IFCs and The Global Recession Geoff Cook

IFCs and The Global Recession Geoff Cook - Chief Executive Jersey Finance

Conventional Wisdom – The full story… • • • Two years ago, few people had heard of the term credit crunch, but the phrase has now entered dictionaries. Defined as "a severe shortage of money or credit", the start of the phenomenon has been pinpointed as 9 August 2007 when bad news from French bank BNP Paribas triggered sharp rise in the cost of credit, and made the financial world realise how serious the situation was. The roots of the credit crunch, however, started earlier.

Worldwide…. What happened • • • Global economy experiences the deepest downturn since just after the Second World War “Worldwide we have an enormous loss of wealth and financial stability” – World Bank Chief Justin Yifu Lin US banks lend on risky mortgages (known as ‘sub prime’ market) believing US house prices would continue to rise Banks and investors around the world ‘buy’ the risk in these mortgages Instead, house prices fall and people can not repay their mortgages and banks and investors worldwide are affected Banks stop lending and investors stop lending to the banks, as they were not confident that the banks wouldn’t go bankrupt

Worldwide…. What happened next? • As a result, booming economies in the East sharply declined and countries such as China saw a huge decrease in export markets • Estimates suggest that an additional 55 to 90 million people could be trapped in poverty due to the recession • The International Monetary Fund estimated potential losses from the credit crunch could reach $1 trillion

So what does $1 trillion look like…. with all this talk about stimulus, bailouts and losses? We’ll start with a $100 dollar note – currently the largest US denomination in general circulation

A packet of one hundred $100 notes about 1 cm and contains $10, 000 (it would fit in your pocket easily and you would have lots of fun spending it!!! )

Believe it or not, but this pile below is $1 million dollars (100 packets of $10, 000). You could walk around with it in your bag with no problem…

While $1 million may look a little unimpressive. $100 million will fit neatly onto a standard pallet board (like you get in shipping)

And $1 billion….

And now this is what $1 TRILLION looks like – which is a million – 1, 000, 000 Notice how the pallet boards are all double stacked. So remember next time you hear someone talk about the phrase $1 trillion…that is what they are talking about

Western World…. What happened? • The crisis from the ‘sub prime’ lending in the US led to Wall Street Bank Lehman Brothers posting losses of $3. 9 billion and days later filed for bankruptcy – becoming the first major bank to collapse since the start of the crisis – employees in the US and UK were axed immediately • Banks, companies and individuals stopped being able to get credit

Western World…. What happened next? • Recessions, job losses, bankruptcies, repossessions began to increase • Governments decided to nationalise banks from Iceland to France • Central banks in US and Canada and some parts of Europe took the unprecedented stop to co-ordinate interest rate cuts to encourage lending • US Federal Bank and European Central Bank tried to bolster the money markets by making funds available for banks to borrow more cheaply • European Commission unveiled an economic recovery plan worth € 200 billion to save million of European jobs, stimulate spending and boost consumer confidence

UK…. What happened? • • The UK is severely effected for the same reasons as the US The first UK bank to fall is Northern Rock, which had built its growth on wholesale funding

UK…. What happened next? • • Total government debt estimated to reach £ 1. 4 trillion due to banks being nationalised/bailed out by the government Northern Rock was nationalised after the government failed to find a buyer (Feb’ 08) The Bank of England unveiled a multi-billion pound plan to help creditsqueezed banks, allowing them to swap risky mortgage debts for secure government bonds (April’ 08) The UK Government announced the first of several bank bail-out packages to make available £ 400 billion of money (Oct’ 08) Royal Bank of Scotland is taken into public ownership (now 84%) after bank announced a record UK corporate loss (Feb’ 09) Government took a controlling share (65%) of Lloyds Banking Group The credit crunch caused deep recession in UK leading to high unemployment and sharp falls in the house price market

Jersey…. What happened? • The credit crisis results in focused political and media attention on Jersey and other offshore jurisdictions, with accusations of blame in causing the economic crisis through shadow banking activities

Jersey…. What happened next? • • • The States of Jersey have decided to inject £ 44 million into the economy to get the Island through the recession to support workers and businesses The island has seen a decrease in jobs available in the market, but has not witnessed the same level of redundancies as mainland UK or Europe House prices have fallenslightly due to lower rates of mortgages being available from the banks

Source: www. ft. com

But the credit bubble was building long before sub prime

And Pubic Finances were already under pressure Total tax revenue as a percentage of GDP, 2004

Public Finances under pressure Ratio of the inactive population aged 65 and over to the labour force percentage

Drivers For Change Growing US Budget Deficit Growing UK Budget Deficit

Drivers For Change EU Monetary Affairs Commissioner Joaquin Almunia has warned Brussels could soon take action against EU member states which let their budget deficits exceed 3% of GDP. France is one of the first in the firing line. Chancellor Angela Merkel has warned German jobless figures will rise despite her new government's focus on tackling the financial downturn.

Drivers For Change “Never again will the American taxpayer be held hostage by a bank that is too big to fail” US economy loses 4. 2 m jobs in 2009, unemployment at 20 year high, fiscal deficit exceeds $1 trn

The Tax Gap?

It’s not here Mr Brown

UK Public Finance Costs: Borrowing Pre Crisis 2003 - 04 Net Debt % GDP 2004 -05 2005 -06 2006 - 07 381. 5 bn 422. 1 bn 461. 6 bn 497. 9 bn 32. 1 34 35. 3 36 1118 bn 1184 bn 1233 bn 1303 bn Source: Debt Management Office HM Treasury and Office of National Statistics

2009 - ‘Pride and Prejudice’ • G 20 scrutiny and financial crisis – London/Pittsburgh • IMF Review • HMT - The Foot review • Obama and the STHAA/Heart Act • AIFM and Enlargement of the European Savings Directive • Business Taxation Code of Conduct group – 0/10 • Anti Tax Haven Campaigning by NGOs and others

Challenge Response G 20 Scrutiny PR – Political 100, OECD Whitelisted Compliant Confidentiality IMF Review Best ratings by the IMF to date HMT - The Foot review Financially stable and valuable, tax leakage worries overblown Obama Heart Act Coordinated response – prospects improving EU Measures AIFM/ EUSD Proactive EU engagement – Status quo improving Business Taxation – 0/10 Code compliant – Coordinated action underway Anti Tax Haven Campaigning by NGOs GFCI – No 13 IFC, STEP IFC of the Year, IMF, Foot Review, Developing Countries engagement, NGO liaison Rating

AIFM • Original proposals highly problematic and included three year freeze on the sale in the EU of offshore funds • Amended proposals from EU parliament and EU Council to continue private placement regime for third countries • Jersey to lobby for ‘opt-in’ passport • Government to meet with key influencers in Brussels beginning of February

Zero/ten • 0/10 has NOT been found to be non-compliant with the EU Code of Conduct on Business Taxation • Fundamental importance of tax neutrality to our Financial Services Industry • Changes to the tax law to be made to create certainty for funds and underlying portfolio companies – notably a tax exemption of collective investment funds, including securitisation vehicles, in accordance with international norms • Continuing programme of engagement and consultation between Industry and Government Departments • Next Industry briefing 23 rd February

The Offering - A World Class Jurisdiction • The world’s leading Trust jurisdiction • Major international Banking centre • Leading European Alternative Funds platform

The Opportunity – Growth in GDP Global GDP Growth (Percent; quarter-over-quarter, annualised) Source: IMF staff estimates

The Opportunity – Growth in HNWI

Getting the message across

Fuelled by Brainpower -Technical 2009 • Developed over 21 laws and regulations • Supported by 5, 200 hours of practitioner time, through Jersey Finance working groups • Contributed an equivalent value of £ 2. 5 m

• London • Bristol • Birmingham • Leeds • Edinburgh • Manchester 2009 Events and Visits Programme • Paris • Geneva • Berlin • Lake Como • Beijing • Hong Kong • Singapore • Shanghai • Mumbai • New Delhi • Moscow • Warsaw • Abu Dhabi • Bahrain • Dubai 5, 500 people 1, 921 Members 160 Member Firms A similar programme is planned for 2010

Events and Visits Spend by Region Middle Eastern Europe 3% 3% China 17% UK 45% Europe 22% India 11%

2010 - Embracing a decade of opportunity • Reap the Reputation Dividend • Open for Business, Open for Businesses • World Class Expertise • Global Reach

Final Thought… Remember we can’t change the direction of the wind, but we can change our sails Thank you

Question and Answer Session

IFCs and The Global Recession Geoff Cook —