Risk from high debt levels may be overstated, departmental study finds

The risk to the Irish economy from elevated debt levels may be overstated, a study by the Department of Finance has claimed.

The research paper, entitled “Analysis of Private Sector Debt in Ireland”, suggests that a significant component of private-sector debt here is generated by multinationals and does not pose a risk to the wider economy.

While debt is an important driver of consumer spending and investment, at certain levels it can make “economies more vulnerable to shocks, for instance from a global trade war or a high-impact event such as Brexit,” the study said.

“It reduces the ability of both households and corporations to weather reductions in income after a negative economic event, for instance to maintain consumption and investment or to continue to service existing obligations. This can magnify shocks and lead to larger swings in economic output,” it said.

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A difficulty arises in determining the threshold at which the relationship becomes problematic.

Currently the Republic has the fourth highest headline debt-to-GDP ratio in the European Union at 244 per cent, behind Luxembourg, Cyprus and the Netherlands.

The department’s study, however, suggests this figure is inflated by multinational debt, a significant amount of which is cross-border intra-group lending for foreign direct investment (FDI) purposes, which does not represent a substantial risk to the domestic economy or financial system.

Distortions

The study attempts to address “these distortions” to produce a core Irish private debt ratio, which excludes the FDI-related debt and uses the Central Statistics Office’s modified gross national income (GNI*), which better reflects underlying domestic activity.

It calculated that the Republic’s core private debt-to-GNI* ratio was 172 per cent in 2017, compared with the headline private debt-to-GDP ratio of 244 per cent. Within this non-financial corporation (NFC) debt-to-GNI* ratio was 95 per cent, while household debt-to-GNI* was 77 per cent.

“This would imply that the existing levels of debt are in line with a level associated with fundamental economic drivers,” it concluded.

The study indicated that Irish household debt now stands at 126 per cent of disposable income, a level last seen in 2003, having peaked at 212 per cent in 2009.

Nonetheless it is still the fourth highest in the EU. The State also has the sixth highest level of household debt in the EU on a per-capita basis, at €29,000 per person.

"The high level of private debt in Ireland has continually been highlighted as an economic risk, including on the European Commission's scoreboard of macroeconomic imbalances," Minister for Finance Paschal Donohoe said.

“Understanding how much of this debt relates to the domestic economy and how much is attributable to the activities of multinationals is crucial to allow us to formulate appropriate economic policy,” he said.

“While the paper finds that household debt levels are not out of line with fundamental economic drivers, the fact that Ireland’s households remain among the most indebted in the EU highlights the continued need for the Government to closely monitor trends in household debt, including regarding mortgage arrears,” he added.