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International Finance: Portugal and Ireland

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Maria Collarte

on 13 March 2013

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Transcript of International Finance: Portugal and Ireland

Economical and Financial Analysis: Portugal and Ireland Oriol Alarcón, Natalia Campos, Maria Collarte, Mario Coppola, Laura Martin, Alessandro Paccagnella Portugal Ireland Portugal Portugal Ireland Ireland The Republic of Ireland is a small, modern and trade-dependent economy which joined the EU in 1973 and uses the Euro since 2002. - Recent years: The Celtic Tiger
1995-2008 period of rapid economic growth
Analogy of the East Asian Tigers in the last 80s - first 90s
- Economic indicators of that expansion:
High GDP growth (10% initially – 5% later on)
Decreasing debt/GDP ratio
Decreasing unemployment rate (last years below 6%)
- Reasons behind:
Low taxation level for corporations
Highly flexible, well educated and English speaking labor force
Access to European market (even more after the Euro)
- Fostered FDI in Ireland (especially from US companies) The booming economy led to:
- Great expansion of the Irish construction sector
National Development Plan implemented by the Government: Large-scale expenditure in national infrastructure
Increase in the amount of credit issued by banks together with increasing trend for holding real estate properties among citizens
- High inflation rate in the last period of this expansion
And not so high increase in the wages level
- Much higher increase in the GDP than in the GNP due to this large amount of FDI Portugal, officially the Portuguese Republic is a country located in the South Western Europe, on the Iberian Peninsula. It has around 10,781,459 people and it forms part of the European Union since 1986. Background The country benefited from entering the EU in 1986:
Standard of living - Quality-of-life Survey 19th
Global competitiveness 22nd
Due to:
Growth of exporting companies
Cohesion of funds What went wrong?
Policy from the government of excessive expenditure (investment bubbles)
Over employment in the public sector
Inflexible and unskilled labor market
Slow and inefficient justice system
Inferior competitiveness on wages: wages growth has exceeded growth in productivity
Banking sector: Banco Português de Negócios and Banco Privado Português, had serious financial problems due to wrong investments, corruption and frauds The crisis in Portugal was a public and a banking crisis at the same time. The bailout of the banking system, in fact, only sped up the inevitable public finance crisis. - Thanks for your attention - However

- GDP: lowest GDP per capita in Western Europe (From 1986 to 1999)
- Between the lowest average income
- Inflation: consistently above EU average Debt crisis and Economic downturn Actions and reforms Challenges remain:
• A worse situation in EU and particularly Spain could have a big impact on GDP growth
• Too much austerity could potentially depress consumer spending and aggravate the recession
• Discontent is growing, it won't be easy to carry on the reforms What has been done?
- First austerity package in 2010 was not enough
Interest rate on 10yr bond continued to rise
Bailout of 78 billion: targets deficit 5.9% in 2011, 4.5% (now 5%) in 2012 and 3% (4.5%) in 2013.

- Austerity measures implemented by the new government of Coelho:
Tax hikes
Cuts in wages in public sector and deep labor market reform
Reforms to improve judicial system
New legal framework to protect competition in market place
Liberalizations in key industries (energy, postal service, railway)
Improved bankruptcy legislation and industrial licensing law

Reforms have been seen favorably by institutions and market
- Bond interest rate constantly decreasing
- Full market access almost reached The future in Portugal is uncertain, the country needs to vigorously pursue structural reforms to improve competitiveness, growth and employment, but it also depends critically on external support and successful crisis policies carried on from the entire Euro zone. Actions and reforms Debt crisis and Economic downturn What went wrong?
- Banking crisis
Excessive interbank borrowing (property loans)
Housing bubble burst - property prices fell
Liabilities > Assets
- Construction sector
Important % of GDP
Economy severely hit
- US financial crisis
Irish growth dependent on US FDI and export
- Perception of default risk, fiscal crisis But after the financial crisis and the house bubble burst
Increase in public expenditure: debt/GDP rose
Loss of confidence from investors: bond yields increased
Fitch’s rating BBB+ from AAA
Increase in unemployment rate
Period of deflation In the early 2000s the average GDP growth rate was 5% and property prices grew 11% annually - Small growth of GDP
- Portugal's sovereign debt rating:
From AA to BB+
- Unemployment:
Over 10% Austerity measures:
- Income levy
- Withdrawal of medical cards
- Croke Park Agreement
- Unlimited guarantees for 6 banks
- National Asset Management Agency (NAMA):
Unsustainable in 2010: 85 billion € rescue package

Bailout terms:
1) Improve banking sector
- Completed recapitalization and bank mergers
2) Fiscal consolidation
- Achieved 2012 deficit target, 2013 looks positive
3) Restore competitiveness and strengthen growth potential
- Labor market reforms implemented Despite "excellent compliance" Moody’s still has a negative outlook:
- Weak economic growth
- High government debts
Export-led recovery unattractive to world demand

Ireland needs to:
Reschedule bank loans with ECB
Access the Outright Monetary Transactions program

Challenges ahead:
One of the largest budget deficits
Long term unemployment
Financial institutions have not reached full lending capacity
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