Ireland and the euro crisis Is there light at the end of the tunnel? Daniel Gros. Centre for European Policy Studies

Transcription

1 Ireland and the euro crisis Is there light at the end of the tunnel? Daniel Gros Dublin April 29, 2011

2 Key points Ireland archetypical case of real estate/credit bubble. Opposite of Greece. 1. Adjustment in real estate sector quick. 2. External adjustment almost complete. Light at end of tunnel. SDll to be achieved: Adjust to higher interest rate environment. Mortgage reform (higher rates plus ways to provide debt relief).

3 Key point 1 Ireland s super real estate/credit bubble reladvely burst quickly: Both for prices and investment. ConstrucDon investment key variable since it shows real impact of property boom. (At what prices residents exchange their houses among themselves irrelevant. LiNle problems in countries with house price booms, but not construcdon (France, UK).)

4 Key point 1 Two ways to measure impact of construcdon boom and bust on economy: Value added in construcdon (impact on GDP). GFCF in sector, indicates scale of waste of resources and hence potendal losses in banking system and burden on government. (Employment turned out to be least important.)

5 Gross value added at 2000 prices: building and constructon Germany France Ireland (RHS) Spain Italy Billion EUR Ireland Billion EUR

6 Gross Value Added in constructon and building as % of total Value Added Germany Spain Italy Ireland France %

7 25.0 Ireland: construction overhang 22.0 Integral= 52% of GDP =housing overhang=losses to banks % of GDP Investement in construction 7

8 Conclusion on real estate bust AcDvity levels back to normal. ContribuDon to GDP growth during boom and bust reladvely minor (few % points of GDP). Scale of accumulated waste of resources gigandc (even higher than Spain). Will take a decade to be absorbed. Losses end up mostly on balance sheet of banks and now government. More to come for government through household defaults (social spending)?

9 Key point II Ireland s savings rates did not fall that much during the boom. Most of the waste in real estate investment financed by domesdc savings. Foreign debt reladvely low Solvency should not be an issue.

10 NaTonal Savings boom and bust Gross national savings Net national savings % Greece Ireland Portugal Spain Italy % Greece Ireland Portugal Spain 0.7 Italy

11 NaTonal Savings boom (2007) and bust (2010) 13 Net national savings % Greece Ireland Portugal Spain Italy

12 Net External debt % GDP Net External debt as % of Exports Greece Ireland Portugal Spain Italy ArgenDna 99 Hungary 08 12

13 (DomesTc) Debt (Foreign) Debt Importance of public debt depends crucially on (net) foreign asset posidon of country: DomesDc debt: even very high levels sustainable since this is not net debt at the level of society (no impact on aggregate consumpdon: lef versus right hand pocket). Foreign: debt service = transfer (requires net exports, i.e. usually a reducdon in consumpdon).

14 (DomesTc) Debt (Foreign) Debt II Importance of public debt depends also on who holds it: DomesDc residents: can always be taxed. Foreigners: if country has linle net debt residents must hold large foreign assets. Can they be idendfied and taxed? Key for Ireland: net debt low, government foreign debt high! Unfortunately poor stadsdcal base because of huge offshore sector (as in banking).

15 Gross External Debt (as % of GDP in 2010q3) and its breakdown by sector Italy Spain Portugal Greece Government Monetary AuthoriTes Banks Other sectors Direct Investment 15

16 Ireland Gross External Debt (as % of GDP in 2010q3) and its breakdown by sector Tot Ext Debt % GDP 1090 Direct Investment 155 Other sectors 420 Banks 394 Monetary AuthoriDes (MA) 66 Government

17 External Debts 120 % Government debt held by non-resid Extern gov debt % GDP 90 Net external debt % Greece Ireland Portugal Spain Italy 9 17

18 Key issue for Ireland LiNle net foreign debt but huge foreign public debt. Private sector must have large assets! Who holds them households or ins/tu/ons? Can they be taxed, sold by government to deleverage (pay down foreign debt). Fire sale not an argument for going slow: market works for foreign assets even if one sdll clings to the illusion that domesdc assets are undervalued. Centre for European Policy Studies

19 Adjustment with euro In euro area all debt is in foreign currency (like emerging markets). In principle same is true for truly fixed exchange rates (or currency board): cannot print money to pay off debt. But, membership in euro is much more than irrevocably fixed rates. Key difference: Access to ECB financing. (For a country in financial distress loss of access means de facto expulsion from euro.) Centre for European Policy Studies

20 Too linle adjustment with euro? (Cheap) ECB financing channel creates decepdve islands of monetary stability. (Lower interest rates than Germany even afer crisis.) Cost of funding for households lower than government! No sudden stop for the private sector. Adjustment delayed is bener? Centre for European Policy Studies

21 Interest rates on loans for house purchase Germany Spain Greece 5.5 Ireland Portugal 5 %

22 Interest rates on loans for consumpton Estonia Greece Ireland Germany Jan 2003Mar 2003May 2003Jul 2003Sep 2003Nov 2004Jan 2004Mar 2004May 2004Jul 2004Sep 2004Nov 2005Jan 2005Mar 2005May 2005Jul 2005Sep 2005Nov 2006Jan 2006Mar 2006May 2006Jul 2006Sep 2006Nov 2007Jan 2007Mar 2007May 2007Jul 2007Sep 2007Nov 2008Jan 2008Mar 2008May 2008Jul 2008Sep 2008Nov 2009Jan 2009Mar 2009May 2009Jul 2009Sep 2009Nov 2010Jan 2010Mar 2010May 2010Jul 2010Sep 2010Nov 0 22

23 Euro benefits (and costs) II Intra eurosystem lending = de facto public debt. Formally normal monetary policy operadons (repo) go to banks, but they are guaranteed by government. Emergency Lending Assistance (ELA) dangerous as it creates wrong incendves (cost to country zero). => Greek (Irish) public debt much higher than measured by normal stadsdcs. Centre for European Policy Studies

24 MFIs borrowing from central banks as % of GDP 100 Greece Ireland Portugal Spain Italy % GDP

25 BELL vs GIPS(Y?) Lessons from the (enforced) adjustment in the EU periphery for the euro periphery? EU periphery: BELL = Bulgaria, Estonia, Latvia, Lithuania All also with fixed exchange rate. Key difference: no support from ECB! Adjustment complete in less than 2 years. Centre for European Policy Studies

26 Finnland Norway Estonia Russia NORTH SEA Latvia Denmark Lithuania Ireland Belarus ATLANTIC OCEAN Great Britain Netherlands Belgium Luxembourg Germany Czech Republic Poland Slovakia Moldova Ukraine France Switzer/ land Autstria Slovenia Hungary Romania Portugal Spain CroaTa Bosnia/ Herzegovina Italy Serbia Montenegro Albania Bulgaria Turkey MEDTERRANEAN SEA Greece Malta 26

27 200 ConsumpTon adjustment: Greece vs. BELL 180 Index of real consumpton 2000 = % 6% 20% Bell Germany Greece needed for stability Greece needed for safety 27

28 200 ConsumpTon adjustment: Ireland vs. BELL 180 Index of real consumpton 2000 = % 8% 10% Bell Germany Ireland needed for stability Ireland needed for safety HP for IRE: stability CA afer 2010=0, safety CA =+2.5% 28

29 Concluding remarks Ireland s super real estate/credit bubble burst quickly collapse in both prices and investment. Since savings rates had been adequate external adjustment almost complete. Light at end of tunnel.

30 Concluding remarks II What comes at the end of the tunnel? A decade of low growth? With remaining policy challenges: 1. Find foreign assets of private sector and deleverage. 2. Find subsdtute for cheap ECB funding. 3. Mortgage reform (higher rates plus ways to provide debt relief). 4. Facilitate shif of resources into tradables.

31 Thank you

32 Degree of openness in the GIPSY in 2009 Country Exports % GDP Imports % GDP Openness indicator Greece Ireland Portugal Spain Italy

33 The evoluton of key factors for sustainability: Growth rates of nominal GDP and nominal interest rates GDP (nominal growth rate) Difference Long-term nominal interest rate Change: Boom to bust After 2010* Difference Change: Boom to bust Greece Ireland Portugal Spain Italy