Economic Indicators: Part 2 (National Debt, the Irish Banking Crisis and the 2010 Census)
In my experience as a public speaker, trainer and media guest, I find that a lot of people are confused by economic indicators, or find it difficult to relate these indicators to one another. I recently published two articles about economic indicators in the Sunday Business Post and thought the readers of my blog might be interested as well…
This article was published in the Sunday Business Post on Sunday May 6th, 2012. Read the first part here.
National debt: what it means for a country to borrow money
During July 2011, the cost of government borrowing was at 14%, its highest level since the European debt crisis began. In essence, this means that if the State had wanted to borrow on the financial markets, lenders would have required a highly punitive 14% interest. Of course, one must remember that the reason they would have demanded such a level of interest is because they were worried that Ireland would default on its loans and they would not get paid back.
Since then however, the Irish economy has made several strides forward and our bond yield has now fallen to approximately 6.8%. This amounts to a halving of the cost of Irish government borrowing and is clearly indicative of the returning confidence of the financial markets in the Irish economy. The NTMA (National Treasury Management Agency) looks after the borrowing requirements of the government and in effect manages the national debt, which stood at €129.6 billion at end April 2012.
There are positives and negatives to building up a level of borrowing on the country’s balance sheet. On one hand, the Irish people can benefit from maintained or better public services, more spending on infrastructure and money is spent on creating employment.
However, on the other hand, if money is borrowed, it must also be repaid… with interest. Instead of being used to repay bondholders (who lend money to the government) in the form of interest payments, this extra money could be spent on building public services, creating enterprise opportunities and capital projects. The higher the interest rate, the higher this opportunity cost.
In addition, if the government finds itself facing a deficit (i.e. it’s taking in less in taxation revenue than it is spending on services, public services, wages and infrastructure), it may turn to raising taxes from the Irish people to get enough money to repay our debts.
Irish banks recovering from their liquidity crisis
In September 2008, the Irish domestic banks faced a serious liquidity crisis: they didn’t have enough money available to cover the potential withdrawal requests of customers. Of course the ATMs never did actually dry up, but if all of the banks’ customers had wanted to take their money out of the banks, the banks couldn’t have complied. As a result, they turned to the government who created an “Eligible Liabilities Scheme”, which essentially provided a guarantee for all the banks’ customers’ deposits.
However, due to fear, many people withdrew their money and lodged it in other institutions within the state as well as outside. According to the Central Bank, retail deposits fell €31 billion between September 2008 and September 2011. As a result, the Irish banks suffered huge losses to their capital base and hence, they needed to borrow money from other sources.
Consequently, during those three years, they borrowed an extra €85 billion from the Irish Central Bank as well as approximately €150 billion from the Eurosystem. This is a very negative indication of how the banks’ stability was viewed, both from inside and outside the country.
However, the funding position of the banks has begun to change. For example, according to the NTMA the banks’ requirement of Eurosystem money is down €44bn from their peak in February 2011. This is now at its lowest point since November 2011, just before we needed to get financial assistance from the troika (European Commission, European Central Bank & International Monetary Fund).
In addition, the amount of retail deposits in the banks actually increased from €118 billion in June 2011 to €121 billion in September 2011. Finally, the amount the banks borrowed from the Irish Central Bank also fell by €1 billion during that same three-month period.
How NAMA handled property loans
In the wake of the banking crisis described above, many Irish financial institutions faced a situation in which they became deeply concerned that people who borrowed large amounts of money to buy commercial property wouldn’t be able to pay it back.
If you add this to the recession the country was facing as well as the flow of deposits out of these banks, this would have been a crippling blow to an already weakened economy and hence the government decided to set up a large property company (called NAMA – National Asset Management Agency) to buy these possibly defunct loans off the banks at a discount.
The rationale behind this idea was that firstly, it would give fresh capital to the banks to lend out to people and businesses. Secondly, if the market was flooded with a new supply of houses in the face of weakening demand, property prices could collapse. Thirdly, this separate agency could work through these loans and retrieve what was possible from the lenders over time. Since then, according to NAMA’s own figures, the agency has acquired 12,000 loans, amounting to €73.8 billion worth of original loans.
However, they negotiated an average discount of 56.9% and hence, paid €31.8 billion for the entire amount of this loan book. On the other end of this transaction, the Irish banks that sold these loans to NAMA received over €30 billion of fresh capital.
For example, let’s say that a bank has €100 of a property loan and NAMA bought it for €43.10. While the banks very much welcome new money coming into the institution as it gives them more money to lend out to borrowers, one must remember that they will not recover the losses “crystallised” on their balance sheets due to NAMA: that is, they will not be able to get back the €56.90 loss they made and this will eat into their profits in the future.
It is also noteworthy that the agency has generated some economic activity itself. For example, there have been almost 200 jobs created. On top of this, NAMA took over the loans on some unfinished properties and has granted €950 million in credit to people and businesses to finish these buildings so that they can be sold on.
Planning the country’s expenses: the 2010 Census
In 2011, the CSO contracted many people throughout the country to distribute census forms which asked the Irish households various questions about their lifestyle, ability to speak Irish, the distance of their commute to work and hopes for the future. By definition, the census is the official count of the nation’s people and a compilation of economic, social and other data.
According to the results of this publication, the number of people currently living on the Emerald Isle (4.59 million) is at its highest in 150 years. However, there has been a significant jump in the levels of people leaving Ireland to create a life in other countries. For example, the Economic & Social Research Institute (ESRI) projected that 1,000 people per week would emigrate in 2011 and this has also fed back into the Census figures as the number of Irish people born abroad has increased by 25% since 2006.
The Census has a number of uses for economic policy and planning. For example, the 2011 Census reported that Laois is experiencing a rate of population growth that is twice that of the country as a whole. As a result, the government can plan its road network today to accommodate this increasing demand.
Also, the Department of Finance gathers data on the demographic profile (i.e. the ages of different groups of people) of the country. This enables officials to consider how much will be needed to be spent on pensions in years to come and how the country will prepare for that.
In addition, according to the 2011 Census, 62% of the population is now living in towns and cities and this is at an all-time high level. If this continues, the Department of Transport will need to consider more elaborate forms of public transport whilst the Department for the Environment will need to strike the balance between urbanization and green areas.
After all, this is what the Census is for (among other things): to take a peek into the future and mitigate the “economic time lag” that so often gets policy decisions wrong.
The recession also affected tourism in Ireland – with an unexpected turn!
Ireland is a popular destination for tourists from Britain, mainland Europe, the USA and the rest of the world. However, each of these areas also suffered economically since the global slowdown in 2008, and as a consequence our own tourism numbers have been hit. For example, between 2006 & 2010, there were 1.11 million less visitors from the UK and 181,000 less people coming from the US. This had a very serious impact on the tills of shops, pubs, restaurants and tourist attractions.
In addition, this had an adverse impact on jobs created to service the tourism industry. According to Fáilte Ireland’s 2010 employment survey, there was a total number of approximately 178,000 people employed in this sector: put another way, this accounted for one in ten jobs in the economy.
However, our economic woes put an unexpected “silver lining” on the cloud of economic recession. The number of people holidaying at home (a.k.a “staycationing”) increased significantly from 7.3 million in 2006 to 8 million in 2010. This is a positive development for the Irish economy as the more money that is spent on Irish goods and services, the higher the marginal propensity to consume here at home as opposed to the marginal propensity to import (which is what happens when we spend our money abroad).
The fact that our cost base has lowered via deflation (see previous post) has also led to the following conclusion published by the Failte Ireland Tourism Barometer: “After two extremely difficult years in business tourism, international conference bookings for 2012 and 2013 are looking much better for incoming tour operators”.
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