Economic Firefight – An Inside View

2. Economic Firefight – An Inside View Alan Ahearne Special 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 Unit labour costs (annual change in 2009, %)

6. Business conditions are improving Purchasing Managers’ Indexes

7. Consumer confidence and spending are improving Consumer confidence Consumer spending* *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 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) *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 Household interest payments (per cent of disposable income)

13. Disposable income and consumption expected to bottom out in 2010 Irish household savings (€ billions)

14. A bit of bank accounting

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?

22. Conclusions • Back burning often used to minimise destruction. • Large fire, but not one that exceeds suppression capabilities.