Monday, 4 January 2010

Personal debt levels

An Saoi: The Central Bank published its preliminary statistics for November a day early, they are available here. The figures continue to make awful reading with no sign that Irish borrowers are getting their personal debts under any form of control. Though you would not get that view from the mainstream media, for example RTÉ’s coverage or Colm Keena’s article in Thursday’s Irish Times where he suggests “Irish people are significantly reducing their personal debt by paying down items such as credit card bills, mortgages and other loans, according to the latest figures from the Central Bank”. Though to give him his due, he does provide a more balanced view as one reads down. Indeed debt as a proportion of GDP/GNP has increased not decreased significantly in the last 12 months.

The Central Bank makes clear that most of the marginal decline in nominal indebtedness was down “…to valuation effects (exchange rate movements, write-downs of loans and increased provisions for bad debts).” and “When valuation effects are accounted for, the underlying stock of PSC was approximately 1.7 per cent lower in November 2009 compared with November 2008.”

Credit Cards are a very clear bell weather of consumer behaviour. They are a very immediate source of credit and have accurately reflected the state of the Irish economy on its downward trajectory. Spending is 5.7% below the level of November 2008, which was itself 16.8% below the November 2007 spending level. Indebtedness has fallen by less than 1% in the past year. The number of business cards remains exactly the same, but the number of personal cards has declined by 46,000 or 2% since the start of 2009. We are now into a second year of declining expenditure on credit cards and the cumulative decline in personal expenditure (on credit cards) of 22.6% in two years, yet personal debt has increased by nearly 8.5% in the same time.

The significance of the levels of personal debt must be seen in the context of declining prices and a shrinking economy. Prices declined by 5.7% to November and GDP is estimated by the Dept. of Finance to be declining by 7.5% and the ESRI suggesting (perhaps conservatively) that house prices in Dublin have declined by 19.1% in the year to October.

Dr. Morgan Kelly’s most recent broadside in Tuesday’s Irish Times and his more detailed paper linked to on this site and on , gives us a picture of the type of zombie future we face because of the lack of a proper functioning banking system and unbearable levels of personal debt. Yet the Government continues to spin the myth that NAMA will free up lending. As Dr. Kelly points out our citizens are already the most indebted in the EU. The Central Bank used to publish a quarterly comparison but stopped doing so in June 2008. The last Table published is set out below.

This table of course would look much worse now, when the declines in prices and GNP/GDP are factored in.

Personal cash savings are likely to continue increasing slowly, and the lack of new personal credit will continue to inhibit new spending, let alone the obligations to pay off existing debt. On that basis, it is very hard to see tax yields dependent on personal spending, such as VAT & Excise increasing during 2010 or 2011. However I shall write further on this issue after the publication of the end of the year figures, which are rumoured to be far better than many were expecting. So good in fact they could not help leaking the news to the Sunday Business Post.


Aidan R said...

It is interesting to compare the debate on public-state debt with that of personal-private debt. To date, very few have made a political-economic link between the two.

What we have witnessed over the past 20 years is not a pure neo-liberal return to markets but a form of privatised debt. Instead of governments taking on debt to stimulate the economy (post war Keynesianism), low to middle income individuals did so. What Colin Crouch calls 'Privatised Keynesianism'. The debt-model is central to both. The bearer of debt different.

The market will always need mass consumption and confident consumers. The irony is how it managed to achieve this over the past 20 years in the absence of secure employment and secure labour markets. One would think that insecure-flexible labour markets, reduced trade union density and volatile employment would make people less 'confident' to consume. Not if you can buy everything with your cheap credit card. Domestic consumer spending facilitated by private-finance insitutions not the public-state was the Anglo-Saxon model.

Credit card growth and mortgages kept the lid on what was, from the begining, a completely unsustainable form of macro-economic managment. Yet, the policy response, to date, has been to cut public spending and thus minimise security for individuals and small businesses against market volatility, and provide security for the credit providers who amassed the wealth from privatised debt that people will now have to re-pay. Incredible.

Seamus Coffey said...

Some graphs on the Central Bank's credit card data are available here.

As per the post above, it shows that credit card debt is not being paid down. The monthly spend is paid but any outstanding balance remains, with the level increasing because of accumulating interest.

More information on general loans and deposits in Irish banks is also available.