Designing a Strategy for Economic Recovery

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Here's a presentation about Municipal bonds in Ireland post budget 2010, given to the Chartered Accountants Mid West Chapter on 10.12.09.

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Designing a Strategy for Economic Recovery

  1. 1. DESIGNING A STRATEGY FOR ECONOMIC RECOVERY Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie
  2. 2. TODAY. Context. Today’s Budget. Looking (far) Ahead.
  3. 3. HELLO.
  4. 4. WE DID THIS TO OURSELVES BY THINKING SHORT-TERM.
  5. 5. 1/3. Context.
  6. 6. PHOENIX TO TIGER. Source: Maddisson, 2008.
  7. 7. Construction as % of national output Source: CSO
  8. 8. Bubblicious. Source: GUI.
  9. 9. Ireland and Japan: Great Similarities. Source: Bloomberg
  10. 10. DEFLATION IS GOOD NEWS FOR SHOPPERS* 2006: 100 (income)/10(Price) = 10 Units of Good. 2007: 100 (income)/5 (Price) = 20 Units of Good. *Who still have jobs.
  11. 11. BAD NEWS FOR THOSE IN DEBT.
  12. 12. Deflation increases the value of debt. A loan of 100 euros today may be worth 107 euros when it is repaid, decreasing the purchasing power of the debtor at the very time when the economy requires increased levels of consumption and investment.
  13. 13. TOTAL VALUE OF IRISH DEBT HAS DOUBLED 2002: 876 BN 2008: 1,600 BN €1.6 Trillion. Source: IMF
  14. 14. 2002 2003 2004 2005 2006 2007 %∆ France 22.5 24.1 26 28.8 32.9 34.9 55 Finland 21.5 24.7 27.3 30.9 32.4 34.3 59 German 43 43.4 43 42.9 42.3 47.7 10 y Greece 14.7 16.9 19.6 23.7 26.8 30.2 105 Hungar 0 7.7 9.4 10.2 11.9 12.4 61 y Iceland 88 86.3 88.8 102.1 - 121 37 Ireland 34 39 50 58.8 63.4 75.3 121 Mortgage Debt as % of GDP, selected countries.
  15. 15. Downturn is Unprecedented. Source: CSO
  16. 16. !"#$%&'()*+,-#.)-,/#(0#1()+2',&# 3&*4,+# )# (# '# "# $# %# &# !%# $&&%# $&&$# $&&"# $&&'# $&&(# $&&)# $&&*# $&&+# $&&,# !$# !"# Source: CSO, October 2009 HICP Figures.
  17. 17. ASSET PRICE DEFLATION Source: Ronanlyons.com
  18. 18. AND HAS THERE BEEN A COLLAPSE IN PRIVATE SECTOR CREDIT? Hell Yes. Source: Central Bank, Sectoral Developments in Private Sector Credit, Sept. 2009.
  19. 19. We have seen this before. Japan.
  20. 20. COLLAPSE IN AGGREGATE DEMAND Source: IMF Country Report.
  21. 21. SUMMARY OF PART 1. We arrive in 2010 at 2004 wealth levels, in need of ECB support, with the fruits of the Tiger years largely lost.
  22. 22. 2/3. THIS BUDGET. Only 1 of 4.
  23. 23. FISCAL CORRECTION
  24. 24. #BUDGET10 Capital investment Mortgage default slashed moratorium~beware! 70 million for flood Carbon taxes victims Pension reform Tax breaks for mooted. startups National Recovery Credit review for Bonds banks
  25. 25. SUMMARY OF PART 2. Budget is 2nd of 4. More cuts to come, more pain to be endured.
  26. 26. 3/3. LOOKING FORWARD We created the crisis. We can solve it.
  27. 27. INTERLOCKING CHALLENGES
  28. 28. Pensions. Ireland’s population will have aged.
  29. 29. 2006 2026 2056 2,000,100 2,268,000 2,125,000 # in work 464,000 844,000 1,532,000 # > 65 4.3 2.7 1.4 # in work/ # > 65 Source: Irish Pensions Board
  30. 30. Pensions shouldn’t be risky. 47.0% 34.2% 19.1% 19.9% 17.6% 15.4% 13.5% 12.3% 8.2% 2.6% 1.2% 1.1% -4.2% -5.7% -11.6% -18.9% 90 91 92 93 94 95 96 97 98 99 00 01 02 03 g g Av Av 19 19 19 19 19 19 19 19 19 19 20 20 20 20 rs rs a a Ye Ye 5 10 (Deliberately excluding 2007-2009 years) Source: Mercer Human Resource Consulting
  31. 31. SO. NEED A SAVINGS PRODUCT WHICH IS (ALMOST) RISKLESS.
  32. 32. Climate change will be a daily reality. Levees Flood protection
  33. 33. SO. NEED MASSIVE INFRASTRUCTURAL INVESTMENT TO DEFRAY COSTS OF CLIMATE CHANGE
  34. 34. Cash Strapped Pension Provision Business Unfriendly Local Authorities Infrastructural Investment
  35. 35. INCREASE INFRASTRUCTURAL INVESTMENT 64th 1.Why? What we have sucks. 2.We can’t compete on wages anymore. 3.We have lots of construction workers. Source: Global Competitiveness Report
  36. 36. !"#$%&'()*&+*,(-.*/&& $! !" #!!!" $!!!" %!!!" &!!!" '!!!" (!!!" !) $! *! !) #" $! *! !) $" $! *! !) %" $! *! !) &" $! *! !) '" $! *! !) (" $! *! !) +" $! *! !) )" $! *! !) ," $! *# !) !" $! *# !) #" $! *# !, $" '()*&+*,(-.*/=& $! *! !, #" $! *! !, $" $! *! !, %" $! *! !, &" $! *! !, '" $! *! !, (" $! *! !, +" 012*-&345*/&67&(4&.8*&'(9*/(:;&+*,(<4&<4&.8*& $! *! !, )" * !, "
  37. 37. HOW TO PAY FOR THIS?
  38. 38. MUNICIPAL BONDS Definition. Debt instruments issued by local authorities to finance investment projects. Municipal bonds can finance important local projects that won’t get funded otherwise. An aging population requires increased pension provision. We need to compete on infrastructural excellence. Municipal bonds are working now in the US and Europe: Build America just increased and re-issued their tax-efficient subsidised debt product to the tune of 56 billion
  39. 39. Local Authority Advisor/ Rating Underwriter Agency Revenues Issuer Projects Bank Bonds Markets Funds Interest/Principal
  40. 40. 1. Increase infrastructural investment 2. Encourage entrepreneurs~ Business friendly policies. Reduce rates. 3. Remove tax structures 4. Reform local authorities
  41. 41. SUMMARY OF PART 3. Investment in infrastructure will be the way to compete in the next 20 years. Long term focus is key.
  42. 42. “SMALL STATES MUST RELY HEAVILY ON THE QUALITY OF THEIR STRATEGIC THINKING TO COUNTER THEIR VULNERABILITY TO INTERNATIONAL INFLUENCES” ––JOE LEE
  43. 43. QUESTIONS?
  44. 44. DESIGNING A STRATEGY FOR ECONOMIC RECOVERY Dr Stephen Kinsella | stephenkinsella.net | stephen.kinsella@ul.ie

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