Debt Dynamics Presentation

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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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Debt Dynamics Presentation