Showing posts with label consumers. Show all posts
Showing posts with label consumers. Show all posts

Wednesday, June 18, 2014

18/6/2014: IMF analysis of Irish households' balance sheet


In previous two posts (here and here) I looked at the IMF's assessment of Irish banks. Now, lets take a quick look at the state of Irish households' balance sheets… Note: I covered outstanding credit to Irish households here.

Again, per IMF: "Household savings remain elevated, with three-quarters of savings devoted to debt reduction since 2010." Which practically means that savings and investment are now decoupled completely: we 'save' loads, we 'save' primarily to pay down debts. We, subsequently, invest nearly nada.


And savings rate has declined: in last 4 quarters on record below 10%, back toward the levels last seen at the end of 2008. Which should mean that consumption should be rising (as savings down)? Not really. Burden of debt is trending down still, from 2012 local peak, but this is still not enough to trigger increased consumption. Hence, the only conclusion is that savings down + consumption flat = income down. Might ask Minister Noon if his policies on indirect taxation have anything to do with this…

More ominously, for all this repayment of debts reflected in our 'savings' rates, the debt pile is not declining significantly:


What is going on? Especially since the recent 18 months should have registered significant debt reductions due to insolvencies and mortgages arrears resolutions acceleration? Ah, of course, that is what is driving the aggregate debt figures (although in many cases the debts are actually rising due to mortgages arrears resolutions, plus sales of debt to agencies outside the cover of Irish Central Bank, like IBRC mortgages sales).

Plus, for all the talk about mortgages arrears resolutions, the problem is barely being tackled when it comes to actual figures:



Oh, and the banks are continuing to squeeze depositors and fleece borrowers:



It's Happy Hour in the banking rip-off (sorry, CBI, profit margins rebuilding) saloon... All along, households are still under immense pressure on the side of their debt overhang.


Next Post: Economic Forecasts from the IMF

Friday, December 19, 2008

Ireland's Debt Mountain(s)


The latest CSO data merely confirms what we have known all along: Ireland is now by far the leading country when it comes to overall external debt held by its corporates, consumers and the Government. Our gross external debt has risen precipitously since the onset of the latest crisis from €1.537 trillion on January 1, 2008 to €1.671 trillion as of September 30, 2008. Some €21bn of this increase is accounted for by the State borrowing its way out of the need to reduce the runaway train of public spending. Roughly €25.3 bn came from the Monetary Authority.

Most worrisome were the increases of roughly €45 bn in the liabilities of the Other Sectors. This line of liabilities (up 4.13% between Q2 and Q3 2008) should have been rising at a much slower pace than the Gross External Debt (up 3.16%) if the households and firms were actually de-leveraging. Alas, this is not the case, suggesting that declines in households' incomes and corporate revenues are forcing the real side of Irish economy deeper into debt-dependency. This will have two implications on 2009 economic environment in Ireland:
(1) 2008 consumers' strike - leading to a precipitous collapse in retail sales - will continue as Irish households attempt to play catching up with de-leveraging that is well underway in the US and UK;
(2) Income tax hikes and VAT rates increases passed in the Budget 2009 will further exacerbate excessive debt burden problems, leading to slower, more painful de-leveraging of corporate and household balancesheets and prolonging the current crisis.

Thursday, December 18, 2008

A train wreck of Irish economic policy

In managing the ongoing economic crisis, observing Irish Government policy can only be compared to watching a train wreck in slow motion. The banks re-capitalization scheme announced this week is just another example. By ignoring Ireland's impoverished and debt-overloaded consumers and companies, the latest plan will not deliver any real benefits to growth, credit flows or consumer/producer confidence.

One frame…

First, the rails buckle underneath as the Exchequer balance snaps under the weight of reckless public spending. Pop, pop – the fastenings fly off as tax line after tax line comes short. “No worries, we have a plan”, calls out the engineer. Enter the emergency budget – empty of any ideas as to how to mend the path or to lighten the load.

Then, the engine slumps oil-less. Banks hit the friction of bad corporate and household loans. The sparks of private unemployment fly. “All’s fine,” shouts the engineer, “we have insurance”. Emergency banks guarantee follows, but panic engulfs the carriages.

For what seems like an eternity the train pushes on. Dust, gravel and engine parts are shooting in all directions. Business insolvencies double year on year under the weight of the heaviest corporate debt load in the EU. Consumers crumble under the largest debt mountain in the OECD. Homes repossessions are on the rise and retail sales crash. The policy engine spins out of control: income, savings and consumption taxes go up and business rates increase. “The fundamentals are sound,” shout engineers. The rest of the world is selling off Irish shares and assets.

By the end of last week, the index of Irish financial companies shares has fallen 67% relative to the Black Monday of September 29th – the point that triggered the banks guarantee. “This will all end happily,” chirp engineers, “We’ll commission new reports, appoint new committees and issue more emergency responses.”

… to another

Enter this Sunday’s desperate ‘capitalization’ package. This promises to deliver some €10 billion to the banks in a swap for equity. The details, predictably, are sparse. Everyone expects the capital injections to be a copy-cat of those instituted by Germany and the UK – the countries hardly facing the same problems as Ireland. This implies a mixture of private and public funds to be made available to the banks with some token conditions, e.g dividends and management bonuses caps.

In a statement the Department of Finance said the plan will underpin the availability of loans to individuals and businesses.

Ooops. By-passing Ireland’s impoverished consumers and companies, the plan will not deliver any such benefits.

Elsewhere in Europe and the US, similar capitalization schemes have failed to reduce the cost of corporate borrowing or to restart lending to the households. In the UK, a £43 billion capital injection scheme has been in place for almost two months and the supply of consumer and business credit continues to fall - whether due to demand slowdown, lenders withdrawal from the market or both. In the US, massive banks’ capital supports have lowered the mortgage rates, but there is no meaningful increase in new mortgages uptake.

Three reasons for State-to-Banks recapitalization in-effectiveness

First, heavily indebted households are unlikely to take up new credit regardless of the cost. Short of the Government scheme to reduce the household debt or to increase after-tax incomes, no policy will shift consumers out of precautionary savings and into credit markets. So the retail sales will continue falling, businesses will suffer and consumers will keep on heading North for shopping. Our engineers, who two months ago raised VAT and now stubbornly refuse to back-down will see even less VAT revenue in 2009.

Second, heavily indebted Irish businesses can use new credit to either roll-over existent debts, or to finance short-term operational expenses, e.g export transactions. With exception of export credits, any new lending will simply re-arrange the deck chairs on the sinking Titanic of corporate Ireland. None of the new loans will go into capital acquisition, investment or hiring. These activities have stopped not because credit got dear, but because economic demand for goods and services has collapsed.

Third, for the banks, turning recapitalization proceeds into business loans will defeat the entire purpose of the scheme. Assuming re-capitalization is needed because bank’s capital is running too low relative to the size of the impaired or threatened loans, recapitalization must drive up the capital-to-loans ratio. Taking the money and using it to issue more loans will do exactly the opposite.

And this brings us to the issue of costs. The scheme will use the last of the remaining taxpayers’ money – the National Pensions Reserve Fund – to increase capital reserves of the banks. This means the state will no longer have any remaining capacity to inject a meaningful stimulus into the real economy. The consumers will go on cutting spending, business will go on laying off workers and the Exchequer will go on issuing new emergency responses. The more things change…