Private sector credit falls by €3.2bn

THE USE of credit by the private sector continued to fall in January, as consumers weaned themselves off credit card debt, the mortgage market contracted and lending to businesses declined.

New figures from the Central Bank show that private sector credit fell by €3.2 billion during the first month of the year, further lowering the annual rate of change in private sector credit to 7.1 per cent.

Just over half of the annual contraction is the result of writedowns by financial institutions, increased provisions for bad debts and the strengthening of the euro against other major currencies throughout the year.

However, in the month of January, most of the decline in credit was due to repayments of credit exceeding fresh drawdowns.

The pace of decline in lending to businesses became more pronounced during the month, according to the Central Bank. Credit to this sector, adjusted for valuation effects, fell 4.3 per cent in the year to January.

Household credit was 2.2 per cent lower in January 2010 compared with January 2009, while there was a 0.5 per cent monthly decline in total household credit compared to December 2009.

Outstanding residential mortgage loans declined by €269 million during the month, bringing the annual rate of decline in mortgage lending to 0.7 per cent. The value of outstanding mortgages at the end of January 2010 was €147.4 billion.

There was a “more rapid” decline in the level of outstanding indebtedness on personal credit cards in January. Repayments exceeded new spending by €83 million during the month, taking the year-on-year change in credit card debt to minus 1.3 per cent.

Ireland’s private sector credit data will be significantly affected by the transfer of toxic bank debt to the National Asset Management Agency (Nama), the Central Bank said yesterday. This is because the transfers are expected to trigger new writedowns of loans.

Although some economists are hopeful that the establishment of Nama will pave the way for a functioning credit market, they do not expect a return to the expansionary credit markets of the boom years.