Analysing credit

An Saoi: Let us assume that the Irish economy will decline by more than 10% in 2009 and that the consumer price index will also fall by around 7%. Without any increase in nominal debt, the value of the debt as a percentage of economic activity will increase by close on 20%.

The CSO has provided us with a reasonable picture of the position in 2008, which is set out in constant (2006) prices and at market prices. Click here to see my estimate of GDP & GNP figures using the above estimates of decline in the economy and the drop in prices.

The level of debt however has moved in a totally different direction, leaving all extremely more likely to default on their debt.

Private debt at 31st December 2008 stood at €424,865M or €344,277 M net of financial intermediation. Assuming that the level of debt remains the same, the debt to GDP ratio would move from 185% to 229% and perhaps more crucially from 220% to 263% when you use GNP. Click here to view a table showing private sector credit / GDP (GNP for Ireland) ratios, taken from Deleveraging the Irish Economy, Goodbody Stockbrokers, Oct. 2008.

Personal debt stood at €172,331M at 31st December 2008, or approx. 50% of total private (non financial intermediation) debt. While this may not increase in nominal terms, the decline in the size of the economy and in its value will dramatically increase it as a percentage of net disposable income.

While the decline in prices may seem extreme, there are substantial drops yet to be seen in the CPI. These include,

- Utility costs, e.g. ESB & gas.
- Imported goods from sterling area have more capacity to fall
- Rent reductions as more and more surplus accommodation chases fewer tenants
- Most recent interest rate cuts
- Falls in commercial rents being passed on.
- Greater competition in the retail sector
- Services sector falls in areas such as hotels, restaurants etc.

There is a great irony in this decline in prices. Ireland needs to get its costs down in comparison to its European competitors, yet the drop in prices is going to create massive other problems. The decline in the year to March has been 2.6%.

Effectively 50% of the commercial private sector debt will be transferred to State by way of NAMA. However the decline in personal income, whether it is caused by unemployment or declining incomes, is going to create a crisis separate from that caused by the developer loans. The balance outstanding on personal credit cards has increased from 2.96 times monthly expenditure in Feb 2008 to 3.8 times monthly expenditure in Feb 2009.

From this we should expect that the Government’s projections of increasing personal consumption from 2010 on will be seriously undermined by the extra debt burden and people’s attempt to deleverage. If this is the case, then their overall GDP/GNP growth projections contained in the recent budget will have to be revised downwards, with all the consequences that will mean for unemployment, investment and the fiscal deficit.