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Ireland: McKinsey not as sanguine as Noonan on debt sustainability
By Michael Hennigan, Finfacts founder and editor
Feb 5, 2015 - 8:40 AM
Ireland: Today we have separately covered the latest report from the McKinsey Global Institute (MGI) on the rise in global debt and limited deleveraging since 2007 while Michael Noonan, finance minister, made clear in the Dáil on Tuesday that Irish debt is sustainable long-term.
Noonan spoke in a debate on Tuesday on Private Members' Motion on a Eurozone debt conference, which has been requested by the new Greek government. The minister had expressed support for the proposal in mid January but two weeks later he changed course following an intervention by Enda Kenny, taoiseach.
Global debt has risen $57tn or 17% of world GDP since 2007
The MGI focuses on total debt - government, household and corporate - while Noonan on Tuesday just referred to government debt and was also obliquely responding to a Tuesday morning op-ed by Fintan O'Toole, the Irish times columnist.
The minister invoked a decade period when in the latter part, credit growth was out of control and it rose almost 30% in 2005:
The solution for heavily indebted countries is growth. If you take Ireland during the period 1995 – 2005 as a model. In 1995 our general government debt was €43bn or 80% of GDP.
By 2005 the debt had increased in nominal terms by €1bn but as a percentage of GDP then stood at 26 per cent. During the period employment grew by around 50%. Do the supporters of a debt default for Ireland truly believe that given the high level of debt the country faced in 1995 that we should have defaulted then and it would have put Ireland in a better position?"
The 1990s was a unique decade for Ireland as was the property hysteria that followed.
The late Dr. Garret FitzGerald wrote in the Irish Times in 2006 that during the brief Celtic Tiger period from 1993 to 2001, our living standards rose by one-half. But this was due to two special factors both of which were essentially temporary in character.
"The first was the impact upon our national productivity of a quite exceptional inflow of new US investment. For a number of years Ireland, with only 1% of Europe's population, attracted up to 25% of all US greenfield industrial investment in our continent. The new technology and skills that this inflow brought contributed to a 4% annual increase in output per worker at national level, ie productivity.
The second factor, which played an even larger role in boosting our living standards during this time, was the huge increase in the total number of people at work, and the corresponding drop in the proportion of dependants in our population. Several factors contributed to this: the exceptional inflows of young workers emerging from the educational system and of women transferring from "home duties" to the labour force, and also the flow of unemployed people returning to work and of recent emigrants coming back to jobs here.
Within a decade these inflows into our labour-force reduced from 230 to 115 the number of dependants that every 100 workers had to support, either directly within their families or indirectly through taxation."
The jobs data for the period from end 2000 to end 2007— property bubble times—is revealing in terms of the potential for a jobs engine post the bubble and crash.
1) Total jobs added in 2000-2007 amounted to 440,000;
2) Total jobs in the exporting/internationally tradeable goods and services sectors (foreign-owned + indigenous) fell by 8,000;
3) There was in effect a jobless exports surge (some of the rise reflected growing tax avoidance);
4) About 10,000 jobs were lost in foreign firms while only 2,000 were added in Irish-owned firms;
5) Official data show that indigenous exporting firms had an export intensity below 40% in the period i.e. more than 60% of their sales were domestic;
6) The failure to add jobs when there was a huge home boom and an international credit boom suggests the narrow base of these firms.
McKinsey says: "We find it unlikely that economies with total non‑financial debt that is equivalent to three to four times GDP will grow their way out of excessive debt. And the adjustments to government budgets required to start deleveraging of the most indebted governments are on a scale that makes success politically challenging [ ] Nor are these economies likely to grow their way out of high government debt—which was essential to some previous successful deleveraging episodes, such as Sweden’s and Finland’s in the 1990s. In these countries, too, government debt rose in the recessions that followed their crises. But their private sectors deleveraged rapidly, and both nations benefited from an export boom, fueled in large part by a 30% currency depreciation and strong global demand. Today, many of the world’s largest economies are trying to deleverage at the same time and in an environment of limited global growth and persistently low inflation. Our analysis shows that real GDP growth would need to be twice the current projected rates or more to start reducing government debt-to-GDP ratios in six countries: Spain, Japan, Portugal, France, Italy, and Finland."
The Irish household debt to income ratio fell 33% from 2007 to Q2 2014 but at 175% remains high and compares with 133% in the UK and 99% in the US.
This is an average and is higher for some sectors of the population while the Irish per capita standard of living is among the lowest in the single currency area.
MGI estimates that half the Irish non-financial corporate debt is in respect of foreign-owned companies.
It is foolish to expect that Ireland will be an outlier on GDP growth dependent on export growth in the long-term when it is mainly relying on a small number of foreign-owned firms that leave little value added in Ireland.
MGI presents the challenges in a historical context:
While history offers many examples of countries that have substantially reduced very high ratios of government debt to GDP, this was accomplished under different circumstances than what countries must deal with today. It also involved considerable political will. After World War II, the United Kingdom had government debt equal to 238% of GDP; for the United States, it was 121%. These ratios were reduced over the subsequent decades, aided in the United States by two decades of very strong GDP growth and in the United Kingdom by a long period of austerity. More recently, Canada cut its government debt from 91% of GDP in 1995 to 51% in 2007, aided by strong global growth and commodity exports. Belgium—like Sweden and Finland, a small, export-oriented economy—reduced government debt from 144% of GDP in 1998 to 101% in 2007 through austerity measures mandated for joining the Eurozone. Today, global economic growth is weak and there are few signs of consensus to pursue austerity that was seen in the United Kingdom after World War II or in Belgium when it joined the Eurozone."
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