economic firefight – an inside view alan ahearne special adviser to the minister for finance...
TRANSCRIPT
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.
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Improving competitiveness spurring exports
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0
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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, %)
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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
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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
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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.
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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)
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Household debt is relatively high
Household debt (per cent of disposable income)
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The underlying deficit has been stabilised. Budget balance (% of GDP)
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-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.
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Percentage of households’ disposable income used to pay interest on debt obligations
0
2
4
6
8
10
12
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2003 2004 2005 2006 2007 2008 2009
pe
r c
en
t
Household interest payments (per cent of disposable income)
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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)
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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
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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.
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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.
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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.
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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.
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Is the Government bailing out the banks?
Who are the “banks”? Shareholders? Senior management? Bondholders? Depositors?
The Government is fixing the banking system.
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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.
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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
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Conclusions
Back burning often used to minimise destruction.
Large fire, but not one that exceeds suppression capabilities.
