February 7, 2005
In Gabriel Garcia Marquez’s Chronicle of a Death Foretold, the story of a gruesome murder unfolds. A young woman marries, but on her wedding night it is found that she is not a virgin.
The groom is incensed and vows to kill her lover. He conscripts the bride’s two brothers to carry out the murder in order to maintain the family’s honour. Everyone in the town is aware of the impending fate of the lover, Santiago Nasar, but they fail to tell him.
The genius of the book is that the reader becomes complicit in this act of wanton silence. We implore the villagers to tell Nasar to run, but they fail us. In the end, we become witnesses and ultimately, accessories to a horrible end.
Everyone could see what was going to happen – the murderers had even declared their intent. Yet nobody thought that they would carry it out, and everybody hoped that something or someone would come along to save the day.
In Ireland, rapid borrowing over the past five years tells its own story: Chronicle of a Debt Foretold. Everyone knows that payback time will come, but we are all hoping that miraculous intervention will bail us out. We want to warn ourselves and our neighbours, but feel that the act of warning itself may awaken the sleeping dogs. So we remain silent, stunned in the face of a rising debt monster.
Let us look at the figures. Last year, for the first time ever, our overall debt level surpassed our income level. This in itself is not the issue. The issue is the pace at which our indebtedness is rising. In 2003, the ratio of debt to income was 94 per cent. By last year that figure had jumped to 120 per cent. This is financial delinquency on a monumental scale.
If it continues at this pace, our debt burden will be twice our income by 2010.
By the end of this month, our debt burden will pass 130 per cent of income.
Does a debt burden of 130 per cent sound familiar? Well, it should, because this is the figure our national debt hit in the mid-1980s – prompting fears that the International Monetary Fund (IMF) would have to intervene in the economy.
Why did a public debt burden of 130 per cent signal remedial action, political upheaval and capital flight, while a private debt burden of the same magnitude today – with no prospect of corrective measures – makes one headline and then fades?
The reason is clear: commentators mistakenly believe that there is some material difference between public and private debt. The only difference is that in the 1980s individuals could avoid paying back public debt by emigrating.
Take a look at the Asian crisis of the late 1990s. It was triggered by too much private sector debt – largely extended by banks to finance property speculation.
Sound familiar? Debt is debt is debt.
And debt, whether it is public or private, has to be paid.
In fact, the debt dynamics of Ireland in 1987 were immeasurably better than they are now. Back then, interest rates were in the high teens, so the reward for curative action was much lower interest rates, as the risk of Irish default receded. Today, the opposite is the case. There is no prospect of interest rates going lower.
For example, the US raised rates this week, and Irish long-term interest rates are close to 4 per cent – a full 2 per cent above the base rate. So the debt dynamics of our much-discussed ‘basket case’ economy of the mid-1980s were actually better than those facing the vigorous 21st-century version. Obviously, the composition of the economy is totally different this year, but the prospective debt dynamics in the 1980s were actually much more appealing than they are now.
Anybody who bought a house in the 1980s will tell you that the combination of inflation up to 1985 followed by a rapid fall in interest rates to 1990 all but wiped out their mortgage debt.
The opposite is the case now. Many financiers are responding to the latest credit figures with a shrug and a suggestion that this is a natural reaction to the historically low interest rate environment.
But borrowing when rates are low is fool’s gold.
The worst time to borrow is when interest rates are at historical lows, because they will only rise over the course of the loan, so you are in for negative surprises.
The best time to borrow is when rates are at historic highs – as they were in the early 1990s – because as the rates fall, the value of all other assets will rise.
Another problem with Ireland’s debt explosion is that it is hugely dependent on property. Property is being used as collateral for second homes, home extensions, foreign holidays, even golf club membership.
While we are seeing huge anecdotal evidence of this, no institution – not even the Central Bank – has hard facts on this ‘equity release’ figure.
But we know that in recent years there have been months when property-related lending constituted close to 95 per cent of all loans extended. This is bizarre.
It sometimes seems that nothing else is going on in Irish financial markets except feeding the property glutton.
Because the banks and the property market are so interdependent, it is hard to know what is driving what. Is the price of property being driven by bank credit, or is bank credit being driven by property prices? Either way, the financial system and the Irish property glutton are umbilically linked.
As long as credit is cheap, the banks will lend. Arguably, the banks are the main reason that land prices remain high, and the banks’ future is so tied up in land that if they stopped lending now prices would fall.
Any fall in prices would lead to bad debts, profit warnings, share price collapses, and bank takeovers.
No chief executive of an Irish bank would survive such a scenario, so there are good careerist and personal, as well as corporate, reasons for double-digit lending to a workforce whose personal income is only rising by 2 or 3 per cent.
Sometimes, we fail to see that banks are simply selling money. Therefore, instead of being the guardians of prudence, the banks can become the agents of profligacy.
Given the inextricable links between banks and land, commentators might use the expression ‘property/credit’ to describe the financial incontinence of modern Ireland in the same way some use ‘Sinn FÃ©in/IRA’ to describe the republican movement.
There is another crucial dimension of the property/credit cycle. Demographically, the young are increasingly becoming the victims of the dilemma, because it is these people who have to pay the prices, while the older generations are benefiting hugely, as they are the original landowners.
Put simply, for every five first-time buyers struggling in the traffic from Kinnegad tomorrow morning, there’s a rich 65-year-old teeing off in the Algarve.
This division is creating a financial second class of people who are up to their eyes in debt, running from work to creche and juggling maxed-out credit cards to stay afloat. They are the central characters in the great Irish literary masterpiece of the early 21st century, an exquisite work of magic realism: Chronicle of a Debt Foretold.
You couldn’t make it up.