Corporate Indebtedness and Liquidations in Ireland

Private-sector indebtedness, measured as the debt to income level, has grown in recent years and is now at historically high levels. Previous authors have concluded that indebtedness is an important determinant of the rate of liquidation among non-financial companies (Wadhwani, 1986; Davis, 1987; Vleighe, 2001). Observing the number of corporate liquidations in an economy (and insolvent liquidations in particular) is important because of the significance of the financial health of non-financial firms for other agents in the economy. Insolvent liquidations, where corporates have not declared their ability to repay all outstanding debts from the proceeds of the liquidation process, in sufficiently high numbers could be a cause of financial instability by forcing banks to write-off bad debts. These liquidations could also transmit financial distress to other corporates (similarly through bad debts) and households (by making household members unemployed). Our analysis shows that the corporate debt to income level has risen in recent years and that the rate of all liquidations has begun to rise recently after several years during which the rate halved. However, the share of insolvent liquidations remains at a low level by historical comparison, suggesting, albeit with some noteworthy qualifications, that a link between the recent increase in corporate indebtedness feeding through to a higher rate of insolvent liquidations is not apparent. 1