Where does all this Irish money come from? 3 graphs.
In Ireland, something out of the monetary ordinary is going on. In March, the value of ‘overnight deposits’ money increased with 12 billion Euro (graph 1). What’s the matter? A helicopter drop? More deposit creating loans? Or something else?
According to scientific economics (see also this ECB manual), ‘Loans create deposits’. Which means that this increase of the amount of money in Ireland might be indicative of increased lending and borrowing and a more positive economic attitude in this country, as Mario Draghi seems to believe: “Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries“. Is he right? When he stated, in another speech, that “the painful measures taken are starting to bear fruit. We see this very clearly, for instance, in the impressive improvement in export performance in Ireland, Spain and Portugal and in the recent uptick in industrial production in the latter two countries” he was clearly wrong. Spanish exports are doing as well as before the crisis, no new fruits there. But Irish goods exports went down with 10% during the first three months of this year – impressive indeed, but not as an improvement. And while Portuguese industrial production (March, Eurostat data) is a whopping 0,7% higher than last year, Spanish production is actually a little lower (albeit indeed less so than in February). So, what about Draghi’s statements about money? Is the Irish deposit base indeed stronger?
When we look at the graph 2 it clearly shows that the increase in overnight deposits is caused by ‘Irish residents’ (households, companies) and not by for instance an influx of foreign money.
When we look at detailed data it shows that unlike the situation in 2005 and 2006, when loans for house purchase indeed created an increase in overnight deposits (which are only part of total deposits), the recent increase in overnight deposits is caused by a shift from Money Market Fund (MMF) shares to overnight deposits (the decline in MMF started in November last year, I do not know why the increase in overnight deposits shows in March, either there is a statistical/administrative quip or money has been shifted around between MMF funds, overnight deposits and still other funds).
When we look at loans as well as deposits (graph 3) it shows that there is no fruit yet – not even blossoms. Funding of banks may have improved, at the cost of MMF’s. But funding of households didn’t. Ireland is still deleveraging and paying back the money which was created to temporarily inflate house prices – which does not only lead to less demand but also to less money, as it disappears ‘into thin air’ again when it’s paid back to money creating banks (MFI’s). A little more about paying back a next time, when I’ll discuss the nine circles of Irish creditor hell which are described in the new Irish Central Bank “Framework for a Pilot Approach to the coordinated Resolution of Multiple Debts owed by a Distressed Borrower 8 May 2013“.