Tuesday, November 23, 2010

'Til Government Debt do us part - Part 2 - The Irish Crisis

Update November 24th, 2010:

As part of the country's National Recovery Plan 2011 to 2014, the Government of Ireland today announced that it would further gouge taxpayers by increasing the standard rate of VAT from 21 to 22 percent in 2013 and to 23 percent in 2014.  This measure is expected to bring in an additional €620 million.  In other news, corporations will continue to benefit from a 12.5 percent corporate tax rate.  Oh yes, and a cut in minimum wage by €1 per hour to 7.65.  Nothing like hitting the helpless who had nothing to do with the mess Ireland is in, is there?

Original Posting:

Ireland has been all the talk in the mainstream media the past week or thereabouts.  While the information in this posting is not particularly new, I am providing readers with a summary of the entire Irish economic crisis in one place.  As well, I thought I'd compare their debt issues to that of the G8 nations from my previous posting found here.  As usual, I have gone to the original government sources for both fiscal and population data; if they are prevaricating, then I'm just passing it along so don't blame me!

From the Government of Ireland's Department of Finance, here's a look at their own national debt numbers, current to the end of fiscal 2009 from a report dated September 2010:

Here's a look at how much it is costing Ireland to service their national debt on an annual basis:

Now let's look at my favourite debt per capita number.  With a population of 4,470,700  and debt of $102 billion at the end of in April 2010, the per capita debt for the residents of the Republic of Ireland comes in at $22,815.  Note that this is well below that of the United States and Japan, somewhat lower than France and Italy and roughly on par with the United Kingdom.

From the Department's Monthly Economic Bulletin for November 2010, they announced the following:

1.) The revised estimate for the 2008 General Government Balance is a deficit of 7.3 percent of GDP.
2.) The revised estimate for the 2009 General Government Balance is a deficit of 14.4 percent of GDP.
3.) The forecast for the 2010 General Government Balance is a deficit of 32.0 percent of GDP.

Is it just me or is this ship heading in the wrong direction?

Here's more bad news:

1.) Ireland's ratio of General Government Debt to GDP at the end of 2008 is estimated to have been 44.3 percent.
2.) The revised estimate for General Government Debt to GDP ratio at the end of 2009 is estimated to have been 65.5 percent.
3.) The forecast for General Government Debt to GDP ratio at the end of 2010 is estimated to be 98.6 percent.

That puts Ireland in 12th place (in 2009) after such fiscally responsible nations as Portugal, Italy, France, Germany, the United Kingdom and Austria.  All hands abandon ship!

Here's an interesting chart from the Department's Monthly Economic Bulletin for November 2010 that pretty much summarizes the first part the entire problem:

 Notice how for at least the period of time from January 2004 to early 2008 that loans for house purchases grew by more than 20 percent year over year?  Notice how that slumped to near zero by the end of 2009?

...and here's the second part of the problem:

In Q1 of 2010, average new house prices fell by 11.3 percent and average second-hand house prices fell by 16.7 percent compared to Q1 2009.  In the capital city, Dublin, average new house prices fell by 14.8 percent and average second-hand house prices fell by 22.3 percent compared to Q1 2009.  All of this is on top of the fiscal 2009 drop in average new house prices of 20.7 percent and 21.1 percent in 2009.  From the peak in 2006, average national house prices have dropped by 36 percent as shown in this chart:

From a Central Bank of Ireland press release dated November 17th, 2010, it was announced that 5.1 percent of all mortgages in Ireland were in arrears by more than 90 days.  On the upside, the total value of the 789,000 outstanding residential mortgages dropped by €316 million to a total of €117.4 billion since Q2 2010.

The drop in real estate prices and rise in unemployment led to dramatically increased stress in Ireland's banking system.  The Irish government formed the National Asset Management Agency (NAMA) to acquire problem loans from banks in exchange for government bonds.  From a speech given on November 18th, 2010 by NAMA Chairman Frank Daly, to date, the original book value of the 11,000 loans acquired by NAMA is €73 billion and it has issued over €30 billion to the affected institutions.   It is estimated that at least €45 billion ($61.2 billion) (and possibly up to €60 billion ($81.6 billion - roughly 80 percent of Ireland's current debt) will be required to recapitalize Irish banks, roughly one-third of Ireland's GDP.  If the best case scenario bank bailout is put into a per capita perspective, the roughly 2 million taxpayers of Ireland will have to pony up $30,600 each (or $13,700 for each man, woman and child) to keep the banks afloat.  To put the $30,600 into perspective, the United States' Troubled Asset Relief Program (TARP), which allowed the U.S. government/taxpayers to purchase up to $700 billion in "troubled assets"  from financial institutions, had a maximum per capita cost of $2260.

Three letters: OMG!

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