Transcript Key Economic Indicators Annual Averages 1961-1980

Ireland and Iceland
Outline
Iceland and Ireland: similarities and differences
Ireland
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Iceland
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Starting points
Putting the house in order: the 1980s
Impact of “the death of distance”
The boom and the bust
Euro member
Basics
The boom and bust
No euro
Features of the two busts
Similarities and Differences
Ireland
Iceland
Size
27,400 sq
miles
58,000 sq
miles
Population
4,400,000
315,000
Per capita
GDP - 2010
$46,000
$39,000
Year of
independence
1922/1949
1944
Ireland
Ireland History in Brief
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1846-50 Irish Famine (pop. peak :8 million)
1919-22 Partial independence for Ireland from
UK; Civil War
1930-1950s Industrial policy of “self sufficiency”
Government: mildly “socialist”
Favored small farmers and agricultural interests
Promoted Irish language
Ireland – History continued
1956
• Government seeks to attract foreign investment in export
manufacturing industries: profits will be tax free for 15 years
1964
• Restrictions on foreign ownership of industry abolished
Industrial Development Authority
• Market Ireland to foreign direct investors
• Lobby government on behalf of investors (taxes,
education, telecommunication, etc.)
Ireland: Inherited Factors
Population (1985)
3.5 million; very young
Area
27,400 sq miles
Language
English; some Irish
Legal system
English common law
Government
Parliamentary
EARLY INVESTORS IN
IRELAND
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General Electric (1963)
Digital (1971)
Wang (1979)
Mostek (1979)
Apple
Westinghouse (Thermo King, etc.)
External Economic/Trade
Agreements
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Not an original member of European Union
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Anglo-Irish Free Trade Agreement (1965)
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Entry into the European Union (1973)
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Joined Euro in 2002
Impact of 1973 EU Entry
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Overall subsidy level roughly equal to Greece
and Portugal
 Substantial subsidies for Irish farmers
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Helped finance refocusing of higher
education
Expanded Irish export markets, e.g. beef
Made Ireland even more attractive as a
“stepping stone” into Europe for foreign
investors
Tax Policy Changes
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1978: EU objects to “discriminatory” effect of
low taxes just for export manufacturing
Irish solution: reduce corporate tax rate from
15% to 10% for all manufacturing
(Now around 12%)
Key Economic Indicators
Annual Averages 1961-1980
1961-1970
1971-1980
Real GDP %
4.2
4.8
Employment Growth
0.0
0.9
Unemployment %
4.8
6.8
Consumer Price Inflation
4.8
13.6
-165,000
+96,000
Net Migration
PUTTING THE HOUSE IN
ORDER - I
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1980: An Bord Telecomm
 One of the worst European telephone
systems
 Largest employer in Ireland
 Both consumer and foreign investor
complaints
 Independence from Post Office, but still
state enterprise
PUTTING THE HOUSE IN
ORDER – II
During 1980s:
 Major upgrading of technology at time of
fiscal restraint
 Focus: To become the lowest cost provider
of quality international telecommunications
services in Europe
PUTTING THE HOUSE IN
ORDER - III
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1987: Focus on budget/debt control in Ireland
 New minority government
 Controlled deficit, e.g. postponed pay
raises for civil servants
 Forgiveness to taxpayers if they paid
overdue taxes (58% marginal rate)
 Agreement with unions on pay increases
 Then 10% corporate tax rate extended to
international financial services
PUTTING THE HOUSE IN
ORDER - IV
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Reform of education
 Reform of higher level education to stress
sciences, engineering
 Two new universities
 Technical college system emphasizing
electrical engineering and information
technology
IRISH ECONOMIC POLICY,
1987 
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Not ideologically “free market,” e.g. like
Margaret Thatcher in England
Very pragmatic
Emphasis on agreement with unions:
 Modest increases in nominal wage
 Real wages would not decline
 Reductions in personal tax rates to help
workers keep pace with inflation
Exchange Rate Policy
Before and After the Euro
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Small country dependency
Irish currency historically tied to British pound
sterling
Upon entry into EU, Irish “punt” created and
valued within EMS
Enthusiastic member of Euro bloc
Downside: no independent monetary policy
Key Economic Indicators
Annual Averages
1981-1986
1987-1993
Real GDP %
4.1
4.8
Employment Growth
-1.3
1.1
Unemployment %
13.8
15.2
Consumer Price Inflation
10.8
2.9
-70,000
-94,000
Net Migration
KEY EVENT: “THE DEATH OF
DISTANCE” c. 1990
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A chance event for Ireland - but “fortune
favors the well prepared”
Technology events
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High capacity, low cost optical fiber
High speed routers and switching networks.
Internet/worldwide web
Competition among suppliers of international
telecommunications services
REINFORCING EVENTS OF THE
1990s
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Uniform corporate rate of 12½% for all firms
(1998)
Personal tax rates cut for individuals
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Impact on labor force participation rates especially
women
1980: 30% → 2002: 44%
Young Irish abroad return to work in Ireland
In-migration from other EU countries
Ireland's Boom
Annual Averages
19942000
2005
2006
2007
Real GDP %
9.0
5.5
5.75
6.0
Employment Growth
5.1
4.7
4.5
3.6
Unemployment %
9.5
4.4
4.3
4.5
Consumer Price Inflation
2.5
2.5
3.9
4.9
-72,400
55,100
71,800
67,300
Net Migration
Policy Implication of the
Irish Boom
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Get the fiscal policy fundamentals right
Positive attitude towards investment, foreign
and domestic, with special attention to taxes
and educational requirements of private
sector employers
Create an environment for the rapid
deployment of modern telecommunications
technology, e.g. encourages investment and
entrepreneurship
Policy Implication of the
Irish Boom (continued)
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Sometimes crises can be helpful
(necessary?)
Get the fundamental fiscal policies right
Reform/investment for telecommunications
infrastructure critical
“Luck” plays a role …
. . . but “fortune favors the well-prepared”
Booms have a tendency to get out-of-hand
Boom to Bust:
The Housing Bubble
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1992-2006: Housing stock rises by 150%
Demand factors:
 Favorable demographics
 Rising real incomes
 No property taxes
 Mortgage interest deductibility
 Favorable capital gains on housing
 Low interest rates
Financial institutions aggressive in liberal lending
terms (e.g. no money down) – but very little
subprime lending
Boom to Bust (continued)
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Property-related lending goes from 40% to 60% of
banking system credits by 2007
Substantial speculative demand, e.g. “buy-to-let”
mortgages were 26% of residential lending
Late 2007: home prices began to weaken
October 2008: Lehman Bros. failure seizes up
interbank lending market; Irish banks lose deposits
Irish government guarantees all deposits and debts in
Ireland of 6 largest banks
Housing prices soared relative to rents
(Bank of Ireland 2006)
Actual and Predicted Long-run Irish
House prices
(Bank of Ireland 2006)
The Bubble Begins to Burst
IRELAND HOUSE PRICE
Source: Central Bank of Ireland
Ireland's Housing Crash
Ireland Today
Annual Averages
2007
2008
2009
2010
Real GDP %
6.0
-3.0
-7.5
-1.0
Employment Growth
3.6
-0.4
-4.6
Unemployment %
4.5
6.2
9.4
13.4
Consumer Price Inflation
4.9
4.1
-1.6
-1.5
Net Migration
67,300
Ireland Real GDP (YOY)
Ireland CPI
Ireland's Currency – the Euro
Ireland's Asset Bubble - Housing Boom to
Bust
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Average national house price in Ireland fell
18.5% in 2009 vs a drop of 9.1 % in 2008
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A 48.2% drop since the peak in 3rd Q 2007 to
January 2012
Ireland CDS
Source: http://www.spiegel.de/international/europe/0,1518,670294,00.html
Iceland: Key Economic Data
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Population: 320,000 (less than 10% of Ireland’s –
about the size of the City of Pittsburgh)
Area: Twice Ireland
Integrated into EU via European Economic Area,
1994 – Not a member of the EU or Euro
Fisheries an important (usually 12% or more of GDP,
40% exports +) and a protected sector (e.g. no FDI
allowed)
Aluminum production also very important
Finance not so much . . . . any more
Relatively high per capita incomes $40,000 vs
$65,000 at its peak in 2007-08.
Opening up the Economy
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Joined GATT in 1964
Privatization of key sectors starting in 1980s
Trade and financial sectors liberalized in the
1990s
Multinational aluminum company investment
in 1990s
Krona floated in March 2001
Substantial investment and lending abroad by
Icelandic companies in 2000s
A Formerly “Fishy” Economy
.... peaked in 2007
Iceland's Bubble
- 2003-2007: foreign funded boom lifted GDP
25%, strengthened krona
- Beginning in 2004: Rapid expansion of three
major banks into overseas markets – borrowed
~$100 billion to buy foreign assets
- Further expansion funded with short-term
deposits, e.g. from UK retail branches of
Icelandic banks
- Other corporations and individuals became
heavy borrowers in foreign currencies (lower
interest rates than 16% charged on krona debt)
Iceland's Bubble (continued)
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2006: hedge funds attack krona as overvalued; attack unsuccessful
Mid-2008: Global re-evaluation of financial
risk led to interbank lending drying up
Icelandic banks couldn't refinance $62 billion
in foreign debt – lost access to overseas ST
funds (similar to European banks later)
Central Bank of Iceland has insufficient
foreign currency assets to assist private
banks, though it tried:
One September 28 2008 government injected
capital into Glitnir Bank (taking 75% stake)
Run on UK branches of other Icelandic banks
Iceland's Official
Foreign Exchange Reserves
(About $7.2 billion)
ICELAND’S BUBBLE - cont.
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Krona devalued (60 ISK → 125 ISK – now
about 116.8 ISK/USD)
GDP growth 2009: - 6.5%,
2010: ~ -3.5%
2011: 2-3 %
2009 : Arranged a $2.1 billion IMF facility
ICELAND’S BUBBLE - cont
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Government has not quite reached
agreement with UK and Netherlands to repay
over $5.3 billion in debts owed depositors of
failed Iceland banks
Iceland President refused to sign agreement,
forcing referendum on repayment
In March 2010 93% voted against repaying
debts under existing terms. Voters continue
to oppose repayment
Meanwhile, Parliament voted to pursue EU
membership – no real movement
Iceland (Volatile) Real GDP
Iceland Real GDP Growth Rate
Iceland Krona
Iceland
Total Public Debt (% of GDP)
Iceland Unemployment Rate
Iceland CPI
Iceland CDS
FEATURES OF THE TWO
BUSTS
Common features
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Sustained booms; rapid bank expansion, e.g.
increasing leverage
Bank reliance on foreign short-term deposits
Liquidity crises for major banks
Massive government intervention in the
banking sector
FEATURES OF THE TWO
BUSTS
Distinguishing features
Irish banks’ over-expansion was in domestic real estate
lending
Ireland government took over banks assets and liabilities
Icelandic banks over-expansion mainly in lending overseas,
frequently to Icelandic companies
Iceland had major FX crisis (not a Euro member)
Large depositors in Icelandic banks in the UK lost substantial
sums; Irish depositors still whole
Iceland in pictures . . . .
Why Iceland was Different ....
via Bloomberg interview
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Government Debt
(as percent of GDP: 2010)
Source: CIA
250
200
150
100
50
0
US Government Budget Deficit as Percent of GDP
Greece
Total Public Debt (% of GDP)
Ireland
Total Public Debt (% of GDP)
Italy
Total Public Debt (% of GDP)
Spain
Total Public Debt (% of GDP)
United States
Total Public Debt (% of GDP)
United States
Total Public Debt (% of GDP)
United States
Total Public Debt (% of GDP)
United States
Total Public Debt (% of GDP)