Wednesday, July 19, 2017

So, what’s going on with the Current Account?

Last week the CSO provided the first insight into the new * variables that will hopefully address some of the distortions in the National Accounts that have been created by PLCs who have redomiciled to Ireland and offshore activities relating to assets owned by Irish-resident companies linked to aircraft leasing and intangible assets. 

While much of what was published was a useful step in the right direction a clearer view of what is happening in the Current Account of the Balance of Payments was not provided.  The problems with the official measure of the Current Account are evident below.

Balance of Payments Current Account Annual

After moving into deficit in the period from 2004 to 2007 the current account began to improve in 2008 but the improvement in 2009 and 2010 was much greater than the underlying performance of the economy would suggest.  The recent volatility is clear and this largely relates to the impact of the onshoring of intangible assets to Ireland.

To improve things we have been provided with a modified Current Account, termed CA*, that makes a number of important adjustments.  Per the CSO:

CA* is the current account balance (CA) adjusted for the depreciation of capital assets sometimes held outside Ireland owned by Irish resident foreign-owned firms, e.g. Intellectual Property (IP) and Aircraft Leasing, alongside the repatriated global income of companies that moved their headquarters to Ireland (e.g. redomiciled firms or corporate inversions).

The impact of the factors on the current account are shown in this table.

Globalisation Impacts on the Irish Current Account

The rise in the income accruing the redomiciled PLCs which drove the rapid improvement in the current account in 2009 and 2010 can be seen while the huge jump in the depreciation related to MNC owned intangible assets that caused in the recent volatility in the Current Account is also readily seen.

So what happens if we exclude the income of redomiciled PLCs, or equivalently consider them to flow out as a factor outflow to their foreign shareholders, and treat the depreciation on certain IP and aircraft assets as an outflow as this arises from gross profits that accrues to non-residents and is linked to assets that may have no direct link with the Irish economy?  Making these adjustments gives us this:

Modified Current Account Annual

Hmmm.  That’s not very good at all.  Yes, we do see some moderation of the improvement in 2009 and 2010 but recent figures do not make sense.  We would possibly have expected continued improvement in the Current Account for the last few years while the huge drop to a deficit of almost €30 billion in 2016 is not reflective of any underlying trend in the Irish economy.

So what are we missing?  Or maybe more accurately was remains in the modified Current Account that continues to distort the figures?  Adjusting for the depreciation of certain IP and aircraft assets is correct but no adjustment is made for their acquisition. 

Sometimes this assets are added to Ireland’s capital stock through a balance-sheet relocation (which has no impact on the current account) but other times the assets are acquired by an Irish-resident company and this transaction is recorded as an outflow in the balance of payments.  There is little doubt that the deficits shown in the modified measures for recent years are, in whole or in part, due to these acquisitions. 

Making an adjustment for the depreciation on these assets is appropriate for when these assets are here but we should also make an adjustment for how those assets get here if that has an impact on the Current Account.  So we need the net outright purchases in the balance of payments of the assets we are making a depreciation adjustment for.

We can get this from new Annex 4C of the Quarterly National Accounts.  This gives a modified Gross Fixed Capital Formation (in nominal terms) where the GFCF excluded from the modified measure are aircraft related to leasing and the onshoring of IP assets.  For some years the split between the two isn’t provided (as some quarters are suppressed) but we have their sum from the difference between the official and modified versions of GFCF.

Investment related to Aircraft Leasing and Purchase of Intellectual Property Assets

We should get a better picture of the current account if we make an adjustment for the fact that all of this investment in aircraft for leasing and the purchase of IP assets will have required them to be imported and therefore counted as an outflow in the Balance of Payments.  Now, there may be some differences in how these transactions are valued for National Accounts versus Balance of Payments purposes but any differences won’t materially change the result. 

So lets make an adjustment to the modified Current Account published by the CSO last week to take account of the purchase of aircraft for leasing and certain IP assets.

Adjusted Modified Current Account Annual

That seems much better.  We have the deterioration from 2004 to 2007 and a fairly steady improvement before return to a small surplus in 2014.  The figures since then seem questionable with a rapid move to a large surplus with this measure showing a surplus of €13 billion in 2016.  If this is true then we are in a very strong position but it does seem implausibly large.

Here is this approach applied above to getting an underlying Current Account as a percentage of GNI*.

Adjusted Modified Current Account Annual over GNI star

Are we running a current account surplus of seven per cent of national income?  It’s seems high.  A Current Account measure that seems to fit the underlying performance of the Irish economy up to 2014 but doesn’t thereafter isn’t of much use.  We want to know what is happening now.

The improvement in 2015 is likely partly due to €2.3 billion increase in Corporation Tax receipts seen that year, of which around 80 per cent was due to MNCs.  Corporation Tax did not grow to the same extent in 2016 so that cannot explain the continued improvement shown in this version of the Current Account.

There may be something happening within the income flow figures.  For example, the retained earnings of direct equity investment attributed to Irish residents increased by almost €3 billion in 2016 (from €10.9 billion to €13.8 billion) but as shown in the first table above the net foreign income of redomiciled PLCs only increased by €1 billion in 2016.  The impact of this €2 billion difference on the Current Account balance produced here is unclear. 

The 9.4 per cent nominal growth rate for GNI* also seems a bit high but it is probably not that far out of the ballpark.  It could be that there is another distortion on the income side that we need to be made aware of or it could be that our current external balance (along with our national income) really is improving at the rapid rate shown here but at least we’re only quibbling over a couple of percentage points of national income.  The figures published last week by the CSO allow us to get closer to what is really going on and it is a step to be welcomed.  More please.

Thursday, July 6, 2017

Some other trends in government revenue

The last post looked at the question as to whether the slow down in the growth of Exchequer tax revenue is reflective of underlying trends in the economy.  The conclusion was that while there has been a slow down in the growth of tax revenue it is due to factors that do not reflect underlying trends in the economy such as the 2015 level-shift in Corporation tax, the 2016 spike in Excise Duty and €2.2 billion of revenue reducing measures over the past three budgets.  Any concerns about the slowdown in tax revenue growth should be limited to the impact on the public finances rather than what it might imply for the economy in general.

Of course, Exchequer tax revenue isn’t the only source of government revenue though for a variety of reasons it attracts the most attention.  A broader measure of government revenue would include PRSI, other appropriations in aid collected by government departments and Exchequer non-tax revenue such as the Central Bank surplus, semi-state dividends, capital resources and income related to banking measures such guarantee fees and interest and dividends from certain banking assets.  So what is happening to these?

Central Government PRSI and Other Revenue

We have a divergent picture.  PRSI receipts have been growing steadily and in June recorded growth on a 12-month basis of 8.4 per cent.  For the year-to-date PRSI is 2.5 per cent or €116 million above profile in contrast to Income Tax which is €214 million behind profile.

The sum of Exchequer non-tax revenue and other appropriations-in-aid has been declining since the final quarter of 2014.  In November 2014, the 12-month sum of these revenues was €7.5 billion while for June 2017 the total was €5.0 billion.

This is due to falls in most of the items that are included in the category.  The surplus from the Central Bank with a general government impact was €1.4 billion in 2014 but was less than €1 billion this year.  €420 million of bank guarantee fees were collected in the year to January 2014 while the current total is less than one-tenth of that.  Around €500 million of dividends were collected by the Exchequer in both 2014 and 2015, last year it was less than €200 million.  Capital resources were boosted in 2014 by the €335 million received from the sale of Aer Lingus shares.  Other appropriations-in-aid have fallen from €4 billion to €3 billion though it is not clear why this is so or how it is linked to the expenditure of those departments.

The takeout is that while Exchequer tax revenue and PRSI receipts are growing, Exchequer non-tax revenue is falling.  This is a not surprise though.  Exchequer non-tax revenue to the end of June was €1,309 million compared to a profiled amount of €1,310 million.  Other appropriations-in-aid are also down year-on-year but are in line with expectations.

An issue may be when the growth rate of net expenditure is compared to the growth rate of taxation when it is known that non-tax sources of revenue are falling.  Using broader measures of central government revenue and expenditure may capture more information.

Central Government Revenue and Primary Expenditure

Monday, July 3, 2017

Should we be concerned with the slowdown in tax revenue growth?

Exchequer tax revenue bottomed out in the middle of 2010 and has been on a fairly steady upward trend since then.

Exchequer Tax 12-Month Rolling

There has, however, been a bit of attention given to the “flattening out” that has occurred since the middle of 2016.  This is more apparent if we look at the annual changes in the moving sum depicted in the chart above:

Exchequer Tax 12-Month Rolling Annual Change

Here we can see that tax revenues recorded their fastest recent growth in early 2015 (13.6 per cent in February) and while it was still above 10 per cent in mid-2016 there has been a steep fall in the growth rate since then with growth down to 3.5 per cent in May 2017.  Should we be concerned about this fall in the growth rate of tax revenues?

There are three reasons that can serve to ameliorate our concerns:

  1. The level shift in Corporation Tax receipts in 2015,
  2. A spike in Excise Duty receipts in early 2016,
  3. The impact of €2.2 billion of revenue-reducing budgetary measures (of which €1.8 billion relate to Income Tax)

Corporation Tax revenues began to rise in the middle of 2014 but really ramped up in the second half of 2015. 

Exchequer Corporation Tax 12-Month Rolling

A level-shift from €4 billion to €7 billion occurred in a very short period of time and for the past 18 months or so receipts have been relatively stable at the new level.  This will obviously have had a dramatic impact on the annual growth rates.   The growth of Corporation Tax exceeded 50 per cent towards the end of 2015 and was still above 40 per cent in June 2016.  Since then the growth of Corporation Tax has fallen markedly as the rise to the new level washes out of the annual growth rates.

The other tax exhibiting a strange recent pattern is Excise Duty.  If we truncate the vertical axis we can highlight this.

Exchequer Excise Duty 12-Month Rolling

Excise duties rose unexpectedly in early 2016 and have returned to somewhere near where they might have been had the steady upward trend seen since the middle of 2013 continued at the same rate.  The reason given for the spike is that excise duty from cigarettes increased markedly in advance of the expected introduction of plain packaging legislation.  The pattern for new car sales will also have contributed to the Excise Duty outturn.  The nature of the spike in early 2016 means that the annual changes in Excise Duty have turned negative.

Here are the annual changes in 12-month rolling sums of Corporation Tax and Excise Duty receipts:

Exchequer CT and Excise 12-Month Rolling Annual Change

What we see is that the growth rate of both have been falling since the middle of 2016 though obviously much more markedly in the case of Corporation Tax.  It is likely that these are driving the similar trend we see in overall Exchequer Tax receipts.  So let’s look at the growth of Exchequer tax revenue excluding these Corporation Tax and Excise Duty (notwithstanding that they are two of the big four ‘tax heads’):

Exchequer All and Ex CT and Excise 12-Month Rolling Annual Change

The navy line is the pattern that has caused some recent concern.  The maroon line is the annual change excluding Corporation Tax and Excise Duty, and while this did fall during 2015 it has been relatively stable for the past 18 months or so, generally showing growth of between four and six per cent.  All the recent slowdown in the growth of Exchequer Tax revenue is due to Corporation Tax and Excise Duty.  Are the 2015 level-shift in Corporation Tax and the 2016 spike in Excise Duty reflective of underlying trends in the economy?

One tax that may reflect the underlying trends of the economy is Income Tax and this appears to have flat lined recently.  This was growing at between eight and ten per cent through 2015 and up to the end of 2016 but the improvement slowed in 2017 to less than half that amount.  The latest Fiscal Monitor shows that Income Tax to the end of May is only up 2.5 per cent on the same period of 2016.

May Exchequer Tax

One reason not to be concerned with this is that around €1.8 billion of measures reducing Income Tax were introduced across Budgets 2015, 2016 and 2017, of which the bulk related to the Universal Social Charge.  One way to assess this could be to compare the growth rate of PRSI (which hasn’t had significant policy changes from a revenue perspective in recent budgets) to the growth rate of Income Tax (which has). 

Income Tax v PRSI

We see a large gap opening up in the past six months or so.  PRSI receipts have grown between eight and nine per cent year-on-year.  Income Tax revenues were growing at close to that level up to late last year but the growth has fallen to around three per cent now.  If this drop was reflective of underlying trends in the economy we could expect both Income Tax and PRSI to be similarly affected. 

The fact that they are not points to something else and the eight per cent growth of PRSI receipts reflects the underlying strong growth in the economy.  And in replying to a PQ the former Minister for Finance indicated that the PAYE component of Income Tax was up eight per cent in the first third of the year compared to the same period of 2016.  Again, this is in line with what we see in the labour market.

On the other side, VAT seems to be growing a little stronger than the underlying trends in the economy would suggest.  It might be something we come back to. As shown below, the growth of VAT on a rolling 12-month basis jumped at the start of 2017 and is now growing at nearly ten per cent.  Although seemingly positive maybe this is the one we should be concerned about.

Exchequer VAT 12-Month Rolling Annual Change

Wednesday, June 21, 2017

Where are the vulture funds?

On the 20th of June, the Oireachtas Finance Committee held a meeting on the National Co-Op Housing Bill.  One of the proponents of the Bill is Edmund Honohan, the Master of the High Court.  A report on the meeting is available here.

Let’s just consider one extract:

Mr Honohan also said his “overwhelming impression anecdotally” was that individuals before the courts in relation to these matters were sub-prime borrowers “who should probably never have been given mortgages in the first place”.

Anything that is based on someone’s “overwhelming impression anecdotally” probably doesn’t have much going for it to begin with.  The piece later says:

Mr Honohan said the “flattish level” of repossessions at 150 per quarter until the beginning of 2014 “doubled overnight” to in excess of 300. “I can think of no significant factor which might account for this sudden change other than the sudden arrival of vulture funds into our distressed mortgage mess,” he said.

“If that is so, you must presume that if the banks are now proposing to finally sell off their huge numbers of deeply indebted loans to the private sector, perhaps increasing the non-bank proportion of non-performing housing loans fivefold from less than 10 per cent to over 50 per cent, we can expect a further significant jump in possession cases.”

We’ll come back to this one. But let’s start with the “overwhelming impression anecdotally” that it is borrowers from sub-prime lenders who are before the courts.

We can check the plaintiffs in civil possession cases in the legal diary notices published on the Courts Service website.  Most mortgage repossession cases are listed on the civil lists of the County Registrars in the Circuit Courts. 

As of today (21/06/2017) there are 45 County Registrar lists that contain cases involving mortgage repossession.  These are for various dates in May, June and July and cover all eight circuit court districts and almost all counties within each circuit.  In total, it was possible to identify almost 1,900 repossession cases on the legal diary for County Registrars.  This is not all repossession cases before the courts as cases not listed for a sitting around this time will not be on the legal diary.  There are probably 10,000 to 12,000 mortgage repossession cases ongoing.  So we have maybe one-fifth of them in the sample extracted today.

Here are two pieces of information on these 1,900 cases.  The year represents the year the proceedings were submitted to the court and the plaintiff is the entity taking the case and seeking the possession order.

Circuit Court Repossession Cases

The 1,874 cases are split into lenders and those who have acquired loans, i.e. vulture funds.  These funds make up 15 per cent of the cases in the lists extracted and the year in which these cases were initiated can also be seen.

Let’s consider another group taking repossession cases. Let’s include AIB, BOI, EBS, PTSB, KBS and Ulster Bank and make a bit of a leap that we can exclude them from the class of subprime lenders that the under the “overwhelming impression anecdotally” are bringing repossession matters before the courts.

Well, between them these six lenders have 76 per cent of the cases on the list.  I don’t know what an “overwhelming impression anecdotally” is but in this case it does not appear to be based on evidence.  It seems to be just a wild claim aimed to gather attention.  That it should be coming from the Master of the High Court is alarming. 

Where did I go to find the evidence to refute this wild claim? The Courts Service website.  Is the Master of the High Court familiar with the Legal Diary?  It only took a short while to gather the figures in the above table.  Surely it would be better to rely on evidence rather than an “overwhelming impression anecdotally”?  But the role of evidence in the ongoing mortgage arrears crisis was sidelined a long, long time ago.

Maybe vulture funds will lead to a big jump in mortgage repossessions.  If they want to execute repossessions they will have to get a court order first but so far there hasn’t been a surge of cases from vulture funds on the court lists.  If anything, they seem underrepresented given the proportion of long-term arrears mortgages they hold.  Where are the vulture funds?

At the end of Q1 2017 unregulated loan owners held 5,085 mortgage accounts that were more than two years in arrears.  The average balance on these accounts was €256,300 with average arrears of missed payments of €121,100. 

We have been told that a tsunami of repossessions has been on the way since at least 2010.  To date, there has been no evidence of its appearance and repeatedly warning of its impending arrival does not appear to be costly. 

These warnings have surely added unnecessary stress and worry to already stressed borrowers.  These warnings have been proved wrong time and time again.  Banks may have a issued thousands of proceedings seeking orders for possession but the Irish courts are not bent to granting them.  This is a fact borne out from observation of the process.  But hey, who needs evidence, let’s propose a multi-billion scheme on the basis of one’s “overwhelming impression anecdotally”.

Monday, June 12, 2017

Trade in cranes as an indicator

This table summarises exports and imports for SITC 744.34: Tower Cranes and the first quarter and full year outcomes since 2010.  The units are tonnes.

Tower Cranes

Back in 2010 we were exporting cranes with nearly 2,500 tonnes of them leaving the country.  These exports have fallen off in recent years and in the first three months of 2017 there have been no exports in this category.

On the other side there were limited imports up to 2010 but this began to picked up in 2015 and 2016 and for the first quarter of 2017 imports are up 50 per cent on the same period last year.

The amounts of money involved tend to be relatively small.  The average price involved is generally around €5,000/tonne but the nature of the changes is pretty clear.  Though we do remain a long way from this:

Cranes in Dublin

Tuesday, April 18, 2017

Is Ireland’s business sector doing better than we think?

After the previous post’s trawl through the household sector accounts, here we have a look at the non-financial corporate sector in the Q4 Institutional Sector Accounts released last week.  Of course, whatever caveats there are about revisions are even more pronounced for the NFC sector but there is likely to be value in the data, particularly if we can gain some insight into what is happening in the domestic business sector (by assuming that revisions are more likely from the MNC side). 

First, the current account:

NFC Sector Current Account

We should immediately be drawn to the 21.3 per cent rise in Gross National Income in 2016.  Working through the numbers we can try to see what the source of this increase was.

It doesn’t appear to be increased output or profits.  Gross Domestic Product (i.e. value added) of the NFC sector grew by 3.8 per cent in 2016 and with COE paid growing by double that amount at 7.5 per cent there was “only” a 2.2 per cent rise in Gross Operating Surplus (akin to EBITDA).

So if profits are up two per cent how is Gross National Income of the NFC sector up more than 20 per cent?  It may be down to who is earning those profits.  It is a well-worn path but we know that the net profits of foreign-MNC subsidiaries operating in Ireland are rightly attributed to their foreign parents.  This can be explicitly through the payment of dividends or implicitly through the attribution of any retained earnings to the foreign parent.  The split doesn’t really matter.  Their sum gives us an indication of net MNC profits earned in Ireland.

In 2015, dividends paid and retained earnings owed by the NFC sector summed to €57.7 billion.  For 2016, it is estimated that these summed to €49.9 billion, a drop of almost €8 billion.  So while NFC profits may have increased by €3 billion it appears that the performance of domestic companies was much stronger as MNC profits appear to have fallen by €8 billion.

Increased profits and reduced factor outflows explain most of the increase in GNI (accounting for €11 billion of the €14 billion increase).  The remainder is explained by increased factor inflows. 

It can be seen that retained earnings owed to Irish-resident NFCs grew by more than 40 per cent in 2016, a rise of nearly €4 billion.  Although these could be the foreign-source profits of Irish MNCs most of the changes in the item have recently being driven by the foreign profits of companies which have redomiciled their headquarters to Ireland.  It is clear that these companies had a good 2016 but these profits bring no benefit to Ireland.

And we have one further caveat to explore before coming down strong that the performance of domestic companies was strong in 2016: depreciation.  The above table gives gross measures.  It will be the case that some of this gross income will be absorbed by depreciation.  If there has been an increase in the amount of depreciation attributed to the Irish assets of foreign-owned companies then the changes in gross income will not be reflective of changes in domestic businesses.  We can try and get some insight from this in the capital account.

NFC Sector Capital Account

There is a good bit going on but our focus is on “consumption of fixed capital”.  We can see that this was relatively stable in 2016, showing growth of just 1.9 per cent.  This is in marked contrast to what happened in 2015 as shown below.

NFC Depreciation

The dramatic rise in depreciation is obviously related to mobile assets.  The two candidates are aircraft and intangibles.  The scale of the increase in the capital stock means intangibles are the culprit.  This is the onshoring of intangibles by MNCs.  A transaction involving c.€24 billion of intangibles occurred in Q4 2016 (as reflected in the quarterly national accounts described here) but the impact this had on depreciation was small relative to the hundreds of billions of intangibles that were on-shored in early 2015.

The acquisition of these assets will enable the companies to avail of capital allowances to offset the capital expenditure incurred against their trading profits.  Although the Revenue Commissioners have not yet published the aggregate Corporation Tax statistics for 2015 we can expect that they will show an increase in the capital allowances used by companies of something approaching €30 billion.

In 2015, the Gross Operating Surplus of the NFC sector increased by €53 billion.  The amount of Corporation Tax paid by the NFC sector increased by €1.8 billion.  This suggests an increase in Taxable Income of around €20 billion.  The reason a large part of the increased Gross Trading Profits did not translate into Net Taxable Income was because of the use of Capital Allowances.  If Capital Allowances were not available then one could surmise that CT receipts would have been around €2.5 billion higher again.  However, if the Capital Allowances were not available then the IP would not have come here in the first place.

And it is also because of Capital Allowances that the distinction between gross and net profits in the NFC sector is important and why we have to be careful about drawing implications about the domestic sector from gross measures.

Still, the three pieces of evidence we have point us in the direction of a strong performance of domestic enterprises in 2016:

  • the sum of outbound dividends paid and retained earnings fell by €8 billion;
  • depreciation was relatively stable  increasing by just €1 billion;
  • retained earnings of re-domiciled PLCs accounted for a little over a quarter of the rise in Gross National Income

It is these muddying features it is hoped that the proposed GNI* will throw some transparency on to allow us to see what is happening the domestic economy.  As we said before:

In rough terms GNI* will be the standard “GDP less net factor income from abroad” to get to GNP with the (positive) balance of EU taxes and subsidies used to get to GNI.  After that, additional adjustments will be made for the depreciation of intangibles that MNCs have located here and the net income earned by redomiciled PLCs.  With these adjustments we should get a better measure of aggregate income developments for Irish residents.

When the Q4 QNAs were released we suggested that:

It’s little more than a guess but, assuming some fall in MNC profits last year, a growth rate in 2016 for GNI* of somewhere around 6 to 7 per cent may not be too wide of the mark.

There was nothing in the institutional sector accounts to contradict that conclusion.  As shown here the evidence supports it.

Aggregate improvement in the household sector continues

The publication last week of the Q4 Institutional Sector Non-Financial Accounts gives us a preliminary view of the various sectors of the economy in 2016.   The figures are subject to revision but can still offer some useful insights.  We’ll start here with a look at the current, capital and financial account of the household sector. First the current account.  Click to enlarge.

Household Sector Current Accounts 2007-2016

The headline is towards the bottom and shows that (nominal) gross disposable income is estimated to have grown by 4.5 per cent in 2016.  With consumption expenditure growing at a slower 3.5 per cent this means the saving rate increased in 2016 – which it did from 11.0 per cent in 2015 to 11.8 per cent in 2016.

The path to this 4.5 per cent increase in gross disposable income shows a few interesting developments.  Compensation of employees from the non-financial corporate sector continued its strong recent performance in 2016 growing by 7.5 per cent and is now up a remarkable 31 per cent from the level recorded in 2011.  Although it is the smallest source of compensation of employees the fastest growth in COE was actually from the household sector itself (through unincorporated entities).

Employee Compensation Paid

Compensation of employees from the corporate sector (financial plus non-financial) is now eight per cent greater, in nominal terms, than the local maximum recorded at the end of 2007.   Most of this is due to the NFC sector as shown in the first table from which COE paid in Q4 2016 was up ten per cent on it end-2007 peak.  Here is compensation of employees received by the household sector since the series began in 1999.

Compensation of Employees Received since 1999

This increase in COE is reflected in higher taxes on income and social contributions paid by the household sector. Taxes on income paid by the household sector rose 3.4 per cent and social contributions paid to the government sector rose 7.8 per cent.   So working through these gives the 4.5 per cent increase in gross disposable income.

Another notable feature of the data, as pointed out above, is that disposable income is rising faster than consumption expenditure.  Here are the seasonally adjusted series provided by the CSO.

Income and Consumption - Seasonally Adjusted

The widening gap between income and consumption in 2016 is evident.  A couple of asides on the chart:

  1. Looking at the chart would appear to suggest as though the growth of consumption in 2016 was close to nil.  In fact the Q4 number is actually slightly below the Q1 number.  However, that does not mean the annual growth figure for consumption was close to zero.  We have already seen that consumption expenditure grew by 3.5 per cent in 2016 and the seasonally adjusted figures in the chart above correspond with that.  The growth is as a result of the “carryover effect”.  Consumption might have been flat in 2016 but because there was growth in 2015, the quarterly levels in 2016 were above those from 2015.  The fact that consumption ended 2015 higher than it began the year causes a “carryover effect” for growth in 2016 which will give an annual growth rate even if there is little quarter-on-quarter growth from that level in 2016.
  2. The measure of income in the chart is Total Disposable Income.  This is Gross Disposable Income plus the adjustment for pension funds.  This adjustment adds back in a deduction which is counted as a social contribution but is actually a form of savings, i.e. contributions to pension funds.  This money is being put aside to fund consumption in the future.  The adjustment for pension funds is the difference between social contributions paid to the financial sector and social benefits received from the household sector.  For example, in 2016 the household sector paid €5,538 million of social contributions to the financial sector.  The household sector received €2,980 million of social benefits from the financial sector.  The adjustment for pension funds at the bottom of the table of €2,558 million is the difference between these two numbers.

The widening gap between income and consumption means the savings rate has increased.  The savings rate is the gap as a percentage of Total Disposable Income.

Savings Rate - Seasonally Adjusted

What are people doing with these savings?  To answer that we need to look at the capital and financial accounts.

First, it could be that people are using the savings to fund investment expenditure.  We can look for evidence of this in the capital account.  As would be expected the 2016 capital account for the household sector is hugely different to its 2007 equivalent.

Household Sector Capital Accounts  2007-2016

In 2007, the household sector has gross savings of €6.3 billion and undertook €23.2 billion of gross capital formation.  Thus to fund consumption and investment expenditure the household sector was a net borrower in 2007 to the tune of €16.9 billion (overall borrowing was growing much faster but that was due to transactions – buying existing houses off each other). 

A decade later and the household sector has gross savings of €11.7 billion but only undertakes €8.6 billion of gross capital formation.  Capital spending by the household sector is rising (and grew 16.5 per cent in 2016) but remains below the level of gross savings.  Thus the household sector is a net lender, and this was at a level of €3.4 billion in 2016.

Net Lending-Borrowing

We can see how this borrowing in 2007 was funded and get some insight into where the  lending of recent years is going by looking at the financial account – and in particular the transactions of the financial account.  The 2016 update won’t be published until later in the year but we can see the general trends in the changes to 2015.  Of course, these are net figures with lots of underlying movements.  The household sector isn’t a homogenous group.  Some people are borrowing to fund expenditure now, others are saving to fund expenditure in the future and others are saving to repay previous while others may be buying or selling financial assets.

Household Sector Financial Transaction Accounts 2007-2016

The most significant change is predictably enough for transactions relating to loan liabilities.  Back in 2007 loan transactions increased household indebtedness by nearly €25 billion (drawdowns far exceeded repayments) while for the past few years loan transactions have reduced household indebtedness by between €5 billion and €9 billion (repayments have exceeded drawdowns).  We can expect this to have continued in 2016.

On the asset side there has generally been an increase in deposits while transactions with insurance and pension reserves have seen a steady inflow of funds.  The pension component of these transactions corresponds to the “adjustment for pension funds” seen in the current account, i.e. the difference between contributions to, and drawdowns from, certain private pensions.  The transactions account also shows that the household sector is generally a seller of equity with the bulk of this made up of unlisted shares (private companies).

Here is the turnaround in financial transactions over the full period for which data is available.  Net financial transactions was negative up to 2008 and has been positive since then.

Financial Transactions

Transactions are only one factor that affects the balance sheet which will also reflect the impact of reclassifications and revaluations.  These are unlikely to significantly effect items like currency and deposits but can be a big factor behind changes in equity and pension reserves.

Household Sector Financial Balance Sheets 2007-2016

The net financial wealth of the household sector almost doubled between 2007 and 2015.  This was due to three factors:

  • €18.3 billion increase in Currency/Deposits (€18.2 billion of transactions)
  • €37.9 billion increase in Insurance/Pension Reserves (€22.9 billion of transactions)
  • €44.7 billion reduction in Loan Liabilities (€35.7 billion of transactions)

Of the €101 billion improvement in these items €77 billion was due to transactions. Reclassifications and revaluations had little impact on the change in Currency and Deposits.  The increase in Insurance and Pension Reserves was €15 billion more than that explained by transactions while the reduction in loans was €9 billion greater than the reduction due to the transactions.  Pensions funds have benefitted from rising asset values and there has been some write-offs of household debt. 

The household sector’s financial balance sheet has been improving but around three-quarters of it has been the result of ongoing saving and debt reduction rather than revaluations.  The overall balance sheet will include real assets (such as property, land, valuables etc.) but they are not part of this data. 

Here are the aggregate financial assets and liabilities of the household sector since 2002.

Financial Balance Sheet

The gap between the two lines above represents household net financial wealth.  This passed €200 billion for the first time in 2015 and there is little doubt that this improvement is ongoing.

Net Financial Assets

If housing assets were included net wealth would still be below the level seen in 2007.  To conclude here is a measure of debt-to-income for the household sector.

Debt to Income

Wednesday, March 22, 2017

The same but different, somehow

Apple and Samsung have distribution operations who manage the sale of their products to independent retailers in New Zealand.  Here are the aggregate accounts for these operations (for ten years in the case of Apple and seven years for Samsung).

Apple and Samsung New Zealand

Apple’s distribution to New Zealand is through a company that is resident and operated in Australia while Samsung used a branch of an Australian company up to 2013 and since then has used a New Zealand company.  The accounts of these companies and branches are easily accessible from the New Zealand Companies Office.

Apple’s distributor is slightly more profitable but there is little between them.  The average effective tax rates for the two are also very close.  One of these made front-page news; one didn’t.  A year ago we wondered the same for this side of the world.

Monday, March 20, 2017

Why is “arrears capitalisation” so difficult to understand?

The most common mortgage restructure currently used by lenders is “arrears capitalisation”.  Of the 121,000 PDH mortgage accounts that have been restructured, 38,500 have had this restructure applied to them.  It might be the most frequently used but it is also the most misunderstood.  One report states:

Arrears capitalisation, where arrears are added to the principal of the loan, was the most common form of restructure, comprising almost 22 per cent of the total, followed by “split mortgages” at 22.4 per cent, where part of a loan is warehoused for an agreed period.

This is wrong.  Arrears should never be added to the remaining principal.  We pointed this out two years ago but it still persists.  And a large part of the blame rests with the Central Bank.  Footnote 2 of their release says:

Arrears capitalisation is an arrangement whereby some or all of the outstanding arrears are added to the remaining principal balance, to be repaid over the life of the mortgage.

The only way someone can owe more when they miss payments is because of accrued interest; the fact of missing payments or going into arrears does not have an impact on the amount owed.  Adding arrears to the amount owed should never happen.

Consider a simplified situation of a loan for €120,000 to be repaid over 10 years.  To focus on the impact of arrears we will assume that the interest rate is zero.  Adding a positive interest does not change the argument.  So in this no-interest situation 120 payments of €1,000 a month are required to repay the loan over ten years.

Let’s say the borrower makes the payments for three years but then misses payments for an entire year.  The three years of payments (€1,000 x 12 x 3) will have reduced the balance to €84,000 and the year of missed payments will result in €12,000 in arrears.

At the start of year five the borrower is in a position to resume payments and engages with the lender.  The lender tells the borrower that the remaining balance is €84,000 and that there are €12,000 of arrears.  There is no basis for saying that the amount owed is €96,000 or any number other than €84,000.  It is nonsense to suggest so.  The borrower has borrowed €120,000, has repaid €36,000 and therefore owes €84,000.  With zero interest to be added that can only be the amount owed.

What is termed “arrears capitalisation” would actually be better described as “arrears amortisation”.  When the borrower engages with the bank at the start of year five there is a outstanding balance of €84,000 and six years remaining on the life of the loan to repay it.  Resuming payments of €1,000 per month will be insufficient to repay the loan over the remaining term.  Those payments would sum to €72,000 (€1000 x 12 x 6) so the shortfall would be €12,000, i.e. the amount of the arrears.

To ensure that the €12,000 of arrears is repaid over the life of the loan the monthly repayments are recalibrated to take account of the missed payments.  So repaying €84,000 over six years with no interest requires monthly repayments of €1,167.

The monthly repayment has gone up but it is not because any arrears have been added to the balance.  The payment has gone up to ensure that the arrears are paid once, not twice.  Under no circumstances should arrears be added to the balance.  The monthly payments have gone up because the borrower has a shorter period within which to repay the loan.  If the payments weren’t increased there would be a shortfall at the end which, in our simple case with no interest, would be equal to the amount of the missed payments.

In the case of our borrower with a debt of €120,000 the payments made are:

  • 36 x €1,000 for the first three years
  • 12 x zero for the year of missed payments
  • 72 x €1,167 for the remaining six years of the term.

The total amount repaid is €120,000.  If the arrears has been added on the total amount repaid would have been €132,000.  And if the borrower has missed two years of payments the total would have been €144,000.  How can the act of missing payments increase the amount that is owed?  Only interest can do that.

With an “arrears capitalisation” the payments are changed to ensure that the balance is paid over the term of the loan.  There is nothing added to the amount owed.  But I’m guessing there will be additions to the number of times we see it being said.

Do we need another category in the mortgage arrears data?

Last week the Central Bank published the Q4 update of their mortgage arrears dataset.  In general the situation is one of steady improvement but are we missing out on some of the underlying trends?

Q4 2016 PDH Arrears

The problem is that an ever larger proportion of the arrears accounts are in the final category for those over 720 days in arrears.  By the end of 2016 there were almost 33,500 PDH mortgage accounts in arrears of more than 720 days.  These accounts had an outstanding balance of €7.5 billion and had accumulated €2.2 billion of arrears.  Here are the reported categories as a proportion of the overall arrears problem.

Q4 2016 PDH Arrears Proportions

At the end of 2016 accounts over 720 days in arrears were 43 per cent of accounts in arrears, 53 per cent of the total outstanding balance in arrears and 89 per cent of the built-up arrears.  Can we really tell what is happening to arrears when so much is reported in an open-ended category?

We can look at what has happened to this category since it was first reported in Q3 2012.

PDH Arrears more than 720 days

There has been some improvement in the number of accounts in this category.  The number peaked in Q2 2015 at just over 38,000 and has now fallen below 33,500.  However both the average balance owing and the average amount of arrears accumulated continue to rise.  There may be a compositional effect at play if it is accounts below the average that are resolved, through whatever means, and removed from the category.

Taking that aside we see that the average balance on these accounts climbs ever higher. For the full period above it rose from €203,400 to €225,800.   This is likely a reflection of no or limited repayments being made to reduce the balance and the accumulated interest being added which increases in the balance.

The average amount of arrears also continues to rise and by the end of 2016 stood at €66,000 for these accounts.  We know these accounts are at least two years in arrears but it is hard to know how deep they go.  If the average monthly payment on these accounts was €1,500 then we are looking at accounts being, on average, something around 44 months in arrears.

It is often argued that very little has been done FOR those who are more than two years in arrears.  But it is also true that little has been done TO them.  It has not been possible to find comparable data for other countries in order to assess the extent to which they have experienced mortgage accounts more than two years in arrears.  Other countries don’t report such figures because it is something which would not be tolerated; some resolution would be applied.  That is not the case in Ireland and cases come before the courts where no payments have been received in five years or even longer.     

When the “more than 720 days” category was introduced in Q3 2012 it contained 15 per cent of accounts in arrears, 17 of the outstanding balance in arrears and 48 per cent of the built-up arrears.  As shown above, those figures are now 43 per cent, 53 per cent and 89 per cent.  OK, part of this reflects the improvements that have seen the arrears figure fall for the past few years but it’s clear these improvements have not been reflected in the 720 day category to the same extent.  A final open-ended category that contains a lot of the observations means we are limited in what can be learned from the data about some of the underlying trends.

It tells a lot about the approach to the problem that it is now necessary to introduce a category for accounts more 1,440 days in arrears.

Saturday, March 18, 2017

Company gets battered for paying higher rate of tax

The New Zealand Herald has a breathless story under the headline “Apple pays zero tax in NZ despite sales of $4.2 billion”.  The story takes the usual approach of linking sales and corporation tax regardless of the well-established principle that corporation tax is paid on profit not sales.  But this piece goes further and ignores the principle that companies pay tax to the country where their activities take place, not where their customers are located.

The Apple subsidiary at the centre of the piece made a profit of $113 million from 2007 to 2016 and its accounts show an income tax expense of $34 million.  On this the New Zealand Herald says:

The accounts also show apparent income tax payments of $37 million - but a close reading shows this sum was paid to Inland Revenue but was actually sent abroad to the Australian Tax Office, an arrangement that has been in place since at least 2007.

A close reading of this paragraph reveals it to be nonsense.  Companies pay corporation tax to the tax authority it is due to.  The company did not pay tax to the New Zealand Inland Revenue because it did not have a taxable presence in New Zealand.  There are no Apple activities in New Zealand to tax.  The company doesn’t have a subsidiary operating there; the company doesn’t have retail stores there.  There is no permanent establishment to levy tax on.

The piece makes a big deal about the amount of iPhones sold to New Zealanders.  But the number of iPhones that Apple sold in shops to New Zealanders is zero.  The sales in New Zealand are through third-party retailers.  Apple has a company, Apple Sales New Zealand, which acts as the distributor of Apple products to these New Zealand retailers.  The company name reflects the market it services; the company itself is based in Australia.

So the company paid the tax directly to the Australian Tax Office because that is where the taxable activities of the company are located.  And this principle has been in place since the 1920s not just since 2007.

The New Zealand Herald piece has all the information that points to this conclusion but chooses to ignore it.  It is pretty easy to see that the company pays its tax in Australia and not New Zealand.  Here is the tax calc from the 2016 accounts which the piece reproduces:

Apple NZ Tax calc

The tax rate applied to the profits is 30 per cent.  New Zealand’s corporate tax rate is 28 per cent; Australia’s is 30 per cent.  The tax is determined using Australia’s 30 per cent rate because that is where it does its business.  Some minor adjustments resulted in an effective tax rate of 32 per cent in 2016 and 33 per cent in 2015.

Maybe something should have clicked when the newspaper had to look to Australia to find someone from Apple to comment on the story:

In a statement issued from Australia, the multinational technology giant stressed it followed the law but did not directly address questions about the structuring of its New Zealand operations and the apparent lack of payments to Inland Revenue.

And the piece then lays it out straight:

Apple's New Zealand operations are wholly owned by an Australian parent and appear to be run from there.

If Apple had operated this subsidiary out of New Zealand it would have paid tax at 28 per cent.  Instead, it choose to base the company in Australia where it is subject to tax at 30 per cent.  So even when paying a higher tax rate companies can take a battering.

Friday, March 17, 2017

Mortgage Repayments in BOI

The last post looked at the aggregate reduction in the stock of PDH mortgage debt in Ireland.  It was a bit crude and the aggregate nature of the data meant some simplifications were required.  Using figures from the annual reports of the banks we can get a deeper insight into the evolution of mortgage balances.  So let’s have a look at Bank of Ireland (which we have done previously here).

First, let’s look at the total amount outstanding by year of origination.

BOI Mortgages Outstanding

In the five years from the end of 2011 the stock of mortgages BOI has in Ireland declined from €27.9 billion to €24.3 billion.  Of these €19.8 billion were PDH mortgages and €4.5 billion were BTL mortgages. 

This 13 per cent reduction since 2011 masks what actually happened to the stock of loans the bank had at the end of 2011 because the bank has, of course, being issuing mortgages since then. 

If we just look at loans issued up to 2011 we again start with a total of €27.9 billion. But ignoring loans issued since then shows that these have reduced to  €18.8 billion, a fall of 32 per cent.  This falls varies by year of origination and unsurprisingly older loans show the greatest falls.

The stock of loans issued before the year 2000 fell by 63 per cent between the end of 2011 and the end of 2016.  For loans issued during the peak of the lending bubble we see that there were 29 per cent reductions in the over the same five year period for loans issued in 2006 and 2007.

The reduction in the outstanding balance could be due to:

  • repayments on the existing loan
  • re-mortgages to a new loan or new provider
  • write-downs on the existing loan

Due to re-mortgages it is probable better to look at the average balance rather than the total stock of debt.  Here are the number of accounts for each years of origination.

BOI Mortgages Number

And using these numbers we can get the average balance outstanding by year of origination.

BOI Mortgages Average Balance

This probably gives a better insight into the capital reduction on mortgages being repaid on a typical or regular basis.  For mortgages issued during the lending bubble we can see that the average balance fell by about one-sixth in the five years from the end of 2011 to the end of 2016.

So for loans originating from 2005-2008 we have a 30 per cent drop in the stock of debt in the past five years and an 18 per cent drop in the average balance for loans that remain extant at the end of 2016.  Of course, we don’t know what happened to the 12 per cent of loans originating from 2005-2008 that were discharged/ended in the past five years.  They may have been replaced by new debt or just simply repaid.  But whatever way we look at it the overall stock of debt from the credit bubble is being reduced.

Mortgage repayments accelerate capital reduction

A lot of attention is right gives to mortgage arrears and property repossessions but it most also be remember that significant mortgage repayments are also being met.  Here is the total outstanding for PDH mortgage in the mortgage arrears statistics.

PDH Mortgage Balance

Since the middle of 2009 the amount of PDH mortgages has fallen from €118.7 billion to €99.6 billion. Still a long way to go you might say but the graph a above is not comparing like with like.  Each quarter is made up of different loans with some repaid and others drawn down.  New loans will will increase the total balance so repayments on the €118.7 billion of loans that was outstanding in Q3 2009 will be greater than €19.1 billion indicated by the chart above.

Figures from the Irish Banking and Payments Federation give the following amounts of PDH mortgage draw downs since the middle of 2009;

  • First Time Buyers: €13.2 billion
  • Mover-purchaser: €11.0 billion
  • Remortgages: €1.9 billion
  • Top-up mortgages: €1.5 billion

Some of these could be existing debt replaced by new debt.  To be conservative we will assume that all loans relating mover-purchases and remortgages resulted in no new debt being created, i.e. the amount of the new loans matched the amount of previous loans. 

There will be new debt from first-time buyers and top-up mortgages. Since the middle of 2009 there have been €14.6 billion of drawn downs on these loans.

This means that the stock of PDH mortgage debt of €118.7 billion has been reduced to €84.9 billion, a reduction of 28 per cent in seven years.  And if mover-purchases and remortgages resulted in additional mortgage debt being created (as they surely did) then this is the upper limit for the reduction that has taken place.  Let’s put it at 33 per cent.

That might suggest that there is another 14 years until the stock of debt from Q3 2009 is cleared for a total duration of 21 years.  But that is to misunderstand the nature of mortgage repayments.  Early in the term the majority interest will make up a greater proportion of the repayments than later in the term.  If the level of repayments remains the same then the rate of capital reduction will increase as the amount being consumed by interest declines.

For the estimated repayments looked at here.  The average reduction in the outstanding balance for the two years at the start of the series was €1.08 billion per quarter.  For the past two years this has average €1.32 billion per quarter.  As would be expected the rate of reduction in the outstanding balance is accelerating.

We are probably looking at the stock of PDH mortgage debt from 2009 being cleared in another ten years or so.  This gives an average term of 17 years.  Of course, this is just an average.  Some loans will be repaid quicker than 17 years and other might take a good bit longer.  But what ever about the persistent problems with arrears and repossessions it is also the case that there are ongoing repayments and the stock of legacy debt is reducing.

PDH Mortgage Balance Estimated Like-for-Like

Arrears is a terrible way of measuring current mortgage distress

The release of the Q4 2016 mortgage arrears statistics generated more interest than has usually been the case for these releases for the past two years or so.  Two elements have featured heavily in the reporting:

  1. That the highest number of PDHs on record were taken into possession by lenders
  2. That there was an increase in “early stage arrears”.

The first of these is fairly easy to identify.  At 455, the total number of PDHs taken into possession in Q4 was indeed the highest on record.

PDHs Possessed

Of these, 112 were the result of a court-ordered repossession while 343 were by agreement between the borrower and lender.  The term ‘voluntary surrender’ is a benign way of putting as the borrower will likely have faced strong pressure from the lender.  Voluntary surrenders are likely in instances where there is negative equity with hopefully agreement also reached on how to deal with any shortfall. 

There will also be instances where the borrowers undertake a forced sale of the property to clear the mortgage.  In these cases the borrowers also lose possession of the property but have some limited control over the process.  Figures for forced sales have never been collected.

The status of the properties taken into possession by the lenders is unknown but a share will be vacant or abandoned properties which should be taken into possession and resold by lenders.

There is also a divergent pattern since the middle of 2015 when there was a 50/50 split between court-ordered repossessions and voluntary surrenders.  Since then the number of court-order repossession has declined with the number of voluntary surrenders going in the opposite direction.

Since this data series began in the middle of 2009, lenders have take possession of 7,100 PDHs.  Of these 4,800 were by way of a voluntary surrenders and 2,300 the result of a court ordered repossession.  This is a small number relative to the scale of the arrears problem.

And it is suggested that part of the arrears problem could be getting worse.  Many reports are the same and this is extracted from one:

The latest arrears figures show that 23,224 mortgage accounts were in arrears for less than three months at the end of last year. This was up slightly on the previous quarter in 2016.

However, it was the first time since September [2012] there had been a rise in the numbers getting into early-stage arrears.

The editors obviously felt this was an important point and used the headline “Spike in mortgage arrears as banks repossess more homes” for the piece.  Here is the Q4 spike:

Less than 90 days in arrears

Hmmm.  There is no spike visible in the chart.  There isn’t even an increase visible.  The spike is an increase of 12.  Total.  In Q3, there were 23,212 PDH mortgage accounts in arrears of 90 days or less; in Q4 the figure was 23,224.  Yes, a rise of 12.

Experts said it was too early to say if there was a trend of arrears rising again.

They could also do with saying that the number of people in 90-days arrears doesn’t necessarily tells us anything about the number of people falling into “early-stage arrears” particular when the overall trend in arrears is down.

Arrears measures missed or partial payments relative to the contracted payment amount.  It tells us nothing about when those payments were missed.  If a borrower has a monthly payment of €1,000 and missed €2,000 worth of payments three years ago they will be 60 days in arrears – yet can have made all contracted payments in three years.

If such a borrower has €4,000 of arrears they will be 120 days in arrears.  If that borrower makes an excess payment of €2,000 they will move to being 60 days in arrears.  And this is why the number of accounts in 90-days in arrears is not necessarily a good guide to the number in “early-stage arrears”.  It can also be influenced by people moving from higher categories into lower ones.

And it can happen for odd reasons.  Consider a borrower on an agreed interest-only of €750 with €3,000 of arrears.  The borrower is 120 days in arrears.  If the interest-only period ends and the borrower moves to a capital+interest payment of €1,500 (which we assume they make) the borrower will now be 60 days in arrears.  The borrower has moved into the lower arrears category because their contracted payment has increased but the amount of arrears has remained unchanged.  Such a scenario is highly unlikely but points to some of quirks that the use of arrears as a measure of distress can result in.

Was there a rise in early-stage arrears at the end of 2016?  We can’t say but I doubt it.  It more likely reflects an improvement in the situation (i.e. lower arrears or restructures moving people into lower categories) than a deterioration.

Thursday, March 16, 2017

Ireland’s NIIP continues to improve

We have previously looked at the impact each of the sectors of the economy have on Ireland’s international investment position – that is, the balance of external financial assets and financial liabilities.  In the main the story is little changed since the previous post.

The CSO have published the Q4 2016 update of the IIP data and here is the Net IIP position for the total economy and for the economy excluding non-financial corporates.


Excluding the IFSC the Irish economy has a NIIP of –€382 billion which is not a very good headline figure.  However, that is hugely influenced by the –€454 billion NIIP of the non-financial corporate sector.  Unsurprisingly the cross-border position of Ireland’s NFC sector is itself hugely influenced by MNCs.  And what is shown above is the net figure.

The Irish NFC sector has €785 billion of external financial assets and €1.24 trillion of external financial liabilities.  The balance gives us the net position of –€454 billion.  Are the Irish operations of MNCs bankrupt?  No. 

This chart above only shows the financial position.  There have been some step-changes in the NIIP of the NFC sector and this is related to the onshoring of intangible assets.  Some Irish-resident companies of MNCs have borrowed huge sums of money and used that money to purchase intangible assets.  The scale of this was in the hundreds of billions in Q1 2015 with ten of billions of such transactions occurring in Q4 2016.  The NIIP of these companies doesn’t really tell us anything about the underlying position of the Irish economy.

We can get a much better insight if we remove them and that is what the blue line does above.  It can be seen that this has been steadily improving since the data series began in 2012 moving from –€90 billion then to +€72 billion now.  That is a large improvement in just five years. 

NIIP by Sector

Most of the improvement has been effected through the financial system.  In the early years of the crisis many of the external creditors of the banks were repaid with liquidity from the Central Bank which itself generated a negative Target2 balance.  While the banks had a relative small net position in 2012 the net position of the Central Bank was –€91 billion at that time.  Since then the banks have reduced their reliance on central bank funding and the external position of the Central Bank has improved with that.

Of the remaining sectors, financial intermediaries have a NIIP position of +€189 billion.  This, in large part, reflects the foreign financial assets of Irish investment and pension funds.  The government sector has a negative position of –€128 billion representing the international nature of much of the borrowing it undertook in the crisis.  Add up all those and you get our net position of +€72 billion – excluding those data polluting MNCs of course!