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I r e l a n d
Irish Debt DynamicsWith a little help from our friends
8th February 2011
I r e l a n d
Economist: Dermot OLeary Tel: +353 1 641 9167 Email: [email protected]: Juliet Tennent Tel: +353 1 641 9469 Email:[email protected]
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Summary
Ireland & EU faces a choice between bank debt restructuring now orprobable sovereign restructuring down the road. Time is of theessence.
Ireland cannot act unilaterally, but must convince EU that it is in theirinterest to take radical steps now
It is clear Irish sovereign can no longer cope with the banking crisis onits own. Further EU support is needed.
No easy options, and Ireland must continue to strive towards a primarybudget surplus, and then keep it there. Fiscal consolidation will not onlybe an issue for the next Government, it will be an issue for twentyyears
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A view from the markets
Irish real* 10-year yields
-2
0
2
4
6
8
10
12
Sep-
85
May-
87
Jan-
89
Sep-
90
May-
92
Jan-
94
Sep-
95
May-
97
Jan-
99
Sep-
00
May-
02
Jan-
04
Sep-
05
May-
07
Jan-
09
Sep-
10
Realrate(
%)
Source: Datastream *using CPI less mortgage costs
Average 1985-1995 = 6.7%
Current = 8.4%
Markets still see Irish situation asunsustainable, despite IMF/EU programme
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What do the numbers say?
Goodbody Fiscal forecasts2009 2010f 2011f 2012f 2013f 2014f
Budget Deficit (% of GDP) -14.6% -31.7% -9.7% -7.8% -6.0% -4.3%
Excluding Banking costs -11.9% -11.8% -9.7% -7.8% -6.0% -4.3%
General Government Debt (% of GDP) 65.6% 94.7% 103.4% 109.8% 113.3% 114.9%
Interest/GDP 1.6% 2.6% 3.7% 4.3% 4.8% 5.2%
Average interest rate 3.2% 3.9% 4.9% 5.0% 5.1% 5.3%
Assumed interest rate on new debt 5.1% 5.0% 5.8% 5.8% 5.8% 6.0%
GDP growth (real) -7.6% -0.4% 1.1% 2.1% 2.0% 2.0%
GDP growth (nominal) -11.3% -1.0% 1.0% 2.6% 3.5% 3.5%
Source: Goodbody estimates
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Banking cost has been the moving
target
Fiscal costs of banking crisis by institution in millions Anglo INBS AIB BOI EBS ILP Total
Equity 4,000 - 3,700 1,663 - - 9,363Preference Shares - - 3,500 1,837 - - 5,337Promissory Note 25,300 5,300 - - 250 - 30,850Special Investment shares - 100 - 625 - 725Possible further capital required 5,000 4,700 1,499 11,199Total 34,300 5,400 11,900 4,999 875 - 57,474
% of 2010 GDP 21.7% 3.4% 7.5% 3.2% 0.6% 0.0% 36.4%Source: NTMA, Central Bank, DoF, Goodbody estimates
Fiscal costs of banking crisesSystemic
banking crisis(starting date)
Fiscal cost
(gross, as %of GDP)
Minimum real
GDP growthrate
Ireland 2008 36.3 -12.3
Korea 1997 31.2 -6.9
Japan 1997 24.0 -2
Iceland 2008 13.1 -9.1
Finland 1991 12.8 -6.2Netherlands 2008 12.7 -5
Hungary 1991 10.0 -11.9UK 2008 8.7 -5.9
Luxembourg 2008 7.7 -8.5
Czech Republic 1996 6.8 -0.8
Spain 1977 5.6 0.2
Belgium 2008 5.0 -4.1
United States 2008 4.9 -4.1
Austria 2008 4.1 -4.6
United States 1988 3.7 -0.2
Sweden 1991 3.6 -1.2
Greece 2008 3.6 -2.5
Denmark 2008 3.1 -6.9
Norway 1991 2.7 2.8
Source: IMF & Datastream
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How much more to come?
Trajectory of Irish government debt levels
0%
20%
40%
60%
80%
100%
120%
140%
1998 2000 2002 2004 2006 2008 2010e 2012f 2014f
Debt/GD
P
With full use of 25bn contingency fund Without use of 25bn contingency fundSource: DoF, Goodbody estimates
PCAR exercise will determinescale of additional capitalrequired
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How sustainable are Irish debt levels?
Public Finances - Key Data (% of GDP)
2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012
Ireland -11.8* -9.7 -7.8 2.5 3.2 4.4 -6.7* -5.6 -4.6 95 103 110 75 98 104
Greece -9.6 -7.4 -7.6 6.0 6.2 7.4 -1.4 2.1 2.6 140 150 156 93 105 110
Spain -9.3 -6.4 -5.5 2.0 2.4 2.8 -5.4 -2.5 -2.0 64 70 73 43 49 53
France -7.7 -6.3 -5.8 2.6 2.7 2.8 -3.5 -2.0 -1.5 83 87 90 57 62 65
Cyprus -5.9 -5.7 -5.7 2.3 2.4 2.4 -2.8 -2.6 -3.0 62 65 68 n/a n/a n/a
Slovenia -5.8 -5.3 -4.7 1.6 1.7 1.8 -2.4 -2.1 -2.0 41 45 48 5 10 13
Slovakia -8.2 -5.3 -5.0 1.4 1.8 2.1 -6.5 -3.2 -3.0 42 45 47 25 28 31Portugal -7.3 -4.9 -5.1 2.9 3.7 4.0 -3.8 -0.1 -0.3 83 89 92 63 68 70
Belgium -4.8 -4.6 -4.7 3.5 3.5 3.6 -0.2 -0.2 -0.5 99 101 102 82 84 85
Italy -5.0 -4.3 -3.5 4.6 4.8 4.9 1.0 1.3 1.6 119 120 120 103 105 105
Netherlands -5.8 -3.9 -2.8 2.2 2.3 2.4 -1.9 0.0 0.9 65 67 67 35 38 40
Austria -4.3 -3.6 -3.3 2.8 2.8 2.9 -0.6 -0.1 -0.1 70 72 73 42 44 46
Malta -4.2 -3.0 -3.3 3.1 3.1 3.1 -0.8 0.2 -0.4 70 71 71 n/a n/a n/a
Germany -3.7 -2.7 -1.8 2.4 2.4 2.4 -0.4 0.2 1.1 76 76 75 51 52 52Finland -3.1 -1.6 -1.2 1.2 1.3 1.6 0.6 1.7 2.2 49 51 53 -57 -52 -49
Luxembourg -1.8 -1.3 -1.2 0.4 0.4 0.5 0.7 1.2 1.1 18 20 21 -42 -39 -37
Euro-area -6.3 -4.6 -3.9 2.9 3.0 3.2 -2.1 -0.5 0.0 84 87 88 59 62 63
UK -10.5 -8.6 -6.4 2.7 3.0 3.2 -5.7 -3.8 -2.0 81 89 95 51 58 62
US -11.3 -8.9 -7.9 2.7 2.8 2.8 -7.1 -5.5 -3.6 93 99 101 68 74 78
Japan -6.5 -6.4 -6.3 2.7 2.8 2.8 -5.5 -5.6 -5.4 198 204 210 114 120 127
Source: European Commission, OECD, Goodbody estimates*Excluding c.20% of GDP of one-off banking costs
Net DebtBudget deficit
Interest
expenditure
Cyclically-adjusted
primary balance Gross Debt
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Been here before
Interest costs/total revenue in Ireland
0%
5%
10%
15%
20%
25%
30%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
e
2012
f
2014
f
Interest/revenue
Source: DoF, Goodbody estimates
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Debt Dynamics
Solvency requires a country to
be able to stabilise its debt This depends on three things
the interest rate, growth andthe primary balance (fiscal
balance excluding interestpayments)
Pbb=ND*[(r-g)/(1+g)]
Government targets have
adjusted the primary budgetbalance (Pbb) in recentBudgets
1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0%
9.0% 8.7% 8.1% 7.5% 7.0% 6.4% 5.8% 5.3%
8.5% 8.2% 7.6% 7.0% 6.4% 5.9% 5.3% 4.8%
8.0% 7.6% 7.0% 6.5% 5.9% 5.3% 4.8% 4.2%
7.5% 7.1% 6.5% 5.9% 5.4% 4.8% 4.2% 3.7%
7.0% 6.5% 5.9% 5.4% 4.8% 4.3% 3.7% 3.2%
6.5% 6.0% 5.4% 4.8% 4.3% 3.7% 3.2% 2.6%
6.0% 5.4% 4.9% 4.3% 3.7% 3.2% 2.7% 2.1%
5.5% 4.9% 4.3% 3.8% 3.2% 2.7% 2.1% 1.6%
5.0% 4.3% 3.8% 3.2% 2.7% 2.1% 1.6% 1.1%
4.5% 3.8% 3.2% 2.7% 2.1% 1.6% 1.1% 0.5%
4.0% 3.3% 2.7% 2.2% 1.6% 1.1% 0.5% 0.0%
3.5% 2.7% 2.2% 1.6% 1.1% 0.5% 0.0% -0.5%
3.0% 2.2% 1.6% 1.1% 0.5% 0.0% -0.5% -1.1%
2.5% 1.6% 1.1% 0.5% 0.0% -0.5% -1.1% -1.6%
2.0% 1.1% 0.5% 0.0% -0.5% -1.1% -1.6% -2.1%
Real GDP
Realinterestrate
Primary budget balance needed to stabilise debt under varying
assumptions for growth & interest rates
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What happens after 2014?
-100
-50
0
50
100
150
1998 2002 2006 2010 2014 2018 2022 2026 2030 2034 2038 2042 2046 2050
NetDebt/GD
P
Scenario 1 Scenario 2 Scenario 3 1980s
Government debt levels beyond 2014 under different
scenarios, all based on a 3% primary surplus
Source: Goodbody estimates
1987 levelrebased to 2014
2% growth, 4% real int. rate
3% growth, 3.5% real int. rate
4% growth, 2% real int. rate
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Debt reduction not just an Election
2011 issue
The 1980s growth/interest rate experience unlikely to be repeated
Debt reduction is a generational issue
Countries have been able to bring down debt from high levels
A primary surplus is the first priority for Ireland
Could take 20 years for debt levels to fall to where EU wants them,even though markets should regain confidence before then
Successful debt reduction episodesPeak
debt Year
Trough
debt Year
Reduction
in debt
level (% of
GDP)
No. of
years
Average
structural
primary surplus
over period
Average
interest costs
over period
GDP
growth
over
period
Belgium 140.8 1993 88.1 2007 -52.7 14 4.5 6.6 3.5
Italy 121.8 1994 103.6 2007 -18.2 13 3.2 7.2 1.6
Ireland 112.4 1987 24.8 2006 -87.6 19 3.6 4.5 6.2
Source: European Commission, OECD, DoF
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Bank debt restructuring
Sovereign support of thebanking system has reached itslimit already
Unsecured, unguaranteed bankdebt must be restructured first
21.5bn of unsecured,unguaranteed bank debtoutstanding
Time is of the essence 60%matures in 2011/2012
Irish bank debtm 2011 2012 2013 2014 2015+ TotalSenior Secured 2,500 5,895 5,463 3,244 4,700 21,802
GovernmentGuaranteed 1,526 3,764 3,845 56 6,971 16,161
Senior Unsecured 5,675 7,027 1,308 938 452 15,400
Senior Subordinated - - - 60 4,362 4,422
Junior Subordinated - - - - 1,630 1,630
Total Unsecured,Unguaranteed 5,675 7,027 1,308 998 6,444 21,452
Total 9,701 16,686 10,616 4,298 18,115 59,415Source: Bloomberg
0
500
1,000
1,500
2,000
2,500
3,000
3,500
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
mln
Source: Bloomberg
Redemption profile of Irish unsecured and senior
subordinated bank debt
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Conclusions
Irish sovereign can no longer support banks. EU must recogniseburden-sharing now or sovereign problems down the road. How?
Direct stakes in banks by EFSF
EU-wide insurance scheme
Facilitation of sale of Irish banks
EU-wide resolutions on bank debt
Double-whammy effect easing sovereign concerns & aidingeconomic growth
Lower interest rate will help, but not the major issue; 1% cut saves675m or 0.4% of GDP per year
Does not reduce need for tough fiscal measures over next few years,but it would make the situation more sustainable if done properly
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