Thursday, 13 August 2009

Money, money everywhere (but here)

Michael Taft: If you took some commentators seriously, you’d be excused for believing that Ireland Ltd. is on the verge of going into liquidation. Whether it’s defaulting on our debt, a growing inability to borrow more, or just despairing over that ‘€400 million we’re borrowing every week – yes, you’d assume the country is out of dosh.

But that doesn’t tally with the recent US Treasury release of data identifying the major holders of Treasury Securities – that is, US debt. China is the biggest holder of US debt – about a quarter of the foreign total. Japan, the tax havens in the Caribbean and the UK (with its tax havens) are also up there. But guess who else is. Yes, poor ol’ broke Ireland.

Irish ‘residents’ hold $50 billion worth of US Treasury securities. That’s almost as much as Germany (even though German GDP is nearly 14 times larger than our own) and more than twice as much as French holdings. Our holdings are worth over $12,000 for every man, woman and child.

Irish holdings have shot up recently. Only last year Irish holdings amounted to $15 billion. In just 12 months, $35 billion fled Ireland for the safety of US debt. Yes, there’s money swilling around – but it’s not swilling here.

This is of a piece. Irish holdings of foreign portfolio securities throughout the world amounted to €1.3 trillion at the end of 2007, with €440 billion held foreign equity and another €575 billion in bonds and notes. The increase since 2000 has been substantial – up from about €500 billion.

To put this in some perspective, Ireland’s €1.3 trillion held abroad compares to the foreign holdings of French residents of €2 trillion – even though the French economy is more than ten times larger than the Irish economy.

Of course, it will be argued that Ireland’s wealth holdings are too big to be maintained in the limited domestic investment opportunities. Foreign Direct Investment may come here by the truckload, wooed by prospects of high returns – but not high enough to satisfy our own residents. They must go abroad to find financial satisfaction; US debt, for instance.

There’s some validity to this argument but there’s another picture. It’s long been a complaint, by politicians and commentators, that money is tight here, but pretty loose everywhere else. Back in the 1950s Flann O’Brien wrote:

‘It is almost a cliché that this country is chronically undercapitalised, that money for productive capital works cannot be got. The administration recently started capital works concerned with land reclamation and drainage and is about to clear all the rocks out of Connemara. With money borrowed from the banks deposited by thrifty farmers? Not on your life. With borrowed American dollars which are twice as costly as pounds.’

Frank Aiken had his own run-ins. When he attempted to finance an expansionary programme shortly after the war, the Irish banks refused to loan, preferring to keep their money safe in the UK. He declared:

‘I regard their turning down of the request (to loan the government money) . . as an act of undeclared war upon our people’.

The banks won and Aiken surrendered unconditionally: the people paid the price

Patrick Honohan wrote only a couple of years before the financial crisis:

‘ . . .despite the emergence of the International Financial Services Centre (IFSC) as a leading player in some subsectors of offshore finance; despite the high profitability and unusually high percentage of the banking system not domestically controlled; and despite the absence of any significant bank failures for over a century; there is little evidence to suggest either that recent Irish growth has been finance-rich in the sense understood by the literature, or that the previous low-growth experience was explicable in terms of a weak financial system.’

Irish banking and financial investment played little role in the Celtic Tiger economy. They were too busy playing away and plotting the eventual chain of events which would lead us to the Carroll liquidation and NAMA.

Michael Hennigan of Finfacts points out that between 2001 and 2007, nearly €41 billion left the economy in search of commercial property abroad, while only a fraction of that was invested in indigenous high-tech companies.

Of course, it would be too simplistic to point out that only a small percentage of these resident holdings abroad would be needed to pay off the entire national debt (of course). Or that even a smaller percentage would be needed to recapitalise the banks without taxpayer intervention (of course). To maintain such a position would betray a profound misunderstanding of capital flows in a highly globalised system (of course).

Besides, it’s not as if Brian Lenihan is unaware of the problem of ‘money flowing abroad’. Only recently, in a fit of patriotic fervour, he called on hard-pressed consumers not to go to Newry to shop. Unfortunately, Lenihan’s ‘Irish money for Irish business’ is a pretty limited. I’ve not recalled him calling on Irish investors to stop crossing the oceanic border and buying US debt.

So the next time you hear a commentator or economist calling on the Government to slash social welfare spending, claiming that we have been paying ourselves too much; the next time you hear some politician saying we have to take ‘tough-love measures’ (usually without the love) because otherwise we’ll go broke; just remember all those hundreds of billions of ‘Irish money’ circulating throughout the world Remember those billions that have fled the country in the last few months to buy US debt. Remember all the money that is going everywhere but here – to invest in our industries, enterprises, and infrastructure.

And if you think this is a curious way to run a modern economy, you’d be right.


Pavement Trauma said...

The point about Irish investor money not being put into Irish businesses is entirely salient. But I'm guessing the headline figures of €1.3 trillion by 'Irish residents' is not what it appears to be here.

Does this figure include the holdings of US and foreign multinational companies and foreign investments companies based in Ireland? I can't find a CSO definition but looking at, say, the amount of Italian bonds (€72 billion) held, I'd say this is the most likely explanation. Hence it is not really all 'our' money. It belongs to entities we attracted here. Probably.

Anonymous said...

If we hold that much US debt we are even more screwed than we think.

What are we going to do when the dollar takes a bath and hyperinflates? The US$ debt is and is going to be worthless.

Michael Taft said...

Pavement Trauma - I pulled out this definition of 'resident':

'The term ‘resident’ covers (a) individuals, including foreign nationals, living in Ireland for at least one year as well as Irish embassy staff and military staff located abroad, (b) Irish government enclaves located abroad (embassies, consulates, etc.), and (c) corporate bodies who have a centre of economic interest located here, including branches of foreign-registered companies. Foreign-owned enterprises located in Ireland (in the International Financial Services Centre –IFSC – and elsewhere) and engaged in internationally traded financial services activities are included.' (

So it does include foreign enterprises. But the 'centre of economic interest'? Does this include brass-plate operations? Probably. We've never been too timid about including MNCs in our national stats. The problem is spearating out the 'indigenous' and the 'foreign'. Does Tesco and Argos have foreign securities based here? Do branches of foreign-owned banks? Given the agnosticism of our state agencies about the operation of MNCs here (transfer-pricing, etc.) we won't know. But even if half of all global securities were owned by indigenous 'residents' - that would still represent a high ratio compared to other countries - France, for example.

Pavement Trauma said...

Thanks for the CSO definition Michael.

I suspect the proportion of securities held by indigenous residents is significantly lower than half. In 2007, according to the NIB 'Wealth in Modern Ireland' (ha!) report, aggregate household wealth was a trillion euro. 23% of this was held as securities - both domestic and foreign. That gives securities worth 230 billion in 2007. Take away the decline in asset values (20%?) since then. Take away the proportion of those securities that are domestic (35%?). You're probably looking at ballpark of around 120 billion in foreign securities being held by Irish households. Ballpark.

I can't see how the domestic corporates holdings of foreign securities approach anything near the ~530 billion euro that would be needed to make up the 50% of 1.3 trillion.

Man, these big numbers are tiring.