Malta has very high private sector debt, according to a recent report issued by the European Commission.
However, despite a private debt bill of more than €13 billion by 2010, more than twice Malta’s GDP during the same year, the government believes it does not pose any serious issues for the country’s traditionally sound financial system.
According to the first ‘Alert Mechanism Report’ issued by the Commission, Malta was among the countries with an ‘internal imbalance’ where it comes to private sector debt.
The latest available data shows that by 2010, Maltese business and private households built up €13 billion in debt – mostly with local banks – amounting to 212 per cent of GDP.
Additional data obtained from the Commission shows that the highest debtors were businesses. In 2010 they owed €8.4 billion while private citizens owed financial institutions some €3.8 billion mostly on mortgages. The total debt also included €795 million in securities.
Asked whether this high debt ratio held by the Maltese could negatively impact the stability of Malta’s economy, a spokesman for the Commission said high ratios of debt in any country could eventually pose problems, but he warned against alarmism.
“There is no conclusive evidence in the economic literature on the optimal level of debt,” a Commission spokesman said.
“Nonetheless, high debt in the private sector poses vulnerability to deleveraging forces. Such a deleveraging process could impact negatively on economic activity.”
On the other hand, a government spokesman played down the potential impact of the high Maltese debt since data issued by the Central Bank, which constantly monitors the situation, does not show any indication of a debt bubble.
The total business and private sector debt bill
For non-financial companies the figures include substantial inter-company loans, and loans from households, the latter mainly in the form of shareholders’ loans, a Finance Ministry spokesman said.
These loans do not impact the local banking system or government finances. If these loans are omitted from the Commission’s figures of 2010, the ratio declines to 159 per cent and comes in line with the EU’s threshold, the spokesman explained.
Central Bank statistics show that borrowing by resident non-financial companies from the banking sector increased only marginally by two per cent from 2009 to 2010. The same happened in 2011. Non-performing loans are also considered to be on the low side.
According to the Central Bank’s Financial Stability Report issued in mid-2011, the overall non-performing loans ratio (covering both households and corporate borrowers) for the domestically-oriented banks remained stable at 7.3 per cent, unchanged from December 2010. Furthermore, about 76 per cent of total non-performing loans are backed by collateral.
“The Commission’s data does not pinpoint any alarming vulnerabilities of the private sector in Malta nor a rapid increase in credit that could be associated with credit bubbles,” the Finance Ministry spokesman said.
“While the authorities are closely monitoring developments, these figures are not currently of major concern and a number of other countries with generally solid financial systems (UK and Sweden) have similar ratios.
In its report, the European Commission signalled a total of 15 member states with high Private Sector Debt ratios.
The highest private debt in 2010 was held by the Irish – 341 per cent of GDP. The Cypriots also have a high private debt bill of some 289 per cent of GDP.
On the other hand, the lowest private sector debt in 2010 was held by the Slovaks with just 79 per cent of GDP.