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Irelands Debt Off the Scale

Dr Constantin Gurdgiev does us a favour by distilling Reihart and Roghoff recent paper’s conclusion re Ireland and,  it does not look good!

“But for those more inclined to read some much more really serious stuff, look no further than to
the latest Reinhart-Rogoff work on debt crisis: A DECADE OF DEBT, Carmen M. Reinhart and Kenneth S. Rogoff, NBER WORKING PAPER SERIES 16827 from February 2011 (no point to link it, as it is password protected). Here are the excerpts:

Starting from the top, the authors say (all emphasis is mine): “there is important new material here including the discussion of how World I and Great Depression debt were largely resolved through outright default and restructuring, whereas World War II debts were often resolved through financial repression [in other words through capital controls, forced expropriation of savings via taxation and soft force-induced diversion of domestic investment to financing of the Government liabilities – in effect, a form of expropriating pension funds etc]. We argue there that financial repression is likely to play a big role in the exit strategy from the current buildup. We also highlight here the extraordinary external debt levels of Ireland and Iceland compared to all historical norms in our data base.”

Another quote: “For the countries with systemic financial crises and/or sovereign debt problems (Greece, Iceland, Ireland, Portugal, Spain, the United Kingdom, and the United States), average debt levels are up by about 134 percent, surpassing by a sizable margin the three year 86 percent benchmark that Reinhart and Rogoff, 2009, find for earlier deep post-war financial crises. The larger debt buildups in Iceland and Ireland are importantly associated with not only the sheer magnitude of the recessions/depressions in those countries but also with the scale of the bank debt buildup prior to the crisis—which is, as far as these authors are aware—without parallel in the long history of financial crises.” And here’s a chart from the paper:

Now, average increase in the crisis was 36%. In pre-2008 history of all modern financial crises, the financial crisis saw increases on average of 86%. In the current crisis, Ireland experienced and increase of Government debt of ca 320%! And this was just Government’s official debt. Quasi-official debts add to more than that. In other words, by historical standards – ca 86% would classify us as being serious bust, 320% would classify as having been financially vaporized!

Puts into perspective the official Ireland’s blabber about ‘we can manage this debt’.

But if we need more, Reinhart & Rogoff oblige: “After more than three years since the onset of the crisis, banking sectors remain riddled with high debts (of which a sizable share are nonperforming) and low levels of capitalization, while household sector have significant exposures to a depressed real estate market. Under such conditions, the migration of private debts to the public sector and central bank balance sheets are likely to continue, especially in the prevalent environment of indiscriminate, massive, bailouts.” So what the authors are saying here is that:

* There has been no resolution to the crisis after 3 years of drastic measures;
* The only outcome of the current approach is private debt (banks) continuation to move onto Government balancesheet, until
* The proverbial sh&&t hits the fan:

“The sharp run-up in public sector debt will likely prove one of the most enduring legacies of the 2007-2009 financial crises… We examine the experience of forty four countries spanning up to two centuries of data on central government debt, inflation and growth. Our main finding is that… high debt/GDP levels (90 percent and above) are associated with notably lower growth outcomes. ..Seldom do countries “grow” their way out of debts.

“…As countries hit debt intolerance ceilings, market interest rates can begin to rise quite suddenly, forcing painful adjustment [guess what’s awaiting Ireland when – with current 10% mortgages stress levels – this happens?].

“For many if not most advanced countries, dismissing debt concerns at this time is tantamount to ignoring the proverbial elephant in the room. So is pretending that no restructuring will be necessary. It may not be called restructuring, so as not to offend the sensitivities of governments that want to pretend to find an advanced economy solution for an emerging market style sovereign debt crisis. As in other debt crises resolution episodes, debt buybacks and debt-equity swaps are a part of the restructuring landscape. …The process where debts are being “placed” at below market interest rates in pension funds and other more captive domestic financial institutions is already under way in several countries in Europe [and recall the cheerleaders for this in Ireland were… the pension funds themselves].

Central banks on both sides of the Atlantic have become even bigger players in purchases of government debt, possibly for the indefinite future.”

Pretty tough words…

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