ALL available evidence suggests the Irish appetite for borrowing continues to grow. Even credit card debt, which typically carries an interest rate of more than 20%, about 10 times the rate of inflation, has zoomed ahead to more than €2 billion. This suggests that consumers who want it all and want it now are willing to pay about €8m a week in interest to the banks for the privilege of using plastic cards.
Simultaneously, the demand for mortgage finance continues to surge ahead with house and apartment purchasers looking for additional credit of about €1.6 billion per month or almost €20 billion a year. The total volume of credit extended by licensed banks within the economy is now in the region of €200 billion, the equivalent of €50,000 for every man, woman and child in the country.
Should we be worried about all of this borrowing? I think not. History may record that in the period since 1990 the Irish — who appeared to suffer every conceivable economic misfortune in the past — suddenly began to enjoy outrageous good fortune. That may be about to continue.
Both the International Monetary Fund and Goldman Sachs expect that the European central bank will cut interest rates later this year, having held base rates steady at 2% for the best part of three years.
This means the cost of borrowing within the eurozone is likely to fall in 2005, rewarding those who have decided to take on more debt. Bone dry economists argue that an interest rate cut is the last thing the soaraway Irish economy needs but, in practical terms, people who have borrowed heavily in recent times will welcome a continuation of the conditions which provide easy and cheap credit.
A leading tax consultant told me last week that anybody who had failed to borrow in order to purchase property over the past five years had simply “missed the boat”. This was a one-way bet, he said, with the cost of credit at a historic low and a booming economy driving an asset price explosion. A herd instinct had taken hold: people simply bought property because they believed its value could go in only one direction.
Some economic pessimists have been predicting a property crash for years, but the people involved in trading property and arranging the funds needed to finance property deals can see no evidence of any downturn. They claim that the unusual demography of the Irish market points to a continued demand for new houses and apartments at a level that is remarkable by European standards. The Irish housing stock is expanding by about 5% a year. This is primarily as a result of the explosion in domestic credit creation, though it should be stressed that department of the environment figures suggest a substantial volume of house purchases are funded without recourse to debt of any kind.
The problem afflicting the arguments put forward by the pessimists is that the capital value of the Irish housing stock has appreciated by about €65 billion a year at current values in each of the past five years. Two-thirds of this is accounted for by the appreciation in the value of existing domestic property, the rest by the creation of new houses and apartments.
All of this is creating a credit market that is flexible and open to rapid lending growth. It is also creating a wealth effect within the wider economy. This, in turn, leads to a degree of aberrant behaviour at the edges of that credit market, as shown by the statistically large increase in credit card debt which has been experienced in recent months.
Irish people are obsessed with property to such an extent that they are now among the world’s biggest purchasers of overseas property, driving up property prices in Prague and Budapest in the same way they have driven up prices in Dublin and Cork. Some property analysts believe that such is the appetite for overseas property that borrowers based within the state could take on cumulative debts equivalent to half the existing volume of domestic credit to pay for overseas purchases within the next 10 years. Not for the first time the Irish economy is breaking the mould.
How is this possible? Some quite startling information emerged last week to show what is going on out there in the real world. It was revealed, for example, that a quarter of corporation profits tax is now being remitted by 10 multinational companies. This is the equivalent of €1.5 billion per year. This suggests that these 10 firms are recording profits of at least €12 billion per year within this jurisdiction, or almost
10% of Irish gross national product (GNP). Effectively this country is operating as a sort of massive tax haven. The buoyancy in profits tax receipts, coupled with the surge in stamp duties arising from the property market effectively allows the government to operate a low income tax regime.
This, in turn, permits a level of buoyancy in the service sector which provides for growth in the labour force of about 3% a year. About 72,400 extra jobs were created in the year to the end of February, almost all of them in services.
The reality is that with ECB base rates at 2% and possibly declining, the cost of servicing the country’s cumulative credit burden is trivial in comparison with the level of wealth creation within the domestic economy, and especially trivial in relation to the increase in asset values.
Over the next two years there is no reason to see any big setback. The period from mid-2006 to 2007 will witness the redemption of the special savings incentive accounts (SSIAs) which will see the equivalent of more than 10% of gross domestic product pumped into the economy in a very short period of time.
For many years, Irish people were forced to pay very high interest rates. Fifteen years ago we were accustomed to paying up to 14% for borrowed capital. Given current credit market realities, it should hardly be surprising that borrowers are snapping up credit at rates which are less then a third of what was considered normal in 1990.
Do you believe that we are looking into the apocalypse over the next few years? I do not. The economy continues to grow at a rapid rate and the SSIA cash will, if anything, pump up a level of consumer spending which is already growing rapidly and paying for a huge increase in service sector employment.
PS: The doubts about the future of the euro refuse to go away. A black mood has taken hold in Italy with government ministers openly claiming that the creation of the euro has robbed the Italian economy of the flexibility that once allowed it to bypass Britain in terms of the absolute value of physical output.
The Dutch also claim the price inflation that followed the creation of the single currency was a big factor in causing voters to reject the EU constitution. And nobody really believes the denials that have come from both the German finance ministry and the Bundesbank that they had discussed the possibility of a break-up of the eurozone.
Even so, do people honestly believe the European project will be allowed to perish? Far too much has been invested over the past 45 years to allow for failure. The Italian and Portuguese economies are groaning under the strains imposed by the single currency regime and the German and French economies have gone ex-growth but nobody among the European elite wants to abandon the grand dream.
