Apr 29, 2011 - Adjust to higher interest rate environment. Mortgage reform (higher rates plus ways to ... Ireland's savi
Ireland and the euro crisis Is there light at the end of the tunnel? Daniel Gros
Dublin April 29, 2011 Centre for European Policy Studies • www.ceps.eu
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). Centre for European Policy Studies • www.ceps.eu
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).) Centre for European Policy Studies • www.ceps.eu
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.) Centre for European Policy Studies • www.ceps.eu
Gross value added at 2000 prices: building and construcTon 120
12 Spain Italy 10
80
8
60
6
40
4
20
2
0
0
Billion EUR
100
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Centre for European Policy Studies • www.ceps.eu
2005
2006
2007
2008
Ireland Billion EUR
Germany France Ireland (RHS)
2009
5
Gross Value Added in construcTon and building as % of total Value Added 14.0
12.0
Germany
Ireland
Spain
France
Italy 10.0
8.0
% 6.0
4.0
2.0
0.0 1995
1996
1997
1998
1999
2000
2001
2002
2003
Centre for European Policy Studies • www.ceps.eu
2004
2005
2006
2007
2008
2009
6
Ireland: construction overhang 25.0 Integral= 52% of GDP =housing overhang=losses to banks
22.0 19.0 16.0
% of GDP
13.0 10.0 7.0 4.0 1.0 -2.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Investement in construction Centre for European Policy Studies • www.ceps.eu
7
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)? Centre for European Policy Studies • www.ceps.eu
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.
Centre for European Policy Studies • www.ceps.eu
NaTonal Savings boom and bust Gross national savings 28
25 21 18
18
8
20 5.3
3
8
6
1.2
3
‐2
Greece
0.6
Ireland Portugal
Spain
‐0.7 Italy
‐4.1 Greece
Ireland Portugal
Spain
Italy
‐7
‐5.8
-7 -12
4.4
%
3 -2
8
17
13
13
13
12.4
13
23
%
Net national savings
‐12 2010
‐9.7 ‐11.6 2010
2007
Centre for European Policy Studies • www.ceps.eu
2007
10
NaTonal Savings boom (2007) and bust (2010) Net national savings 12.4
13
8
5.3 1.2
3
0.6
%
‐2
Greece
Ireland
4.4
Portugal
Spain
‐0.7 Italy
‐4.1 ‐5.8
‐7
‐9.7 ‐12
‐11.6 2010
2007
Centre for European Policy Studies • www.ceps.eu
11
600 Net External debt % GDP 500
Net External debt as % of Exports
400 300 200 100 0 Greece
Ireland Portugal
Spain
Italy
Centre for European Policy Studies • www.ceps.eu
ArgenDna Hungary 99 08 12
(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). Centre for European Policy Studies • www.ceps.eu
(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). Centre for European Policy Studies • www.ceps.eu
Gross External Debt (as % of GDP in 2010q3) and its breakdown by sector
Italy
54
Spain
29
Portugal
0
6
Government
5
43
36
85
0
19
72
54
Greece
40
18
99
38
50
55
100
Monetary AuthoriTes
33
150
Banks
Other sectors
Centre for European Policy Studies • www.ceps.eu
11
7 1
200
Direct Investment
15
Ireland Gross External Debt (as % of GDP in 2010q3) and its breakdown by sector
1090
Tot Ext Debt % GDP 155
Direct Investment
420
Other sectors
394
Banks Monetary AuthoriDes (MA) 66 Government 55 0
200
400
Centre for European Policy Studies • www.ceps.eu
600
800
1000 16
External Debts 120 % Government debt held by non-resid 108
Extern gov debt % GDP
105
90
Net external debt
% 60 59 85 30
57
65 56
55
54
54
46
45 29
19
9
0 Greece
Ireland
Portugal
Centre for European Policy Studies • www.ceps.eu
Spain
Italy
17
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 • www.ceps.eu
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 • www.ceps.eu
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 • www.ceps.eu
Interest rates on loans for house purchase 6.5 6 5.5
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 • www.ceps.eu
MFIs borrowing from central banks as % of GDP 100 Greece
Ireland
Portugal
Spain
Italy
80
% GDP
60
40
20
0
Centre for European Policy Studies • www.ceps.eu
24
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 • www.ceps.eu
Finnland Norway Russia
Estonia Latvia
NORTH SEA
Lithuania
Denmark Ireland
Belarus Great Britain
Nether‐ lands
Poland
Belgium
Germany
Luxembourg
ATLANTIC OCEAN France
Switzer/ land
Ukraine Czech Republic Autstria
Slovakia Hungary
Slovenia CroaTa Serbia Bosnia/ Herze‐ govina Monte‐ negro Italy
Portugal
Moldova Romania
Bulgaria Turkey
Albania
Spain
Greece MEDTERRANEAN SEA Malta
• 26
ConsumpTon adjustment: Greece vs. BELL 200
Index of real consumpTon 2000 = 100
180
‐20% 160
140
‐6% 120
‐20% 100
80 2007 Bell
2008 Germany
2009
2010
Greece needed for stability
Centre for European Policy Studies • www.ceps.eu
2011
2012
Greece needed for safety 27
ConsumpTon adjustment: Ireland vs. BELL 200
Index of real consumpTon 2000 = 100
180
‐20% 160
140
‐8% ‐10%
120
100
80 2007
2008 Bell
Germany
2009
2010
Ireland needed for stability
2011
2012
Ireland needed for safety
HP for IRE: stability CA afer 2010=0, safety CA =+2.5% Centre for European Policy Studies • www.ceps.eu
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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.
Centre for European Policy Studies • www.ceps.eu
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. Centre for European Policy Studies • www.ceps.eu
Thank you
Centre for European Policy Studies • www.ceps.eu
Degree of openness in the GIPSY in 2009
Country
Exports % GDP
Imports % GDP
Openness indicator
Greece
19.0
29.8
0.49
Ireland
90.7
75.4
1.66
Portugal
27.9
35.5
0.63
Spain
23.4
25.5
0.49
Italy
24.0
24.4
0.48
Centre for European Policy Studies • www.ceps.eu
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The evoluTon of key factors for sustainability: Growth rates of nominal GDP and nominal interest rates GDP (nominal growth rate)
