Economic Firefight – An Inside View

Economic Firefight – An Inside View

Alan AhearneSpecial Adviser to the Minister for Finance

Presentation to NUI Galway Dublin Alumni Club 11 May 2010

3

Outline

Are we winning the fight?

Is a fight worth winning?

Truth or myth?

4

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.

5

Improving competitiveness spurring exports

-4

-2

0

2

4

6

8

10

eu

ro a

rea

ire

lan

d

be

lgiu

m

ge

rma

ny

gre

ece

sp

ain

fra

nce

ita

ly

cyp

rus

luxe

mb

ou

rg

ma

lta

ne

the

rla

nd

s

au

str

ia

po

rtu

ga

l

slo

ve

nia

slo

va

kia

fin

lan

d

pe

r ce

nt ch

an

ge

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-à-vis the euro area

source: EU Commission Autumn 2009 forecasts

Unit labour costs (annual change in 2009, %)

6

Business conditions are improving

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

70.0

Ja

n-0

1

Ap

r-0

1

Ju

l-0

1

Oct-

01

Ja

n-0

2

Ap

r-0

2

Ju

l-0

2

Oct-

02

Ja

n-0

3

Ap

r-0

3

Ju

l-0

3

Oct-

03

Ja

n-0

4

Ap

r-0

4

Ju

l-0

4

Oct-

04

Ja

n-0

5

Ap

r-0

5

Ju

l-0

5

Oct-

05

Ja

n-0

6

Ap

r-0

6

Ju

l-0

6

Oct-

06

Ja

n-0

7

Ap

r-0

7

Ju

l-0

7

Oct-

07

Ja

n-0

8

Ap

r-0

8

Ju

l-0

8

Oct-

08

Ja

n-0

9

Ap

r-0

9

Ju

l-0

9

Oct-

09

Ja

n-1

0

Ap

r-1

0

manufacturing

services

construction

not expanding or contracting

Purchasing Managers’ Indexes

7

Consumer confidence and spending are improving

0

10

20

30

40

50

60

70

80

90

100

Jan-07

Mar-07

May-07

Jul-07

Sep-07

Nov-07

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

98

99

100

101

102

103

104

105

106

107

108

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Consumer spending*Consumer confidence

*Volume of core (excl cars) retail sales. 2005=100

8

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.

9

Drag on GDP from new homebuilding easing

0

10000

20000

30000

40000

50000

60000

70000

80000

90000

100000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

un

its

House completions (including Dept of Finance forecasts)

10

Household debt is relatively high

Household debt (per cent of disposable income)

11

The underlying deficit has been stabilised. Budget balance (% of GDP)

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010f 2011f 2012f 2013f 2014f

% o

f G

DP

Stability and GrowthPact "threshold"

*Underlying 2009 General Government Deficit of 11.8% of GDP excludes bank recapitalisation costs.

12

Percentage of households’ disposable income used to pay interest on debt obligations

0

2

4

6

8

10

12

14

2003 2004 2005 2006 2007 2008 2009

pe

r c

en

t

Household interest payments (per cent of disposable income)

13

Disposable income and consumption expected to bottom out in 2010

2007 2008e 2009e 2010f

1. Disposable income 94 100 96 92

2. Consumption 92 94 85 82

3. Savings 2 6 11 10

4. Savings ratio (%) 2.3 6.1 10.9 10.2

Irish household savings (€ billions)

14

A bit of bank accounting

Fictional Bank Balance Sheet Assets Liabilities Loans 62 Capital Equity 4 Subordinated debt 2 Total capital 6 Other assets 19 Funding Deposits 60 Senior funding 15 Total funding 75 Total assets 81 Total liabilities 81

15

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.

16

Banks need additional equity capital to meet the new capital standards

Bank of Ireland: €2.7 billion. Private capital raising. Significant return to the State from its involvement in

the capital raising – includes conversion of preference shares into ordinary equity.

Allied Irish Bank: €7.4 billion. Detailed capital plan submitted to Financial Regulator.

Can be fully met from the National Pension Reserve Fund.

NPRF will hold valuable shares.

17

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.

18

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.

19

Is the Government bailing out the banks?

Who are the “banks”? Shareholders? Senior management? Bondholders? Depositors?

The Government is fixing the banking system.

20

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.

21

Should Anglo be liquidated immediately?

Fictional Bank Balance Sheet Assets Liabilities Loans 62 Capital Equity 4 Subordinated debt 2 Total capital 6 Other assets 19 Funding Deposits 60 Senior funding 15 Total funding 75 Total assets 81 Total liabilities 81

22

Conclusions

Back burning often used to minimise destruction.

Large fire, but not one that exceeds suppression capabilities.