Personal debt ‘not a strain on economy’

IRELAND’S €84 billion personal debt mountain is not a strain on the economy as borrowers have more money to spend despite their debts, a leading economist believes.

Davy Stockbrokers' head of research Robbie Kelleher believes that, despite recent statements by the International Monetary Fund (IMF) and the Irish Central Bank, debts ratios should not be a cause for concern. "A typical consumer in 2004 is paying a much higher proportion of his income in debt service than his equivalent in 1996; but the real value of what is left over after debt service is still some 50% higher than it was in 1996. In that sense, there is no increased burden of debt service at all," Mr Kelleher said, in a market commentary sent to clients of the Bank of Ireland owned company yesterday.

The Davy economist said the sensitivity of increased interest rates is not as large as one might expect. "For example, a 300bps hike in interest rates would reduce income after tax and after debt service across the economy by about 2%. That is before taking account of any offsetting benefits that would accrue to personal incomes from higher deposit rates," he said.

Mr Kelleher said that one needs to take a look at the broad numbers.

"Since the end of 1996, the level of personal debt outstanding across the economy has risen more than fourfold, from €18bn to a forecast €84bn by the end of 2004, equal to an annual rate of increase of 21%", he said.

Mr Kelleher said the economy as a whole and personal incomes in particular have also increased, but despite this, debt/income ratios have risen sharply from 1996 to 2004.

"For the economy as a whole, we reckon the ratio of personal debt to disposable incomes has risen from 49% in 1996 to more than 100% in 2004. The servicing of this debt has been made easier by the fall in interest rates over this period.

"Mortgage rates, for example, have fallen from 7.5% to 3%3.5% at present. Nevertheless, the debt-servicing burden has risen significantly, from 9% of incomes in 1996 to an estimated 15% of disposable income in 2004," he said.

Mr Kelleher said that in assessing whether this level of debt is affordable or serviceable, it is not the ratio of debt/income that is most important.

"It is what is happening to the real value of residual incomes after debt-servicing has been met. This is where we can take comfort from the recent Irish experience.

Even allowing for the increased debt burden, disposable incomes rose in real terms by 50% between 1996 and 2004," he said.