2012 Jan 27 - John Finn - Treasury Solutions

abm financial advisers“Something for your (in)digestion!” John Finn January 27th 2012

Presentation Outline1. The Euro going forward ( and the Irish going backwards?)2. Interest rates going nowhere?3. Foreign exchange going everywhere?4. Questions

1. The Euro – what’s the problem?• Sovereign nations in Europe cannot fund themselves driving up yields which pushes down prices• This, in turn, is becoming a banking problem as the banks hold sovereign bonds as assets which are falling in value• Banks required to “mark to market” these assets incurring losses and reducing their capital in the process….• But they are now required to raise an extra €114bn in capital by June 2011

Euro problems• Need to drive down their loan:deposits ratio (reduce loans, increase deposits)• Need to increase capital adequacy ratio (increase capital, reduce loans)• Need to refinance (€700bn in 2012/13)• €2 trillion refinancing estimate in total i.e. banks competing with government to raise funds

Sovereign debt yields rise….

While ratings fall….

Greece has a refinancing problem but Italy is just too big… Eurozone debt maturities (€bn per annum) 2012 2013 2014 2015 Cum %Greece 48.6 29.7 27.2 19.8 46.90%Portugal 25.1 9.8 14.3 9.8 48.80%Spain 151.9 68.2 62.9 40.7 54.60%Ireland 5.6 18 0 0 27.50%Italy 342.2 159.2 131.5 137.5 48.10%Total 573.4 284.9 235.9 207.8

Are investors worried?• Repatriation of “non-EUR” home• Conversion into other currencies• Contingency planning – Effect on banking partners – Location of assets and liabilities – Location of assets and costs – Legal implications – Commercial implications (e.g. effect on supply chain?)

What could go wrong? The eurozone crisis is not tackled (adequately or at all) 2-phase euro emerges and we are in the weaker one or.. Euro disintegrates altogether (estimates cost of break up is 60% of GDP) Worldwide depression would be inevitable US moves to a protectionist state of operation

Importance of the US economy

Irish Problems Government running a large current deficit Also taking private (banking) debt on board Resultant reduction on disposable incomes Knock-on effect on private households ability to repay Write-off of bank loans is seismic But phase II (write-off of private mortgages) coming down the tracks

Sectoral % breakdown 1999 and 2007100% Property80% Whole/retail60% Services Hotels, etc40% Infra/Utility20% Manufacturing Agri, etc 0% 1999 2007

Sectoral breakdown in €m 96,184100,000 Agri, etc 80,000 Manufacturing Infra/Utility 60,000 Hotels, etc 40,000 Services 5,556 12,103 Property 20,000 10,537 2,677 3,331 Whole/retail - 1999 2007

2012 crystal ball gazing - Europe Euro will survive but not in same format – Greek casualty European banks in more difficulty than previously thought - increased capitalisation inevitable leading to increase in number of nationalised banks More sovereign austerity as a result – Europe where we were 2 years ago? ECB will have to print money despite German protestations Socio-economic issues to emerge – capitalism as currently constituted now seriously questioned

What needs to happen ? No more room for tax hikes – effect on disposable income could have “perverse” effect on tax take Further public sector reform required as precursor for restructuring Change in bankruptcy laws need to be closely monitored Property prices must stop falling to improve consumer confidence Credit to flow but NAMA totally ineffective in that context Pillar banks need to act as such Some sovereign/bank debt write-off

2. Interest Rates• 3-month euribor• 3-month euribor versus ECB base rate• 3-year swap rates• 3-year swaps versus 3-month euribor

0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.0003/03/0803/05/0803/07/0803/09/0803/11/0803/01/0903/03/0903/05/0903/07/0903/09/0903/11/0903/01/1003/03/1003/05/1003/07/1003/09/1003/11/1003/01/1103/03/1103/05/1103/07/1103/09/11 3-m euribor03/11/11 3-month euribor vs. ECB base rate ECB Base Rate03/01/12

0.60 0.85 1.10 1.35 1.60 1.85 2.10 2.35 2.60 2.85 3.10 3.3501/01/200901/03/200901/05/200901/07/200901/09/200901/11/200901/01/201001/03/201001/05/201001/07/201001/09/201001/11/201001/01/201101/03/201101/05/201101/07/201101/09/2011 3-year swap vs. 3-month euribor01/11/2011 3-yr swap 3-m euribor01/01/2012

1.20 1.70 2.20 2.70 3.20 3.70 4.20 4.70 5.20 5.7027/01/0227/07/0227/01/0327/07/0327/01/0427/07/0427/01/0527/07/0527/01/0627/07/0627/01/0727/07/0727/01/0827/07/0827/01/0927/07/0927/01/10 3-year swap at historic lows27/07/1027/01/1127/07/11 3-yr swap

3. Foreign Exchange (“FX”) Rates• EUR/GBP• EUR/USD

0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.0025/01/0725/04/0725/07/0725/10/0725/01/0825/04/0825/07/0825/10/0825/01/0925/04/0925/07/0925/10/0925/01/1025/04/10 EUR/GBP 5-year trend25/07/1025/10/1025/01/1125/04/1125/07/1125/10/11 EUR/GBP25/01/12

0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60 1.7027/01/0227/07/0227/01/0327/07/0327/01/0427/07/0427/01/0527/07/0527/01/0627/07/0627/01/0727/07/0727/01/0827/07/0827/01/09 EUR/USD 10-year trend27/07/0927/01/1027/07/1027/01/1127/07/11 EUR/USD27/01/12

5. Questionsjohnfinn@treasurysolutions.iewww.treasurysolutions.ie

EUR/GBP Summary Table High Low % diff Average2011 0.9042 0.8283 9.16% 0.86812010 0.9148 0.8086 13.13% 0.87952009 0.9649 0.8397 14.91% 0.89152008 0.9803 0.7338 33.59% 0.79722007 0.7382 0.6553 12.65% 0.68452006 0.7006 0.6687 4.77% 0.68192005 0.7067 0.6624 6.69% 0.6839

EUR/USD Summary Table High Low % diff Average2011 1.4939 1.2856 16.20% 1.39252010 1.4582 1.1875 22.80% 1.32652009 1.5141 1.2455 21.57% 1.39442008 1.6038 1.2332 30.05% 1.52702007 1.4966 1.2864 16.34% 1.37032006 1.3336 1.1837 12.66% 1.25632005 1.3467 1.1672 15.38% 1.2449

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2012 Jan 27 - John Finn - Treasury Solutions

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2012 Jan 27 - John Finn - Treasury Solutions — Presentation Transcript