that looks at some of the issues raised in the talk here and the site also has threads open on some of the other sessions held that day.