External Balance Sheet Risks in Ireland, Part II

The COVID-19 pandemic poses financial stability challenges with potential implications for the funding of economies. In the context of external borrowing, the empirical literature has shown that the level and evolution of net external debt liabilities can signal future crisis. Due to Ireland’s role as a financial centre, however, traditional data cannot be used at face value for such purposes. In Galstyan and Herzberg (2018) we focused on the external position of the banking sector only. However, a more encompassing approach is warranted given the shift of liabilities from the banking sector to the government sector in the aftermath of the crisis. Extending our previous work, we provide an estimate of net external debt liabilities for domestically-relevant entities in Ireland and propose a modified threshold indicator for monitoring external vulnerabilities. We find that on the eve of the global pandemic Ireland’s external balance sheet vulnerabilities were relatively limited.