Household Debt above 85pc GDP

Household debt is storing up trouble
Friday September 8th 2006

HOUSEHOLD debt in some EU countries such as Ireland looks unsustainable, especially as the cost of borrowing is rising, European Economic and Monetary Affairs Commissioner Joaquin Almunia said yesterday.

“At the end of 2005, household debt was above 60pc of GDP (gross domestic product) in half of the euro-area member states, and above 70pc of GDP in Ireland, Luxembourg and the Netherlands,” Mr Almunia told a debt market conference in Madrid.

“Household debt dynamics appear unsustainable in some member states, particularly in a context of rising interest rates,” he said.

When measured against national income (GNP), Ireland’s household debt is even higher, at around 85pc of GNP.

Mr Almunia told the conference that the EU “needs to keep in mind the possibility of a sharp correction of financial asset prices, which in turn requires efficient supervision mechanisms.”

A sharp fall in property prices is one of the things causing concern to policymakers, especially if combined with slower economic growth and higher unemployment.

This could cause difficulties for some banks and the Commissioner said there was a need for a “substantial convergence in supervisory practices”.

Is the debt-fuelled world living on borrowed time?
Thursday September 7th 2006

The global lending spree is getting out of hand, with more rate rises the likely result - but could the sheer weight of debt crush soaring consumption?

IF you weed the garden when you don’t have to, goes a wise old saying, you’ll never have to weed the garden.

It could be the motto for central banks. And there is a strong suspicion that both the European Central Bank and the US Federal Reserve waited until they had to go weeding, with the result that their task is all the more difficult. It may even be too late to fully eradicate the dreaded inflationus horribilis from their patches without some heavy digging.

In the case of the euro area, one reason for concern is that nearly everyone is starting to behave more like the Irish and the Spaniards. While not naming names, ECB President Jean-Claude Trichet was referring to Ireland when he said last week that lending conditions in some markets were “abnormal”. The problem for him and the ECB is that the abnormal is beginning to look normal.

The ECB’s survey of bank lending in July showed the trend. Banks began reporting higher demand for credit in the middle of 2005. Household demand for mortgage loans took off first. By the beginning of this year 40pc more banks were reporting increased demand than the number citing steady or falling demand.

Then the corporate sector followed, with a positive balance of 20pc of the banks surveyed reporting increased loan demand for firms. The growth in mortgage demand did fall sharply from the April survey, but it is still growing.

The “abnormal” conditions in Ireland were on view in our own Central Bank’s detailed credit figures for June. They are even more abnormal than might have been thought, following a review of how the data is measured. Property and mortgages now account for an even bigger share of borrowing.

It is truly enormous. The monthly credit figures show private sector debt rising at 25-30pc, as they have done for most of the past five years. But, as the chart shows, lending for property activities grew by 65pc in the twelve months to June!

This is separate from the 27pc rise in mortgages, and is mainly lending to companies for property-related activities. With €20bn advanced in such loans in the twelve months, they account for 17pc of all private sector credit. Add mortgages, and property loans make up more than half the total debt.

In a consoling, if hardly surprising, analysis some time ago, the ECB concluded that borrowing had been highest in those euro countries where debt had been lowest, such as Ireland. Such convergence was only to be expected, once everyone had the same interest rate.

But we have all converged now, and then some. In terms of home-loans, the Dutch, though part of old, core Europe, are in the deepest, with 90pc of their debt for house purchase. The Irish are second, at 80pc. The Spanish, despite their huge property boom, are not much above the euro area average of 70pc, reflecting the fact that they started from further back.

The question now is whether the ECB can halt a more widespread growth in borrowing, and what it would take to do so. Many analysts believe the ECB has left it a bit late. True, many of the same analysts excoriated Frankfurt for any suggestion of increased rates, but that’s life.

The reason for thinking the ECB is “behind the curve” is that the growth curve may well have turned down already. Among the Big Three of the USA, eurozone and Japan, the much-maligned euro economy had the fastest growth in the twelve months to June. But most analysts expect that 2.4pc rate to slow from next year.

Ideally, interest rates should peak before growth, but ideal is rare. As regards the ECB’s intentions, though, the fact that its own projections see a possibility that growth will be maintained in 2007 can be taken as a sign that it has not ruled out more rate rises next year.

And, of course, the ECB, more than most, watches growth in the amount of money as well as in output. This time, there is no doubt that much of the money growth is from borrowing, as distinct, say, from selling shares for cash. The ECB has a clear mandate to stop that sort of thing from getting out of hand.

Interest rates of 4pc some time next year most certainly cannot be ruled out. But the ECB may find that it is pretty difficult to kill the appetite for debt, once people have got the taste for it. That certainly has been the case with the Bank of England.

The Old Lady of Threadneedle Street was one of the fastest on her feet, beginning to tighten at the end of 2003, well before the Fed and long before the ECB. She winged the property boom, but she did not kill it. Even with interest rates at 4.75pc, the latest figures show borrowing at a 15-year high, and home loans up 28pc. Another rate rise looks likely.

Some analysts are coming to the view that, actually, it may not be possible for central banks to engineer a “soft landing” for debt and associated inflation. Only an economic shock - a recession - will do it. That might come from central banks, in the way that Paul Volcker’s Fed infamously raised interest rates to penal levels and killed inflation, bit it seems unlikely.

So far, Ben Bernanke seems to be no Paul Volcker. The ECB probably lacks the political legitimacy for such drastic action, even if one could get it past an 18-member, twelve-nation Governing Council. The good news is that some think the global economy will do the job for the central bankers, as the weight of debt, especially in America, crushes consumption. Well, it’s one definition of good news.

Both Articles … si=1685478 … si=1683853

What is this household debt to disposable income ratio? is this interchangable with household debt to GDP ratio (or GNP)

Household Debt to Disposable income ratios

country 	1995	2008	% increase
Ireland	  48	 176	267
UK		    106   173	63
France		66	  72	9	
Spain		 59	 130	120
Canada		103	130	26
Source: Goodbody (cited by Amárach)

We even get a mention here on page 19 of 94

not sure how accurate this heat map of Europe is
thankfully we never had sub-prime borrowing in Ireland…

Mortgage debt alone is around 100% of GNP and 85% of GDP .

It’s important to hammer home to people that the problem is too much debt.

Everything else - bank bailouts, NAMA, unemployment, emigration, government and consumer spending cuts, higher taxes etc etc - are symptoms of this problem.
Not only does it get to the heart of the matter, but it exposes the sheer lunacy of borrowing €20 bilion annually.
Trying to treat all the symptoms through additional borrowings is akin to someone with lung cancer being told to smoke a cigarette if it makes them feel better.