It is easy to forget the great achievements of the economy in 2002-2007, which were concealed by the credit bubble. Service exports more than doubled from €31.6bn to €64.9bn. Software (+95%) and business services (+244%) were the star industries. We neglect to highlight insurance and financial services, in anticipation that growth in these areas may be more difficult to come by in the years ahead. Nonetheless, Ireland may gain market share of a shrinking pie thanks to its attractive tax regime, deep pool of graduates (it has the second-highest percentage with third-level education in the EU-27) and first language of English.

The imbalances are fading. Housing's share of GNP will be back in line with the European average by end-2009 and it will stay there. The household savings ratio will return to the late-1990s level. Moreover, our competitive edge can be sharpened with the right policies. Employment is going to drop 4% next year, but we need real wages to come down too. That means pay cuts for the non-traded (public) sector. Tax rates must not be raised any further. And further investment in the productive capital stock needs to remain sacrosanct."

Davy analyst Emer Lang comments:"Reports in the Irish media continue to speculate about a potential re-capitalisation of the Irish banking system, following comments by the Taoiseach yesterday (November 19th) that stressed Irish banks are 'solvent', while acknowledging that this may not be enough, as expectations have changed. The recent PWC report 'demonstrates, under a number of stress scenarios that capital levels in the covered institutions will remain above regulatory levels in the period to 2011'. However, as we have been pointing out, efforts to maintain capital ratios through management of loan books at a time when earnings are under enormous pressure from loan impairments, are inconsistent with a banking sector that can help businesses and the economy in general. This constraint is likely to be underlined by the business plans due to be submitted by the institutions covered by the government guarantee to the Financial Regulator today, showing how they intend to reduce risk, to ensure the prospect of any call under the guarantee is minimised.

A report in today's Irish Independent suggests that the finance minister will meet senior bank management today to discuss the position, 'as a number of private equity firms circle the banking system looking to co-invest with the government'. The report mentions Carlyle and JC Flowers along with Sandler O'Neill, which it suggests is advising an interested consortium. Meanwhile, an article in the Irish Times quotes the Minister for Finance saying 'informal approaches' have been made by several potential investors.

Rather than relying entirely on outside investors at this stage, we do not think that any re-capitalisation plan should preclude existing shareholders following their money — a point being stressed to us by clients in recent days."

Goodbody economist Dermot O'Leary asks: What comes after zero?:"Conducted at the height of the financial trauma following the demise of Lehman Brothers and the bailout of AIG, it is no surprise that the minutes of the latest FOMC meeting, released last night, make for pretty grim reading. The committee now expects that US GDP will contract moderately in the second half of 2008 and the first half of 2009, although risks are seen to be on the downside. These views are borne out by the substantial downward revisions to growth forecasts; in 2009, the mid-point of the forecasts suggests that GDP will expand by 0.7%, relative to expectations for an expansion of 2.4% in June. Some members are substantially gloomier, with at least one believing that GDP will contract by -1% in 2009. Such an outcome would be the lowest since the -1.9% contraction in 1982.

Although the target Fed funds rate was lowered to 1% at the October meeting, the increased efforts from the Fed over the past few weeks, including the substantial increase in the size of its balance sheet (quantitative easing), has meant that the actual Fed funds rate has been below this level over recent weeks. It is likely, therefore, that the Fed will simply communicate that its target Fed funds rate will be reduced by another 50bps at its next meeting in December. The closer the rate goes to zero, the less effective the interest rate becomes as a monetary tool. Therefore, Bernanke and co. will have to look into the toolkit for other methods to boost the economy. Luckily, this is an area that Bernanke has particular experience in and would have discussed it extensively in public when deflation fears were taking hold in 2003. The Fed has already used some of its ammunition with the setting up of a whole range of different liquidity facilities. The next step, possibly at the December 16th meeting, will be an official pledge to the market that rates will be kept low “for a considerable period”, a communication tool that was used by Greenspan and indeed in Japan when rates were reduced to zero. Bernanke was nicknamed “Helicopter Ben” for his innovative ideas for the Fed to provide stimuli to the economy (like throwing money from the sky!). Rates at zero will mean these ideas will be put to the test."

Goodbody analyst Eamonn Hughes comments on the Irish banks:"After extensive commentary in yesterday’s media around capitalisations in the banking sector, there was further commentary throughout the day on the matter from the Taoiseach (Prime Minister) and the Minister of Finance. The Government now has access to the PWC report into the balance sheet of the banks and the Minister for Finance is quoted as saying that the report “demonstrates under a number of stressed scenarios that capital levels in the covered institutions will remain above regulatory levels in the period 2011”. While helpful in some respects, we are not sure that the market would be comfortable with regulatory minima as the bottom line in a stressed scenario, but presumably we will get clarity on this in due course. The report “confirms that all the institutions reviewed were in excess of regulatory capital requirements as at end September, the date the guarantee was announced”. However, the Taoiseach went on to add that “international market expectations in relation to capital levels in the banking sector have altered” and “meeting these expectations may be challenging with consequences for both the sector and the wider economy”. On capitalisations, the Minister of Finance is quoted as saying that “it is not the function of the government to fund or bail the bank” and now “expects that the covered institutions will explore fully the potential for meeting these capital needs through raising private capital and disposing of appropriate assets”.

The preference for the government is for “private investment” and it confirmed that it had received “informal approaches from investors”. So we are moving inexorably to endgame it now appears. The Taoiseach made an observation that recapitalisation alone would not provide a guarantee of increased credit availability to businesses and this would appear an astute observation, given that UK banks are down near 35% since the government injected capital into those institutions as the market frets about the credit cycle. He went on to add that any action “needs to be measured”. While there was mounting speculation yesterday that announcements on the banking sector are likely to be within days, this latter comment from the Taoiseach hints possibly at a timeframe that is not imminent. Also, with all the business plans by the banks which address the sustainability of their business models being deposited with the government today, it is likely that these will be incorporated into any deliberations. It may also hint that M&A is part of any solution, which may delay the process somewhat as these transactions work through. Also, the indication of “informal approaches” probably hints at nothing imminent and for some rather than all the banks. At a minimum, there is extensive work going on behind the scenes, though until we know the shape and extent of any intervention - and we are not sure if it involves some or all of the banks - then it is hard to see institutional investors get involved in the vacuum. If nothing else, the staggering of the approach to funding (see following story) probably hints at the allegiances of the government. Let’s get this over with sooner rather than later, please!"

Goodbody analyst Anna Lalor says: "AIB is in the process of issuing bonds under the government guarantee scheme, which according to a market source involved in the sale (quoted on Bloomberg) could be priced at 50-60bps over mid swap rates. Bloomberg also notes that this spread is 10 times the 5bps achieved by the agency set up to provide guaranteed loans to French banks, while the UK banks have issued guaranteed debt at a spreads of 18-25bps. We had highlighted that the issuance of bank debt would be an orderly process, with the two “national champions”, AIB and BOI, issuing first, after the Government issues Sovereign paper. This process has also been highlighted in the Irish Times today, which indicates that both AIB and BOI will issue debt under the guarantee first, followed by IL&P, Anglo, EBS and Irish Nationwide. The banks are said to have agreed not to look to raise more than €2.5bn (presumably in each round of funding), so that they do not take too large a share of the funding available to Irish banks.

Separately, Bank of Ireland yesterday announced that it is calling €600m of Tier 2 debt, which is due in December 2013, but is callable this December. Its decision to call the issue points the bank being comfortable with its total capital levels without this amount, over the shorter term (as longer dated funding is not available currently)."