"David McWilliams' analysis of private debt is 100% wrong"

Another great piece of analysis by Séamus Coffey in the Indo.

DAVID McWilliams wrote an article for Wednesday’s Irish Independent under the heading "Private debt so enormous that default is only option". The conclusion is stark: In Ireland, given the magnitude of the debt, it is very clear to me that only a fraction of this household and corporate debt will be actually paid off. The figures scream default.


The figures in the piece do indeed scream default, but the figures are wrong. 100pc wrong.



If Irish debt were eight times national income, Ireland would indeed be bust ...


However, Irish debt is actually around four times national income and using figures 100pc greater than this is misleading.

Click to expand...

Excellent article & well explained. While respecting that D McWilliams does raise a number of highly important truths and did identify the overheating economy at an early stage, I am less impressed by his more recent polemic pieces. It would appear that his agenda is to accentuate the negative side of the economy and use only negative stats to achieve this. We need to see more balanced ecomomic commentary & this article is to be welcomed.

Not a huge fan of the Indo but at least they're able to print commentators with opposing views..

Quite a well argued article, but other than correcting the numbers I do not see the point in it, as I do not believe that 4 times income is any more manageable than 8 times income.

However, Irish household debt is also very cheap

Click to expand...

This is a very dangerous argument to be making. Neither Greece nor Ireland had any problems until interest rates started going up. It is very foolish to think that interest rates can stay this low for any long period of time without causing other damage or a very sudden increase in the future.

Ireland has a huge amount of debt. However, we do not need false figures to give a misleading indication of the position we are in. Ireland needs to pay down or see an increase growth income that will bring the debt ratio down from its current four to below three times national income. This is a difficult but not an impossible task.

Click to expand...

This is true, but whether it is 4 times or 8 times doesn't make a difference. Even 4 times income is way to high too be able to get out of the mess in any meaningful way.

I did not believe that David Mc Williams was correct when he said there would be no soft landing. He has been proved correct, again. Why doubt him now

Nobody is right all the time, or wrong all the time. So everybody's analysis should be subject to critical appraisal.

[Yes, I know some people have a better strike rate than others. I also know that some people can not be trusted to report accurately how their predictions have stacked up against reality.]

Chris said:

This is true, but whether it is 4 times or 8 times doesn't make a difference. Even 4 times income is way to high too be able to get out of the mess in any meaningful way.

Click to expand...

At 4 times income, the interest at 5% would be about 20% of annual income. Given:

1) the debt is by and large to pay for shelter
2) the interest on the debt is the largest element of the cost of shelter

Is an effective cost of shelter of 20% of income really such an insurmountable hurdle to recovery?

In addition to this, the question is to whom do we owe this private debt? Is it to other citizens of the state, in which case you do not have a collective problem, or to citizens outside the state, in which case we need to assess whether we can make enough "outside" income from exports, tourism, etc to repay whatever amount we externally owe.

DerKaiser said:

Is an effective cost of shelter of 20% of income really such an insurmountable hurdle to recovery?

Click to expand...

Only time will tell, but looking at countries that have exceeded about 90% debt/gdp you will overwhelmingly see very slow or no growth in economic output. I for one think that 20% of income on servicing debt is insurmountable because the interest will not stay at 5%.

DerKaiser said:

In addition to this, the question is to whom do we owe this private debt? Is it to other citizens of the state, in which case you do not have a collective problem, or to citizens outside the state, in which case we need to assess whether we can make enough "outside" income from exports, tourism, etc to repay whatever amount we externally owe.

Click to expand...

Could you elaborate on why you think that if the debt is owed to citizens of the state that there is no collective problem? I think that the idea of "we owe it to ourselves and therefore it is not a problem" is completely flawed (not saying this is your argument). It doesn't matter who you owe money to, it is a liability on one side and an asset on the other. Where it is recorded as an asset doesn't matter in regards to the debt burden and in the event of a default, if anything it would be worse when the creditors are "locals".