Personal debt levels

An Saoi: The Central Bank published its preliminary statistics for November a day early, they are available here. The figures continue to make awful reading with no sign that Irish borrowers are getting their personal debts under any form of control. Though you would not get that view from the mainstream media, for example RTÉ’s coverage or Colm Keena’s article in Thursday’s Irish Times where he suggests “Irish people are significantly reducing their personal debt by paying down items such as credit card bills, mortgages and other loans, according to the latest figures from the Central Bank”. Though to give him his due, he does provide a more balanced view as one reads down. Indeed debt as a proportion of GDP/GNP has increased not decreased significantly in the last 12 months.

The Central Bank makes clear that most of the marginal decline in nominal indebtedness was down “…to valuation effects (exchange rate movements, write-downs of loans and increased provisions for bad debts).” and “When valuation effects are accounted for, the underlying stock of PSC was approximately 1.7 per cent lower in November 2009 compared with November 2008.”

Credit Cards are a very clear bell weather of consumer behaviour. They are a very immediate source of credit and have accurately reflected the state of the Irish economy on its downward trajectory. Spending is 5.7% below the level of November 2008, which was itself 16.8% below the November 2007 spending level. Indebtedness has fallen by less than 1% in the past year. The number of business cards remains exactly the same, but the number of personal cards has declined by 46,000 or 2% since the start of 2009. We are now into a second year of declining expenditure on credit cards and the cumulative decline in personal expenditure (on credit cards) of 22.6% in two years, yet personal debt has increased by nearly 8.5% in the same time.

The significance of the levels of personal debt must be seen in the context of declining prices and a shrinking economy. Prices declined by 5.7% to November and GDP is estimated by the Dept. of Finance to be declining by 7.5% and the ESRI suggesting (perhaps conservatively) that house prices in Dublin have declined by 19.1% in the year to October.

Dr. Morgan Kelly’s most recent broadside in Tuesday’s Irish Times and his more detailed paper linked to on this site and on www.irisheconomy.ie , gives us a picture of the type of zombie future we face because of the lack of a proper functioning banking system and unbearable levels of personal debt. Yet the Government continues to spin the myth that NAMA will free up lending. As Dr. Kelly points out our citizens are already the most indebted in the EU. The Central Bank used to publish a quarterly comparison but stopped doing so in June 2008. The last Table published is set out below.

This table of course would look much worse now, when the declines in prices and GNP/GDP are factored in.

Personal cash savings are likely to continue increasing slowly, and the lack of new personal credit will continue to inhibit new spending, let alone the obligations to pay off existing debt. On that basis, it is very hard to see tax yields dependent on personal spending, such as VAT & Excise increasing during 2010 or 2011. However I shall write further on this issue after the publication of the end of the year figures, which are rumoured to be far better than many were expecting. So good in fact they could not help leaking the news to the Sunday Business Post.

Where are all the (cash) savings going?

An Saoi: Hidden inside the Central Bank’s monthly statistical reports is an analysis of household cash holdings in banks and credit unions (Table B2.2). These figures seem to tell a very different story to the one being broadcast by the stockbroker employed economists. While they are suggesting that there is a massive increase in saving underway, cash held by households is declining.

I have extracted the figures for the past three years, which provide a potted history of the period. Cash saving peaked in May 2007, the final month of the SSIA scheme. Cash held has fallen 15.5% since then. In 2008 the banking crisis saw substantial withdrawal of €8,600M between July and December. While savings had increased steadily for the first six months of the year, perhaps as money moved back from the mattress to the bank branch, the decline in the past two months has been substantial

The importance of this decline in cash deposits held by households cannot be overstated. Most ordinary people use banks or their local credit unions for regular saving and immediate access to this cash when necessary is crucial to help people pay unexpected bills. In due course, the slimmed down Irish banks will have to move to sourcing cash savings to balance their lending books. This will have to come from domestic savings.

Other assets normally included as part of household saving are not easily accessible, if at all. Even those that can be cashed in will normally incur a substantial tax charge on any withdrawals. Pensions are taxable as earned income and investments held through investment funds may incur an exit tax. Capital withdrawals from housing stock are one of the reasons we are in the mess we are in.

A Eurobarometer survey on the public’s perception of the social effects of the current crisis, available here, suggests that many people are beginning to struggle to make ends meet with 19.6% suggesting that they would be at high risk of being able to meet an unexpected bill of just €1,000.

There maybe some signs that people are paying off debt, which is reflected the decline in spending. However, this may be due to lack of access to new lines of borrowing rather than any concerted effort to get personal finances in order. In the case of credit cards we have had 12 months of continuous decline in their use, but no decline in the outstanding balances. The Central Bank’s explanation of decline in private sector debt is sobering,

“The vast majority of this annual decline is a result of valuation effects, such as write-downs of loans and increased bad-debt provisions given more difficult economic conditions…”

Further cuts in expenditure are going to see a greater squeeze on personal savings and pressure on organisations like St Vincent de Paul society, who report a 30% increase in calls for assistance.