When all the people you read every week for information are talking about the same report, you know that you should read it. From Paul Krugman on the left to John Mauldin on the right, some of my favourite reads of the week are citing a McKinsey Consulting report on global debt.
Reading through it, one chart jumped out at me. Have a look at the chart. Yes, the one accompanying this article. It is taken from data of the Bank of International Settlements. It shows just how much debt the Irish economy is carrying. What it tells you is that Ireland is the most indebted country in the world. When compared with Greece, Ireland is carrying more than two-and-a-half times more debt. We are twice as indebted as Portugal.
This deterioration happened when we were members of the euro. When we borrowed hand over fist from German and British banks in particular.
The implication of this figure is that the Irish economy has to grow six times faster than the interest rate charged on this debt in order for the overall debt burden to remain stable. Assuming that the rate of interest — even with all the negotiations — is 4pc. This means that the Irish economy would have to grow by 24pc next year, just to ensure that the debt/GDP ratio stays stable.
Much is made of the government debt –which remains enormous — but the real problem seems to be the debt held by the banks or the financial institutions and the debts built up by Ireland Inc, as well as the debts which we, the people, incurred in the boom.
The implication of this for the next few years — if we try to pay this money back — is that the huge outflow from the economy every year will amount to just over €30bn — that’s at an interest rate of 4pc. Quite how we can cope with this is anyone’s guess.
So it is time to get real. There is little or no hope of this money being paid back in total. In fact, the least of our worries is the government debt when you consider the size of the private sector, corporate and banking debts.
In terms of default, conventional wisdom suggests that Ireland should not default on its sovereign debt. This is a persuasive argument and we — the Irish citizens — should probably go along with it.
But when it comes to the private debts, whether it’s the debt you might be carrying on the house you bought in the boom, or a company’s debts or even the debts of the financial system, the iron rule of capitalism needs to be applied.
This rule says that in order to get out of the debt mess, the lenders and the borrowers must pay. Given what the data is telling us, it is amazing that the line has been held for so long, without massive default. Indeed, what is more amazing still is that the national narrative has been dictated for so long by the lenders who, having lent the various players in the country over 600pc of income, are clearly the villains in this story. If anyone wants evidence of reckless lending, there it is straight in front of your eyes.
At the moment, the Irish Government is reading from the creditors’ script, trying to wrangle a few euro out of them and being apologetic in the process while resorting to sound bites like “who would lend to us?”
The problem with these type of debt numbers is that the people who are lending to us are only facilitating the payments of other creditors. So the money they are lending now is being stuffed recklessly down into a hole of debt and all it is doing is creating yet another pyramid scheme and yet more dependency.
For example, this includes the Anglo €1.25bn, which is being paid (pathetically) today. This is just adding to the mountain of debt, which is already built up, because we are just adding more and more debt to the huge financial burden to pay for this existing liability.
Can you see how this is yet another pyramid scheme? It is the inverse of the credit pyramid scheme in the boom — which couldn’t last. It is a debt pyramid scheme where the likelihood of getting out at the top, is based on how much more debt we stuff into the bottom of the pyramid.
We are not the only country facing this dilemma, but our situation is by far the most precarious. The whole of the West is dealing with the consequences of the credit boom. Most countries are condemned to years of debt repayment, rebuilding their balance sheets and increasing savings. This is termed deleveraging.
In Ireland, given the magnitude of the debt, it is very clear to me that only a fraction of this household and corporate debt will be actually paid off. The figures scream default.
Take a typical Irish case where a business — like a local convenience store — borrowed €4m to build a few retail units and a few apartments in the boom on a turnover of €700,000. The bank lent the money and everyone clapped the “entrepreneur” on the back.
Today, turnover is €450,000 but the development can’t sell for more than €1m. Even if they could find a buyer, at €1m, where will they get the money to pay the rest of the €3m outstanding?
They won’t. So the hit will be taken by the bank that lent the cash. Then the bank has a default problem. This is what is happening all over the country. This presages massive defaults on an ongoing basis.
There are two ways you can get out of debt. One is that you can work your way out over years and years. This is the “right” thing to do. But sometimes, when the weight of debt is just too heavy, it is impossible. I fear that this is the case for Ireland, irrespective of how certain parts of the economy — for example the export sector — are moving. It is just not possible, without inflation, to pay this debt in full.
We have been told this week that a “bomb” would go off if the Anglo debt were to be defaulted on today. That is nonsense. The bomb has already gone off. It went off when all this lending was incurred and every time someone got more into debt, a further little device detonated, creating the economic wasteland we walk in.
Before you finish, take a look at the chart again. Examine the numbers for Ireland and you tell me if there is possibly another way out of this?
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The Personal Insolvency Act of the Oireachtas, to be legislated into law by end April 2012, will clear out a lot of the dead wood. http://www.irishtimes.com/newspaper/breaking/2012/0125/breaking18.html This Bill is so significant, the entire text, all 159 pages, are posted on the IT website in .pdf format. So if you owe 6 figures and you can’t pay it, as DMcW points out, you won’t pay it. You’ll be repossessed under the new Personal Insolvency Laws later this year. Then you can start again, as is common practice all over the world. What kind of an amazing mess will then be on… Read more »
I wonder how far will the Insiders go to get to keep their pOnzi machine going!?
The reason why we are payn’ bondholders, non-guaranteed, insured, anonymous, all part of their game to keep the pOnzi machine in place for the next bubble.
Their pOnzi machine must be kept in situ at all cost.
What else can explain this insanity.
Hi David. It is very difficult to argue with your conclusions in todays article, and of you have consistently stated this for a long time now. Much as I dont like your conclusion, I haveto agree with them. Re: Enda Kenny and Coalition policy, I believe now that they also secretly believe that we will default.But not just yet.And obviously they cant give ANY hint of this. Enda went to visit David Cameron recently. What came out of that? “Relations between UK + IRL have never been soooo Gooood!!!” blah, blah, The day after, Enda mentioned-as an aside- that “Ireland… Read more »
Debt is a substitute for income. Sometimes OK. Often bad.
Where’s the chart?
McKinsey Consulting report link doesn’t work either.
So, what’s the message, should people stop paying off their mortgages and credit card bills and car loans because the lender will have to take a hit?
K…well…hmmm…. Seamus Coffey in article of today’s Indo 120125 states: ”The figures in the piece do indeed scream default, but the figures are wrong. 100pc wrong.” David’s figures are from the McK report he cites Coffey maintains irish debt is 4 not 8 times the irish income. ”Irish debt is actually around four times national income and using figures 100pc greater than this is misleading. The data come from the Bank of International Settlements (BIS) who try to use gross and unconsolidated data as a measure of overall indebtedness. This can lead to unusual results.” He explains his reasoning and… Read more »
IT this evening:
“The draft Insolvency Bill is a “significant advance” toward addressing the problems of indebted households, the Free Legal Advice Centres organisation (Flac) has said.
It added the proposed legislation had the capacity to make a significant improvement for those who are currently struggling with debt”.
http://www.irishtimes.com/newspaper/breaking/2012/0125/breaking70.html
What has happened to the McKinsey Consulting report site? It seems to have disappeared!
Brendan
Can anybody on this blog explain to the ordinary man in the street why we borrow money on a Friday to pay down a debt on Monday.This is pure and simply loan sharking.As with all loan sharks its in the loan shark’s interest to keep you borrowing and never pay down your debt in full.Anybody who is currently involved in this type borrowing at a local level will know exactly what I mean.If Joe Average had 10 jobs working 48 hours a day he still wouildn’t pay down his debt in 3 lifetimes. I don’t think we need a McKinsey… Read more »
David you are absolutely right, but unfortunately at the end of the day the interests and the ambitions of few people are going to prevail over the one of the majority, and the interest of the common good…unless we demand a new Government that is ready to do something about it, and is ready to fight in our behalf, because it’s clear tha this one is fiddling with figures, and robbing Peter to pay Paul.
I have believed from the beginning that the aim of the European establishment is to transfer all debts owed by Ireland Portugal Greece etc. into the control of Germany France and the ECB. When this is done, pressure will be put on these countries and force these countries into a federal Europe. As a consequence of this action, we will also be forced to raise our 12% corporation rate of tax, again we will become an outpost of a powerful force in Europe, but not Britain this time.
Brendan
We’ll limp along like a wounded WWII convoy crossing the Atlantic hoping the Wolf pack doesn’t finish us off. Clearly the game is up, the numbers speak for themselves, in fact the game has been up for some time, anyone with a small to medium size business has to be staying awake at night crunching the figures over and over. Meanwhile Archbishop Martin shows up on RTE out in Davos, he is either looking for a bailout for the Irish church from some wealthy donor or hoping that gang will ‘see the light’. We are moving inexorably to the final… Read more »
Ireland will plod along as long as we are loaned money from ECB or some other source. The game will go on and on until DDay. That will be when someone genius in the ECB or somewhere else (God knows where ) decides that Ireland will not get any more money. I figure we owe 1/4 of a billion give or take 50 billion . Please correct me if you actually know how much. We have borrowed 80 billion since the crash. So the point is we are up to our necks and the big question remains . How long… Read more »
David’s article’s often meet criticism for advocating defaulting on bank’s debt’s i.e. allowing the self-equilibrating laws of capitalism to work – as they must eventually! I think those who criticise this argument are afraid of the consequences of this action (…rightly so – they probably should be – I am sure David and every last one of us are also afraid of what this might unleash in the short-term). Leo Varadkar described how the ‘friendly advice of the troika’ that this would be tantamount to a bomb going off in Dublin!! But what David is prescribing as a remedy does… Read more »
If people get a chance and they still have Sky coming into the house, I recommend PBS (channel number 166), which shows some outstanding documentaries. One of them I had the pleasure of watching recently was on Mark Twain (real name Samuel Clemens) who went from being a very wealthy man to financial ruin and the bankrutcy of his publishing firm, the sum was enormous. Instead of running off or worse, Twain faced up to the magnitude of the problem and went on a world speaking tour and only returned to the US after every cent was paid. When he… Read more »
It’s no wonder people won’t even get out of their pyjamas to go to the labour exchange any more. What a joke the country has become and look at the leadership – Kenny & Noonan, two ex-schoolteacher, career politicians of the type that have gotten the country to exactly where it’s at today. Not that anybody from FF would be any better. Ireland’s leaders, rather than facing the brutal reality of the country’s situation have their heads stuck in the sand. It’s time to abandon the Euro Experiment & move forward, not scramble to resuscitate a dead duck. Disorderly default… Read more »
On the other hand maybe because we Irish have grown to over-value desirable but unnecessary objects & lifestyles we would wish to maintain the status quo in belief that we can return again to the way things were before. So we hang on to everything we have for the bumpy austerity ride until the next magic period of growth (bubble) begins, but we get to keep a semblance that the world we live in, is as we perceive it to be. A gold framed mirror is hugely desired by, & given expensive value for a middle aged ‘wealthy’ person in… Read more »
I see Mr. Callelly was arrested in his Clontarf residence as opposed to the one he used to claim mileage from in West Cork. Obviously there’s not the incentive to live in West Cork now that he no longer works in Dublin? – Does that make sense? Probably not but it illustrates a worrying point……… Ivor, being of the ruling/political class, found it quite easy to justify the bending of a rule and the telling of a lie because it is afterall…. just the people and just the peoples money. On Sunday Mr. Varadkar chose to spin a fib about… Read more »
Coming from Ireland and living in New York gives me a perspective on the current situation from both sides of the atlantic. In visits to Occupy Wall Street and conversations with Irish friends it seems to me that nobody has an clear idea of what could replace the current system. I put together a few ideas that could use technology to help make democracy more responsive and transparent. If you have the time please take a read and let me know if you find it interesting. I’ve been working in the web industry since the mid 90′s and a lot… Read more »
German President Wulff harassed by an unbelievable coordinated press, tv, media witch hunt. Is Bankers’ Revenge Behind the Media ‘Revelations’ about the German President? The obsession of the mainstream media in Germany, with one revelation after the other about relatively petty suspected financial irregularities of the President, Christian Wulff, with all of this orchestrated campaign mounting into calls for Wulff’s resignation, raises questions about the real motives behind this witch-hunt. Turns out the same media, with the two mouthpieces of the banks, {Frankfurter Allgemeine Zeitung} and {Financial Times Deutschland}, in the lead, were deeply upset about Wulff several months ago,… Read more »
We are told that a bomb will go off, but lied to about where. It will go off in foreign banks as default is inevitable. CDS, CDI’s with counter-parties all over the place will vaporize. I think most would be quite happy to see that now. I will become obvious then what FF/FG was doing all along – protecting a global financial empire that’s in its end-game. The question is then to move this in depth, a concerted staged revolution. We have more friends than most see right now. The sheer pressure has brought French presidential candidate Holland to a… Read more »
Lyndon Jones has taken a break from the site to pursue a greater understanding of “austerity” and has asked me to deputise for him. Lyndon has taken my advice and travelled to Egypt to, the Monastery of Saint Anthony which is a Coptic Orthodox monastery standing in an oasis in the Eastern Desert of Egypt, in the southern part of the Suez Governorate. So here we go, Austerity is good for your soul. Ireland needs to pay double digit interest rates to unguaranteed, unaccountable, rogue, scatterbrain, half-baked, fcuk witted bond holders and learn to love it. Oh yes and the… Read more »
Happy Gilmore informed the Public Accounts Committee or more to the point Deputy McLaughlin of Sinn fein that “you cannot expect to borrow money and not expect to have some conditions attached” So it looks like Happy and Co. are going to move and closed that little loophole, whereby Banks can no longer loan out money to every gombeen gobshite in the country as was the case here to fore…. We can all sleep well in our beds tonight, now that Happy and Co. have drilled down and found the cause of our bankruptcy…..It was all about the “conditions that… Read more »
Headmaster Noonan is gambling that by paying off the bondholders , that he will be able to agree a deal to kick the can holding the promissory notes well down the road in the future….at least 10 years with suitable interest rate attached…
Enda kenny is feeding the Irish people lies and if you look at FF/ FG / lab they are all the same a bunch of liars. FF is very careful in what they say against the current government because it might see the chance of trying to claw it’s way back into government at some point in the not to distant future,I believe that FF damage this country so badly that we where left on life support ,and then FG and lab came in and turned off the life support .Enda said we will pay our way ,who does he… Read more »
McWilliams has it absolutely right. Time to stop the hostage-taking of Ireland and her future generations, bring an end to the second-greatest emigration, cease the mortgaging of her future to pay yesterday’s debts so that banks can be made whole. To do otherwise, implies banks have no culpability for their behavior and the consequences that behavior has had on the lives of Irish citizens. Kick them all out, I say. Drop the euro. Eliminate the toxic, debt-based system that created the mess. Go to a gold/silver backed currency administered by the Irish Republic alone and route out the bankers and… Read more »
Papers full of nonsense stories yesterday to take the attention away from the fact FG/Lab repaid 1.25 billion of anglo bonds. 1 – Irish state sold bonds is complete bluff. These bonds were merely swapped or kicked down the road for another 12 months and I understand 70% of these bonds were not taken up. http://www.businessweek.com/news/2012-01-25/irish-seek-to-avoid-funding-cliff-with-2014-bond-switch.html 2 – I think this callely story is a piece of well timed theatrics. Covneys hysterical performance on Vincent Browne does show however that the situation is has become unsustainable. Enda was an embarrassment yesterday in the Dail standing by his growth forecast of… Read more »
I am new to the forum and not as learned as some of the people here but there is one thing I know !! when the noise gets too much and you cannot form the right conclusion there is only one true voice you should listen to….YOUR INTUITION, many many people ignore their intuition and it is only hindsight which shows the error of their ways. David you have it right and you always have, Irelands moral compass is broken, we have sold our souls to the bankers, there is another bubble forming and has been forming for a long… Read more »
Harper66 Labour is no more, I have spoken in the past number of months to elderly past members of the Labour party including my own father who are totally disgusted and dis-illusioned with todays labour party. I grew up in a household where fighting for your fellow man against the injustices of the likes of big banks and vested interests was bred into me, I remember watching the St Patricks Day parade from the top floor of the Federated Workers Union in Parnell Sq, I was so proud,(also the site of Vaughans Hotel and the location the Constitution of Ireland… Read more »
Fight back, Bring back the gold standard. We should realize we’r victims of a financial war. We need leaders who are strong enough to fight back for the people. We could be the first country to bring back the gold standard. Think of all the scared money out there looking for a safe place to go. We could leach paper wealth from currency’s such as Euro and US dollar. As the new Gold backed Irish punt increases in value we could use the ponzi tactics of the banks to carefully monetize more punts to buy more gold. Unfortunately Ireland hasn’t… Read more »
A lot of the analysis centres around the actions of the various players when it all boils down to human nature. I have worked at the top of the corporate ladder, in small business, being self employed, being broke, emigrated, came home, had money, gone broke again. But there was always one common trait I noticed. Those in power be it Boards, CEOs, Governments landlords or whoever wil hang on to the power until the last moment. Whether it is fear or greed or stupidity or just good old fashioned ego. I do not know, but history has shown us… Read more »
Apologies for the chart link not working – we’ve added a copy of the chart above.
Agree Deco,
Truth is, a lot of the fringe groups and independent politians now would have been mainstream Labour Party members 30 years ago, but Labour has lost the centrepiece of it doctrine, a social conscience, equality of men and this is the old adage of “Divide and Conquer”
All in little things that are going wrong in this country, the important things are hidden by the elephant that is the Banking/Sovereign Debt Issue, I heard a great saying just the other day,
“IF YOU HAVE A DEAD SKUNK IN YOUR HOUSE, YOU WILL NOT NOTICE THE MILK GOING OFF”
ANYBODY WHO WANTS TO UNDERSTAND BANKING IN IT’S SIMPLICITY AND FROM A LAYMANS POINT OF VIEW, GO TO http://WWW.KHANACADEMY.ORG AND SPENT A HOUR REVIEWING THE SECTION TITLED “BANKING AND MONEY” IT WILL BE AN HOUR WELL SPENT, I ASSURE YOU, START AT BANKING 1
United Kingdom in even worse shape, almost at 1000% of GDP. Have a look at the Financial Institutions “contribution” to the UK’s Debt. Not bad for just one square mile….
http://static7.businessinsider.com/image/4edb70a56bb3f7b433000030/debt.jpg
If anyone wants to step aside from our domestic predicament and take an overall view, I recommend “EXTREME MONEY by Satyajit Das,. Clear, concise and utterly straightforward, both in historical analysis and suggested solutions. Mainly DEFAULT and, to paraphrase, burn the lenders, start again from Year Zero.
It is about as useful as the so called democracy we have mate. The sad thing is that we dont live in a democracy any longer or have you noticed. Anyway if you could harness that energy and agression you display you might be a good canditate for changing the presen circus in the Dail.We were better off under the Brits
Reputational Costs
The Fiscal Advisory Council have invented a new jargon .Will this be a debased coin ? Or just Debased full stop .
http://www.rte.ie/news/2012/0126/fiscal-business.html
The facts of the figures posted in the article do not look good infact abysmal. And whilst they may try to bash and discredit the messenger and deny the reality of the facts the reality of the facts will not go away. What is it they say doing the same thing over and over again and again and expecting change….
Who in their right mind would believe the Irish Govt the Irish Civil service and most of the economic experts and the nonsense that RTE ditches out every day.
Anyway David I just hope you are prepared for more beatings.
What is it they say doing the same thing over and over again and again and expecting change…. ahh….Insanity, Stupidity, Ignorance We can borrow our way out of Debt !!!! As long as the last act is “DEFAULT” The greatest crime of this is the wasted time! We are here for a good time, not a long time. Time is the great leveller and a comodity, resource (or whatever you want to call it) that we cannot make more of, every generation has it’s cross to bear, Famine, WW1, WW2 etc… maybe this is our cross. I wouldn’t want to… Read more »
Is this level of total debt worse than the Japanese debt mountain of the 80’s -90’s?
Are we World beaters in this respect?
If the Mkinsey report is even half right, it does not really alter the fundamental fact. We have a major debt overhang which really unserviceable. I thank David for pointing out that the Civil/Public Service debt is not really the core problem. In some ways, I take some solace from this becasue if it were, it would be even more difficult to solve politcally. I am no friend of the inefficiencies in the PS, but when you get down to it, the majority of their debt is for paying the Gardai, Teachers, Nurses and Army…beyond that the pareto chart of… Read more »
“Charlie,Bertie,Biffo,Burke,Calleley etc…” to coin a phrase “you have done your country NO service” Mr Kenny,Mr Gilmore,Mr Bruton,Mr Varadkar etc.. the sovereign people of Ireland have placed the reigns in your hands, this is your chance, your moment in history, do the right thing and call a halt to this madness, call a halt to the greed and stand up for your people and country, they are all you have. Think of the lives selflessly forfeited in previous generations for our freedom, independence and liberty, do not dishonour your forefathers by bowing to the faceless, nameless commercial entities that would strip… Read more »
Paxman gold!
http://www.youtube.com/watch?v=e2VuElk5_Bg
David, I like numbers and I love diagrams, so this one is a winner for me. I have harboured the notion for a long time that since the foundation of the state, Government has seen its role as being primarily a tax collector, and regarded it as its right to disburse this tax however it saw fit, mainly by putting it in the pockets of the most powerful lobbys in the country. Conor McCabe talks about this at length in his book Sins of the Father. While he himself is somewhere to the left of Che Guevara, its hard to… Read more »
Reality Check,
Key points SOVEREIGN, WILL OF THE PEOPLE AND DEMOCRACY
That’s all that needs to be said.
Let the people decide….
David i agree 100% with your conclusions. In fact as Far as i can see there are only 2 Economists who think it possible for us to avoid default. Seamus Coffee of UCC who has an excellent blog and regularly comments on these matters and John Mchale. John Mchale doesnt comment any more cos he is now in the employ of the government. You could probably add Alan Ahearn to the list (he hasn’t commented in a long time as he is also in the employ of the Government). The point is It would actually help us if these last… Read more »
Irish republic = Insult to people’s intelligence.
Maybe the Govt is waiting for the opportune time to default?
(never waste a crisis and all that)
Like a disorderly Greek credit default swap triggered Euro break up? sometime around March-April?
Oh dear I’d better snap out of it!