Irish Election are pleased to announce our collection of Irish 
€1.3 TRILLION REASONS WHY IRELAND HAS AN OVERDRAFT FOR AN ECONOMY
Read more about: Economy, Fianna Fail, Government, Housing, Progressive Democrats
Heads up to Random Walk for this one. And, ahem, McWilliams for the overdraft line. Ireland’s gross external debt increased by 262% under Fianna Fáil and the PDs, from around €521 billion in 2002, to over €1.36 trillion as of 30 June 2007. The gross external debt, according to the CSO, consists of “the gross external debt of all resident sectors (i.e. general government, the monetary authority, financial and non-financial corporations and households), June 2007 report available here.
This is simply one consequence of having an economic policy based around the interests of your political bagmen, rather than the economy itself. There is absolutely nothing random about any of this. Furthermore, to argue that to owe so much is not a problem in a world where credit has just burst, is to wait for the planes to land on Fantasy Island.
It’s a big number but it has to be set against assets. Suppose for example that a bank based in the IFSC is running a fund that has borrowed €10 billion and used it to invest in e.g. emerging market debt. The debt statistics count the €10 billion as gross debt but don’t count the offsetting purchase of an asset. The net debt could be close to zero — as long as the fund isn’t being stupid (which is another story). I do think that there are financial landmines sitting in the IFSC but not of the trillion euro variety. Note also that government debt is a tiny proportion of the total.
Since 2002, Irish external debt has increased by over €841 billion. Have assets increased in proportion as well, to offset it? Given that 25% of the Irish economy involves selling ourselves houses, where do you think that puts the Irish economy?
I think the numbers contain 2 different issues. One is the explosion in “hedge” funds run out of Dublin that borrow from banks internationally to invest in international assets such as dodgy US mortgages. For those type of transaction, the external debt (what they borrow) is matched by an external asset (the possibly dodgy US mortgage). So on paper the assets and liabilities match but we’ll find out over the next few months whether they actually were an appropriate match.
The other issue is the domestic housing sector. This is mostly domestic assets (houses) backed by domestic liabilities (loans), so the incipient crisis is if the market crashes and the houses are worth less than the loans. But that could happen even if Ireland was an entirely closed economy with domestic savers financing mortgages. Now in fact I think some Irish mortgage lenders probably were borrowing abroad so some of this activity is probably in the external debt number above. The other issue is the one the ESRI highlighted, that so much of GDP is now taken up with us buying, selling, and building houses.
I agree. One point though. We’ve had a mortgage boom in Ireland over the last ten years. One of the reasons for the crazy prices paid for houses was the fact that banks and mortgage lenders have been buying credit on the open market (which they have to sell) and pushing prices up. The two are linked. It’s not a case of €280,000 being paid for a house in Leitrim, where 22% of the housing stock is empty, where Ireland a closed economy. first of all, the builders would not have gotten the money to build the houses in the first place, followed by buyers getting the necessary funds to buy the overpriced houses. Our house prices are linked to the international availability of easy credit. Well, what was easy credit until a few months ago. housing bubbles don’t happen in a closed economy.
It’s hard to tell but I think this company, Nua Homeloans, may be an example of an Irish firm borrowing internationally to finance mortgages issued in Ireland. Note also the Celtic veneer, via the name, on the enterprise which otherwise could be anywhere.
http://www.rte.ie/business/2007/1002/finance.html
Cheers P. O’Neil for the link. Hadnt heard about them before. I know the Irish economy is more than the construction industry and property market, and I really hope that people don’t get burned with this, but, it is hard to see this ending well. As an economy we are heavily dependent on the international credit markets, I mean, much more than most economies given our small size. I think we’re up there with Spain in terms of debit, and that’s in actual figures not in ratio, and spain’s got a population almost 12 times that of Ireland. We’re just below Britain, and Britain’s almost 15 times the population of Ireland. I know that the docklands financial centre acts as a de facto off-shore bank, but, so does the city in london to an extent.
god. and there’s so many people who’ve been sold a lemon in the last ten years as well.
Here are a few points on the above. Our External Debt does not include equity or financial derivatives. It should be noted, however, that much of this external debt is offset by holdings of foreign financial assets by Irish residents. I got these points from CSO website http://www.cso.ie/releasespublications/documents/
economy/current/externaldebt.pdf
The concern over our External Debt was aired on the PropertyPin on 16th July last http://thepropertypin.com/forum/viewtopic.php?p=19671#19671. The External Debt as at September 2007 will be published at the end of this month. I would expect that the debt will stand at over $2 trillion. The USA external Debt which is causing so much hassle for the dollar is under $10 trillion.