Differences in Borrowing Behaviour between Core and Peripheral Economies — Economic Environment versus Financial Perceptions

Using the Eurosystem Household Finance and Consumption (HFCS) data, this paper identifies the key differences in borrowing behaviour between core and peripheral nations. As such, we focus on non-collateralized debt such as credit card loans, bank overdrafts and other forms of non-collateralized debt, which reflect daily borrowing behaviour more closely than does mortgage debt. We examine the differences in levels and prevalence of these debts, and break down these differences into two major components: financial perceptions and the economic environment. We aim to explain to what extent these influences contribute to the differences in debt ownership and levels of holding between core and peripheral countries in Europe. We found that differences in financial perceptions do contribute to the differences in debt in a significant way, while the economic environment contributes little to this outcome. Households in the European periphery are much more conducive to debt if they have the same financial perceptions as those in the core countries in Europe.

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Emerging Economies Starting to Wobble

The Chinese economy is weakening. Industrial production is falling. China’s exports fell by 8.9 per cent, year on year in July, compared with a 1 per cent fall in the first half of 2015. Investment in fixed assets is dropping. Household spending is down.

When vast amounts of credit allow economies to expand and use the resources of capital, labour and land in the economy to their fullest extent, this expansion of credit eventually creates its own reversal, as we know well here, and as the Chinese economy may learn in the coming months.
Chinese authorities are saying the equivalent of “it’ll be grand” to the Chinese people, and, perhaps, to themselves. To Irish readers, it should all sound a bit familiar.
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Paper Dragon.

It’s not every day you lose almost ten billion euro. I’d call Thursday a bad day for Argentina’s national debt managers. (Imagine being the person giving that news to the minister for finance. Ouch). Almost one-third of Argentina’s international reserves are held in yuan, China’s currency.

The yuan devalued sharply after the People’s Bank of China, China’s central bank, started setting the yuan’s level relative to the US dollar’s closing level the day before, in effect handing part of the determination of the price of their currency to the private markets. This change has introduced a lot of volatility into the markets.

 

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So now is the time to ask: do we work for the banks, or make them work for us?

Ireland’s banks. We don’t like them. They’ve cost us a fortune. Given how much they’ve cost us, we want them to function as they used to. We want them to do the simple things, things like taking deposits, creating loans, the bread and butter stuff of funneling credit into the real economy.

We’d like overdrafts and short-term loans for plumbers again. The odd SME loan. Little plastic savings boxes and stickers for kids. We want them to repair their balance sheets and recoup their losses, without causing too many of their customers crippling psychological damage. All that.

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Letter to NY Times

Sir, I read with interest Prof. Hans-Werner Sinn’s assertion (“Why Greece Should Leave theEurozone”, July 24, 2015) that Ireland’s austerity effectively ended in 2010. As an Irish citizen and an economist I can tell you it didn’t. Dr. Sinn says the bubble burst in 2006, it was 2007. Dr. Sinn says no fiscal rescue was available—there was, but it wasn’t enough. Irish debt relative to GDP went from about 35% in 2006 to about 124% in 2013. Dr. Sinn says Irish wages fell drastically. Not so. According to Ireland’s Earnings, Hours and Employment Costs Survey, private sector wages fell by about 4% while public sector wages fell by about 3% over the crissis. Not nothing, but hardly a drop justifying the term ‘drastic’. What actually happened was employers reduced their wage bills by reducing employment and average hours worked per employee. This is important because what is really going on in the Irish economy is a Keynesian adjustment in quantity of labour and not a neoclassical wage-rate adjustment, implying the ‘cure’ for Ireland’s problems was not so much a supply-side set of ‘reforms’ but a (an?) increase in demand, first from the rest of the world thanks to Ireland’s remarkable openness as an economy, and then from a demand response following the end of austerity in 2013--not 2010. The Greek economy is nowhere near as open as the Irish economy, and, as measured by the cyclically adjusted structural balance, has already endured more than double the amount of austerity than Ireland. The Irish story isn’t a price adjustment, it’s a quantity adjustment. Dr. Sinn gets the most important part of his diagnosis wrong. His prescription is likely to kill the Greek patient. I’m not calling him a quack but if it walks like a duck, etc.

Published in the NYT on the 11th of August.

Budget debate begins: I'm happy to do the state some service by working with NED

I live a charmed life in many ways. I belong to a generation that was well educated, essentially for free. I made it all the way to a PhD with no debt. The taxpayer paid for that.

The state delivered a very good education and I reap the rewards of it every day. The state gave me the means to make my living and even gave me a job afterwards.

So when the Department of Finance asked me to be a rapporteur for the new National Economic Dialogue (NED) process, I said yes without hesitation.

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Greek euro exit would scar a generation

Last week, Greece became the first developed country to default on the IMF.

Greece’s debt is 180 per cent of its GDP. Most of this debt, it will never pay back. To give you a sense of scale, Greece owes more than €90 billion to Germany alone. It owes around €70 billion to France, slightly over €61 billion to Italy. The key reason Greece owes so much to its official creditors is because nine of every ten euro lent to Greece in 2010 went to pay back debt that should have been restructured then.

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Absolute power, absolute accountability

Ministers for finance often have no idea just how powerful they are until they leave office. When they get the gig they are too busy being slapped on the back to think about it, and all too often the distractions of the job and their focus on getting the next job prevent them from actually exercising the power our constitution gives them.

And there are so many distractions, not the least of which is the traditional Irish political compulsion to be at the opening of things – preferably wearing a hard hat – or dealing with some crisis or other, or having the ears bent off them by special interest lobby groups.

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Currency is not destiny

Iceland and Ireland were both rocked by the fallout of the Global Crisis. This column argues that differences in currency arrangements affected the mechanisms of the boom and the collapse. Iceland’s banks collapsed because they did not have a lender of last resort in euros. Ireland did. But Iceland’s collapse and ensuing capital controls shifted the burden of debt restructuring onto foreign creditors to a much greater extent than in Ireland.

Read the rest of our piece on VoxEU