The celebrations to mark the ECB’s move away from any interest rate rise (shortly followed by the US Federal Reserve) fell a bit flat, don’t you think? Which seems a bit odd, given how often we are told about our mountain of debt.
Commentators did their best. One pointed out that at the peak of the last cycle, ECB rates were more than 4pc. Imagine what that would do to a big variable mortgage. It did not seem to have much effect.
Interest rates have been low for a long time. Like the boy who cried wolf too often, the warnings have lost their force. Instead, a more familiar situation is developing. Last week the rate on German government debt went negative, meaning banks and other investors are willing to pay a small percentage for the privilege of holding Berlin’s bonds.
After more than a decade – perhaps two – the pattern remains intact. Central banks think first of avoiding recession. But the possibility of recession also raises the possibility of real problems with our debt.
On the face of it, this should be no surprise. Household debt amounts on average to 15 months’ disposable income – what is left to be spent after tax. That is a lot better than the 25 months’ reached in 2003, but it is still a large figure – the fourth-highest in the EU.
Among the EU-15, only Greece, Italy, Spain and Portugal have lower credit ratings, but not necessarily more debt. The countries with higher levels of household debt than Ireland include Denmark, the Netherlands and the UK. They all enjoy higher ratings – although Britain’s would probably be lower if it did not have its own currency.
One reason for the difference is the Irish banks’ exposure to debt and the debtors’ exposure to the banks. Despite the widespread, controversial sale of loans, almost one in 12 of those that remain are in arrears to some extent.
The risks for debtors, especially mortgage holders, were highlighted in a recent report from the ESRI. It finds that a one percentage point interest rate rise would produce a 0.5 percentage point increase in the numbers falling into arrears (equivalent to a change of more than 5pc).
If and when the interest rate cycle does turn, history suggests that it would turn quickly, with a rapid series of quarter point increases. This would probably be faster than incomes were rising to pay such an increase, especially if whatever had inspired the turn was itself depressing wages and employment.
As might be expected, the research found that younger, lower income households, where the adults were under 35 and at an earlier stage in their mortgage, were most vulnerable.
Less expected was the particular warning to the lucky folk on tracker mortgages. It is possible, in these hypothetical circumstances, that the high margins on Irish variable mortgages might be reduced, but tracker holders will bear the full impact of the ECB rise.
For now, it is all very hypothetical, so perhaps the worries are overdone, But for some such as the Brokers Ireland organisation, there is plenty to worry about right now.
Although arrears at the domestic lenders have been falling at more than €1bn a year, much of this is due to the sale of loans to other entities – vulture funds if you will. The brokers extracted from this month’s Central Bank data the startling figure that those with payments more than two years in arrears make up almost 90pc of the total problem loans which remain.
This may not be enough to pose a direct threat to the banks, with their shrunken loan books and increased capital. But the brokers raised one of several thorny political problems when they said it was high time the lenders separated those unwilling to pay from those unable to pay and wrote down debt for the latter.
The unstated implication is that the former should be forced to pay or ejected from the premises – which is of course another thorny issue. This is one of those distinctly Irish phenomena where the size of the political difficulty bears little relation to the size of the actual problem.
Repossessions are so rare and prolonged that the system benefits mainly those unwilling to pay. There was a grand total of 28 court-ordered repossessions in the last quarter of 2018, out of 63,246 mortgages in some form of arrears.
Those unable to pay get caught in the trap, while government-sponsored research suggests everyone else is paying a premium on their mortgages to compensate for the lenders’ lack of enforceable collateral.
The political process, far from amending this situation, is reinforcing it. The flurry of government action to deal with a negligible problem is even causing trouble with Europe. The ECB has already succeeded in removing some provisions of the consumer protection act which came into force this year, but apparently is still not happy with the course of events.
It sent a missive to the Government last month, apparently using words similar to those in the Commission’s country report on Ireland this month. The Commission added a warning that any legislation will have to be consistent with its proposals for new EU law on credit providers, borrowers and the recovery of collateral.
It mentions no fewer than three pieces of new legislation which it thinks could generate “undue obstacles” to getting rid of bad loans. Very politely the commission says these are “unintended consequences”, whereas we all know they are very much intended.
In a footnote it asserted the need for a level playing field for all concerned. The ECB, which of course wields real power, is determined that the banks are not singled out to bear the brunt of adjustment; precisely what many would see as the purpose of the legislation.
All of this gives an added significance to the new report on private sector debt by the Department of Finance. It is to be commended for attempting to strip out the enormous loans carried by multinationals on their Irish books and use the more realistic modified national income (GNI*) for its analysis.
The figures show how important that is. While total private debt to GDP is a whopping 244pc of GDP, the core figure, without multinationals, is around 170pc of GNI*, comprising 75pc household debt and 95pc domestic corporate debt.
That’s a lot better but is it good enough? It is a far from simple question, because the true burden of a country’s debt depends on factors such as demographics, potential growth and returns on investment.
The EU rules set a limit of 133pc of national output beyond which debt becomes an economic “imbalance”. Ireland has been over this limit since the early 2000s – the period which many see as the start of the Bubble.
The Department’s analysts boldly go further, using benchmarks to compare Ireland’s private debt ratio based on fundamental economic factors. Done that way, household debt is found to be below the benchmark, despite being among the highest in the EU.
For the corporate sector, debt has been broadly in line with the benchmark for the last two years. The report suggests that certain features of the economy, including expected economic and population growth, provide a broadly acceptable explanation for higher levels of both household and business debt than most other European nations.
That might be taken as an explanation for the sang-froid about interest rates and support for the view that we should not get too hung up about our debt, or excited about interest rates. But the report also carries a possible explanation as to why markets are not equally sanguine.
It points out that even a modest downturn, where the rate of economic growth fell to the same level as the growth in debt, but no lower, would see household debt reaching a level close to its pre-crisis peak by 2023.
That is the new potential trap. Such reports do not represent government policy, although one likes to think they inform it. Mr Donohoe went no further than to say the Government would monitor the trends. Hardly surprising, when policy seems to be to leave the debt elephant largely undisturbed, while furiously pursuing the repossession mouse.