Ireland’s national debt grew at the highest rate in the world after the crash but the rate at which the economy is now expanding is sufficient to ease the debt burden, new research finds.

The study, by consulting firm McKinsey, also concludes that the rate at which Irish households have cut debts as a proportion of disposable income eclipses all other countries, with only the US coming close.

Contrary to expectations that the deepest global recession since the second World War would lead governments around the world to deleverage, McKinsey finds that debt continues to grow in nearly all countries.

Global debt has grown by $57 trillion (€49.8 trillion) since 2007, with developing countries accounting for roughly half the increase. “In advanced economies, government debt has soared and private-sector deleveraging has been limited,” says McKinsey.

Real economy

The

Debt and (Not Much) Deleveraging

study shows how the totality of “real economy” debt in Ireland reached 390 per cent of economic output on a gross domestic product basis in 2014. This debt-to-GDP ratio was second only to Japan (400 per cent).

Such figures are derived by combining overall government, corporate and household debt. McKinsey says the 172 percentage point increase in the totality these debts in Ireland between 2007 and 2014 was the world’s highest.

McKinsey finds that government debt in Ireland advanced 93 percentage points in 2007-2014, with only the public debt of Spain rising at a similar rate. Government debt advanced by 92 percentage points in Spain, which received European aid for its banks; and by 83 percentage points in Portugal, which received a full-blown bailout.

The public debt of Greece, the government of which wants euro zone creditors to write off some of its bailout loans, rose 70 percentage points.

The consultants say the challenge now for countries such as Ireland is to reduce the high level of public debt. Still, the firm ranks Ireland in a group of only three advanced economies – alongside Germany and Greece – in which public debt ratios are forecast not to rise in the next five years.

Debt ratio

“Given current primary fiscal balances, interest rates, inflation, and projected real GDP growth rates over the next five years, we calculate that the ratio of government debt to GDP will continue to grow in many advanced economies, including Japan, the US, the UK, and a range of European countries.

“Greece, Ireland and Germany are rare exceptions in which government debt-to-GDP ratios are projected to decline.”

McKinsey says the forecast reduction in Ireland’s public debt “is the result of strong projected GDP growth backed by a strong rise in business investment and exports”. It cites “consensus estimates” in which Ireland’s real GDP is projected to expand by 3 per cent per year for five years.

“Based on current GDP forecasts, Ireland, Greece, and Germany do not require any additional growth to start public-sector deleveraging.”

Saying unsustainable levels of household debt in the US and other advanced economies were at the core of the 2008 debacle, McKinsey believes the comparatively limited extent of household deleveraging since then is a surprise.

It was mainly in Ireland and the US, where households were worst-hit by crisis, that household debt levels had fallen. “Ireland and US stand out, with household debt as a per cent of income declining by 33 percentage points in Ireland and by 26 points in the US.”

Taken alongside Ireland’s other “real economy” debts, household debt dropped 11 percentage points in 2007-2014. The US decline was 18 percentage points.

McKinsey says non-recourse mortgage debt in the US was a big feature of the system there, leading to painful foreclosures for American borrowers.

“In contrast to the US, Ireland has used a large-scale mortgage restructuring programme for households that are unable to meet their payments,” it says.

“Unlike in the US, where households lost their homes through foreclosure, the Irish approach has provided financial relief without foreclosure. However, it should be noted that many restructurings in Ireland are short-term only.”

Tax system

McKinsey noted a 90 percentage point increase in the totality of non-financial corporate debt in Ireland, saying this mostly reflects the attraction of the corporate tax system. “Foreign-owned enterprises contribute 55-60 per cent of the gross value added of all companies in Ireland and, we estimate, at least half of Ireland’s non-financial corporate debt.”

The report says the relationship of such debt in Ireland to national GDP “is not indicative of risk” as the debt funds activities in other countries.