Transcript Economic Firefight – An Inside View

Economic Firefight –
An Inside View
Alan Ahearne
Special Adviser to the Minister for Finance
Presentation to NUI Galway Dublin Alumni Club
11 May 2010
Outline

Are we winning the fight?

Is a fight worth winning?

Truth or myth?
3
The economy is turning

Consensus forecast is for a return to positive
growth in the second half of this year.



Or sooner!
Growth projected to strengthen next year and
beyond, led by exports.
Net job creation of 20,000 next year, and
45,000 each year thereafter.
4
Improving competitiveness spurring exports
Unit labour costs (annual change in 2009, %)
10
Ireland is the only country in the euro
area in which unit labour costs are
falling - last year there was a 5¼%
improvement in unit labour costs vis-àvis the euro area
8
4
2
0
-2
finland
slovakia
slovenia
portugal
austria
netherlands
malta
cyprus
italy
france
spain
greece
germany
belgium
ireland
-4
luxembourg
source: EU Commission Autumn 2009 forecasts
euro area
per cent change
6
5
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
30.0
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Business conditions are improving
Purchasing Managers’ Indexes
70.0
65.0
60.0
55.0
50.0
45.0
40.0
35.0
manufacturing
services
construction
25.0
not expanding or contracting
20.0
6
Consumer confidence and spending are
improving
Consumer confidence
Consumer spending*
100
108
90
107
80
106
105
70
104
60
103
50
102
40
101
30
100
20
99
10
98
0
Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar- May- Jul- Sep- Nov- Jan- Mar07
07 07
07
07 07
08 08 08
08
08 08
09 09 09
09
09 09
10
10
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar09
09
09
09
09
09
09
09
09
09
09
09
10
10
10
*Volume of core (excl cars) retail sales. 2005=100
7
The economy is turning


Budgetary targets for public spending
and taxation on target through April.
Unemployment rate unlikely to rise
much further.


Small decrease in the live register in April.
New homebuilding near to bottoming
out.
8
Drag on GDP from new homebuilding easing
House completions
(including Dept of Finance forecasts)
100000
90000
80000
70000
units
60000
50000
40000
30000
20000
10000
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009e 2010f 2011f 2012f 2013f 2014f
9
Household debt is relatively high
Household debt (per cent of disposable income)
10
The underlying deficit has been stabilised.
Budget balance (% of GDP)
6
4
2
0
% of GDP
-2
-4
Stability and Growth
Pact "threshold"
-6
-8
-10
-12
-14
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009*
2010f
2011f
*Underlying 2009 General Government Deficit of 11.8% of GDP excludes bank recapitalisation costs.
2012f
2013f
2014f
11
Percentage of households’ disposable income
used to pay interest on debt obligations
Household interest payments (per cent of disposable income)
14
12
per cent
10
8
6
4
2
0
2003
2004
2005
2006
2007
2008
2009
12
Disposable income and consumption expected
to bottom out in 2010
Irish household savings (€ billions)
2007
2008e
2009e
2010f
1. Disposable income
94
100
96
92
2. Consumption
92
94
85
82
3. Savings
2
6
11
10
2.3
6.1
10.9
10.2
4. Savings ratio (%)
13
A bit of bank accounting
Fictional Bank Balance Sheet
Assets
Liabilities
Loans
Other assets
Total assets
62
Capital
Equity
Subordinated debt
Total capital
4
2
Funding
Deposits
Senior funding
Total funding
60
15
6
19
81
Total liabilities
75
81
14
We are in the ultimate phase in the resolution
of our financial crisis

NAMA has determined the price for the first
tranche of loans, after rigorous loan-by-loan
analysis.



50% average discount – aggressive valuations.
NAMA has forced the banks to acknowledge reality
and recognise their losses.
Financial Regulator and Central Bank have set
prudent capital requirements.

8% core tier 1 capital requirement, of which 7%
must be equity.
15
Banks need additional equity capital to meet the
new capital standards

Bank of Ireland: €2.7 billion.



Allied Irish Bank: €7.4 billion.


Private capital raising.
Significant return to the State from its involvement in the
capital raising – includes conversion of preference shares
into ordinary equity.
Detailed capital plan submitted to Financial Regulator.
Can be fully met from the National Pension Reserve
Fund.

NPRF will hold valuable shares.
16
Bank of Ireland deal: What does the State get?





A functioning bank.
About 36% share of the bank.
Roughly €1.8 billion of preference
shares with a coupon of 10.25%.
€491 million profit for its warrants.
€51 million in fees for conducting this
deal.
17
Is the Government bailing out the builders?

Borrowers continue to owe every cent.

Provisions v. write offs.

No more rolling up interest.

Protection for homeowners.
18
Is the Government bailing out the banks?

Who are the “banks”?





Shareholders?
Senior management?
Bondholders?
Depositors?
The Government is fixing the banking
system.
19
Is the Government bailing out the bondholders?

Bulk of bonds in issue by Irish banks are
ordinary senior bonds.


e.g. certificates of deposits.
Senior bonds are:




part of banks’ funding, not risk capital.
owned by pension funds, insurance companies,
credit unions, multinational companies, and other
long-term providers of funds. Same investors that
buy Government debt.
covered by the Bank Guarantee.
legally entitled to same treatment as deposits.
20
Should Anglo be liquidated immediately?
Fictional Bank Balance Sheet
Assets
Liabilities
Loans
Other assets
Total assets
62
Capital
Equity
Subordinated debt
Total capital
4
2
Funding
Deposits
Senior funding
Total funding
60
15
6
19
81
Total liabilities
75
81
21
Conclusions


Back burning often used to minimise
destruction.
Large fire, but not one that exceeds
suppression capabilities.
22