Are Irish households and corporations over-indebted - and does it matter?

Abstract

Household and corporate indebtedness has soared in recent years and is now at historically high levels. The market for credit today is unrecognisable compared with just 30 years ago when, in the national economic interest, the rate of credit growth was controlled centrally. The central questions addressed in this paper are whether households and corporates are over-indebted now and why this might be a worrying development? Previous authors have suggested that over-indebtedness may have severe consequences: (i) higher rates of arrears and bankruptcies, (ii) sharp contractions in investment and consumption, and (iii) increased fragility in the banking system. The aggregate evidence on indebtedness is contrasted with micro-data on households, corporates and credit institutions. This paper concludes that households and corporates may not be over-indebted when (i) account is also taken of improvements in their debt-service capacity and (ii) micro-data is used to qualify the aggregate indebtedness data. Furthermore, credit institutions appear to be well insulated against severe shocks that could potentially arise from households or corporates.