2012 jan 27 - john finn - treasury solutions
TRANSCRIPT
abm financial advisers “Something for your (in)digestion!”
John Finn
January 27th 2012
Presentation Outline
1. 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 2007
0%
20%
40%
60%
80%
100%
1999 2007
Property
Whole/retail
Services
Hotels, etc
Infra/Utility
Manufacturing
Agri, etc
Sectoral breakdown in €m
2,67710,537
96,184
12,1035,556
3,331
-
20,000
40,000
60,000
80,000
100,000
1999 2007
Agri, etc
Manufacturing
Infra/Utility
Hotels, etc
Services
Property
Whole/retail
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
3-month euribor vs. ECB base rate
0.501.001.502.002.503.003.504.004.505.005.506.00
03/0
3/0
8
03/0
5/0
8
03/0
7/0
8
03/0
9/0
8
03/1
1/0
8
03/0
1/0
9
03/0
3/0
9
03/0
5/0
9
03/0
7/0
9
03/0
9/0
9
03/1
1/0
9
03/0
1/1
0
03/0
3/1
0
03/0
5/1
0
03/0
7/1
0
03/0
9/1
0
03/1
1/1
0
03/0
1/1
1
03/0
3/1
1
03/0
5/1
1
03/0
7/1
1
03/0
9/1
1
03/1
1/1
1
03/0
1/1
2
3-m euribor
ECB Base Rate
3-year swap vs. 3-month euribor
0.600.851.101.351.601.852.102.352.602.853.103.35
01/0
1/2
009
01/0
3/2
009
01/0
5/2
009
01/0
7/2
009
01/0
9/2
009
01/1
1/2
009
01/0
1/2
010
01/0
3/2
010
01/0
5/2
010
01/0
7/2
010
01/0
9/2
010
01/1
1/2
010
01/0
1/2
011
01/0
3/2
011
01/0
5/2
011
01/0
7/2
011
01/0
9/2
011
01/1
1/2
011
01/0
1/2
012
3-yr swap
3-m euribor
3-year swap at historic lows
1.20
1.70
2.20
2.70
3.20
3.70
4.20
4.70
5.20
5.70
27/0
1/0
2
27/0
7/0
2
27/0
1/0
3
27/0
7/0
3
27/0
1/0
4
27/0
7/0
4
27/0
1/0
5
27/0
7/0
5
27/0
1/0
6
27/0
7/0
6
27/0
1/0
7
27/0
7/0
7
27/0
1/0
8
27/0
7/0
8
27/0
1/0
9
27/0
7/0
9
27/0
1/1
0
27/0
7/1
0
27/0
1/1
1
27/0
7/1
1
3-yr swap
3. Foreign Exchange (“FX”) Rates
• EUR/GBP
• EUR/USD
EUR/GBP 5-year trend
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
25/0
1/0
7
25/0
4/0
7
25/0
7/0
7
25/1
0/0
7
25/0
1/0
8
25/0
4/0
8
25/0
7/0
8
25/1
0/0
8
25/0
1/0
9
25/0
4/0
9
25/0
7/0
9
25/1
0/0
9
25/0
1/1
0
25/0
4/1
0
25/0
7/1
0
25/1
0/1
0
25/0
1/1
1
25/0
4/1
1
25/0
7/1
1
25/1
0/1
1
25/0
1/1
2
EUR/GBP
EUR/USD 10-year trend
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
27/0
1/0
2
27/0
7/0
2
27/0
1/0
3
27/0
7/0
3
27/0
1/0
4
27/0
7/0
4
27/0
1/0
5
27/0
7/0
5
27/0
1/0
6
27/0
7/0
6
27/0
1/0
7
27/0
7/0
7
27/0
1/0
8
27/0
7/0
8
27/0
1/0
9
27/0
7/0
9
27/0
1/1
0
27/0
7/1
0
27/0
1/1
1
27/0
7/1
1
27/0
1/1
2
EUR/USD
EUR/GBP Summary Table High Low % diff Average
2011 0.9042 0.8283 9.16% 0.8681
2010 0.9148 0.8086 13.13% 0.8795
2009 0.9649 0.8397 14.91% 0.8915
2008 0.9803 0.7338 33.59% 0.7972
2007 0.7382 0.6553 12.65% 0.6845
2006 0.7006 0.6687 4.77% 0.6819
2005 0.7067 0.6624 6.69% 0.6839
EUR/USD Summary Table High Low % diff Average
2011 1.4939 1.2856 16.20% 1.3925
2010 1.4582 1.1875 22.80% 1.3265
2009 1.5141 1.2455 21.57% 1.3944
2008 1.6038 1.2332 30.05% 1.5270
2007 1.4966 1.2864 16.34% 1.3703
2006 1.3336 1.1837 12.66% 1.2563
2005 1.3467 1.1672 15.38% 1.2449