Thursday, December 13, 2018

The continuing remarkable improvement in Ireland’s Net International Investment Position

The Net International Investment Position (NIIP) of a country is the balance of external financial assets and liabilities.  In headline terms, Ireland is a huge debtor nation with a negative NIIP of around €420 billion, or around €90,000 for every person in the country. 

While this can put Ireland at the top (or maybe the bottom) of international tables two factors are worth noting: the impact of the IFSC and MNCs on Ireland’s data.  Both of these contribute significantly to Ireland’s NIIP position but these debts will not fall on the shoulders of Irish people so there inclusion in the €90,000 net debtor position is misleading. 

And if we strip them out we get an entirely different picture.  Here is Ireland’s NIIP excluding the IFSC and the non-financial corporate (NFC) sectors using all available data in the latest series.

NIIP ex NFCs Q2 18

It would be nice to see this series extended backwards but it is not a surprise to see that we had a debt position of around €100 billion at the start of 2012.  Since then the turnaround has been remarkable and we have moved to a net creditor position of almost €120 billion.  On a per capita basis we have €25,000 more external financial assets than external financial liabilities.

It could be that stripping out the entire non-financial sector omits some important information.  Stripping out the NFC sector does purge the data of the polluting impact of foreign-owned MNCs but the international position of domestic firms is excluded as well.  However, there is nothing to suggest it would alter the underlying pattern shown above.

It is worth looking at a sectoral breakdown of the above aggregate position.  There are four sectors included in the total shown above:

  • General government (public debt)
  • Monetary authority (central bank)
  • Monetary financial institutions (banks)
  • Financial intermediaries (pension and other investment funds)

Here is the contribution of each to the underlying NIIP shown above

NIIP by Sector Q218

The negative NIIP €130 billion for the government sector is unsurprising and, of course, is linked to the c.€200 billion of debt that the government has, and this NIIP position has been largely unchanged for the past few years.

On the other hand, financial intermediaries has seen a sustained improvement in their positive NIIP, rising from €100 billion at the start of 2012 to €200 billion in the latest data.  This largely reflects the value of private pension and investment funds of Irish households.  This increase will be the result of additional contributions but also revaluation effects, reflecting the rising value of various financial assets through the period.

The NIIP of monetary financial institutions has changed little over the period shown.  It was close to zero in 2012 and had edged up to around +€20 billion by the middle of this year.  One reason for this is that the chart excludes the chaos of the 2008 to 2010 period when the banks ran into huge problems and their external liabilities would have been bouncing around.

We know that during this period the banks repaid almost all of their external creditors and did so by drawing down huge amounts of central bank liquidity which reached up to €180 billion at one stage.  This improved the NIIP of the financial sector but merely transferred the external liabilities to the central bank, at least until the banks were able to repay the central bank liquidity they were using.

And this is can be seen.  At the start of 2012, the monetary authority (the Central Bank of Ireland) had a negative NIIP of around €100 billion.  This largely reflected a liability to the Eurosystem in respect of the liquidity provided to Irish banks to allow them to pay their creditors.

Since then, the banks have been reducing the size of their balance sheets but in terms of the NIIP this shows up through the position of the central bank rather than the banks themselves as they have been using the reduction in loans and increase in deposits to reduce their reliance on central bank liquidity, which in turn reduces the central bank’s liabilities to the Eurosystem.  This is the deleveraging we have been going through for the past decade or so.

And the net result is that, if we strip out the IFSC and MNCs, Ireland has a positive international investment position of almost €120 billion.  It has been a remarkable turnaround.

Of course, this aggregate does not reflect the distribution.  The biggest debtor is the general government sector which, in a sense, is all of us, while the biggest creditor are financial intermediaries which reflect the pension and investment savings of a much narrower subset of households.  And it is also the case that some of the improvement in the financial position has been brought about by the sale of real assets.  Still it’s much better to be talking about the distribution of assets than the burden of debt.

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