Ireland’s Private Debt Problem

You saw the chart about two weeks ago on Developed economies’ debt levels by sector. Different economies have different debt problems. A few like Greece have public sector debt woes. And this is the sort of problem that forces a default only when the country is a currency user (and not a monopoly issuer of currency) as Japan has demonstrated. Mostly, however, the problem is in the private sector, where all of the indebted parties are currency users.

Ireland wasn’t in those charts but Ireland’s problem is private sector debt. An article in the Irish Independent that I think is significant highlights the dilemma.

THE Government is too focused on the question of public debt when it needs to concentrate on private indebtedness, according to a leading economist.

Speaking at an economics conference in Trinity College last night, Goodbody Stockbrokers chief economist Dermot O’Leary said the question of private debt had largely been put on the back burner until now, broadly because of the policies of the EU and ECB.

"Irish household debt is about 200pc of disposable income and, at that level, it could take between five and seven years to get that back down to ‘normal’ levels," he said.

"There has to be more focus on this issue because, as things stand, it will affect our ability to reach our growth targets," he added.

–Ireland is facing ‘a lost decade’ due to private debt

200 percent debt to GDP is absolutely enormous. The highest in the chart from January was Australia at 105% followed by the UK, Canada, the US, Spain and South Korea all above 80%. Ireland at 200% is in a completely different league. I haven’t had time to fact check this number but if it is true, you can see the problem.

Bottom line: Ireland cannot grow its economy until this debt is forgiven or written down. Public sector austerity in the face of this mountain of private sector debt will produce undesirable results. My prediction is that Ireland fails to meet targets and is re-coupled to the core. I would avoid any Irish retail or consumer-oriented stocks, and German and UK banks with heavy exposure to Ireland because Ireland is doing relatively well now. When Ireland misses targets and the economy falters, it will be a surprise and these companies will writedown loans and cut earnings aggressively.