european sovereign debt crisis: still not contained

European Sovereign Debt Crisis: Still Not Contained PETR ZEMCIK, DIRECTOR

Economic Outlook Conference, May 9-10, 2012

4

Source: Moody’s Analytics

Expansion

In recession

At risk

Recovery

April 2012

Global Business Cycle Status

5 5

0 50 100 150 200

Greece

Italy

Ireland

Portugal

Belgium

Euro area

France

U.K.

Germany

Spain

Netherlands

20012011E

Fiscal Burden Increases

Sources: European Commission, Moody’s Analytics

General government gross debt, % of GDP

6 6

EFSF ESM

Institutional form

Private company owned by euro

zone states

Intergovernmental

organization

Capital structure

Guarantees and over-guarantees

from the euro zone countries

€80 billion paid-in capital,

€620 billion callable capital

Lending capacity

€440 billion; about €240 billion

remains €500 billion

Lending costs

Funding costs + 200 bps for 3

years, 300 bps afterwards Funding costs + 200 bps

Duration Until June 2013 From July 2012

Financing Intergovernmental decision Linked to the Treaty

European Firewalls May Not Suffice

How the EFSF and ESM Differ

Sources: European Financial Stability Facility, European Stability Mechanism, ECB,

Moody’s Analytics

7 7

-15 -10 -5 0 5 10

Netherlands

Austria

Germany

Ireland

Euro area

Belgium

France

Spain

U.K.

Italy

Greece

Portugal

2011E

2012F

Macreconomic Imbalance Across Europe


Current account, % of GDP

8 8

-6

-4

-2

0

2

4

6

8

10

12

01Q3 03Q1 04Q3 06Q1 07Q3 09Q1 10Q3 12Q1

ECB Germany

Greece Euro zone

ECB Follows Taylor Rule

Policy rates in %, actual rate for ECB, Taylor rule based otherwise


9 9

0

5

10

15

20

25

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12

ECB bond purchases, € bil (R)

Italian 10-yr yield (L)

Spanish 10-yr yield (L)

ECB Becomes the Lender of Last Resort

Sources: Bloomberg, Moody’s Analytics

Government bond yields, %

10

20

40

60

80

100

120

140

160

180

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

LTROs

Euribor-OIS

Libor-OIS

Inter-Bank Lending Has Been Improving


Spread in basis points

11 11

0

100

200

300

400

500

600

700

800

900

1,000

Aug Sep Oct Nov Dec Jan Feb Mar Apr

Banks Park Large Sums on ECB’s Deposits

Sources: Moody’s Analytics, ECB

Deposit facility, € mil

12

Bond Yields Remain Elevated


Generic 10-year government bond yields, %

0

5

10

15

20

25

30

35

40

4

6

8

10

12

14

16

18

20

Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12

LTROs

Italy (L)

Spain (L)

Portugal (L)

Greece (R)

13 13

0

5

10

15

20

25

30

35

40

09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1

Tightening of credit lines

Expected tightening of credit lines

Credit To Private Sector Is Tightening

Sources: ECB, Moody’s Analytics

Net % of the euro zone banks reporting

14 14

1.0

1.5

2.0

2.5

99 00 01 02 03 04 05 06 07 08 09 10 11

One year ahead

Two years ahead

Inflation Expectations Remain Subdued in Europe

Sources: ECB, Moody’s Analytics

HCPI forecast, % change

15 15

-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1

IrelandGreeceCyprus

SpainPortugal

FranceSlovakiaSlovenia

NetherlandsItaly

BelgiumAustria

MaltaGermany

FinlandLuxembourg

Estonia

Most Euro Zone Countries Are in Deficit

Sources: European Commission, Moody’s Analytics

Fiscal balance in 2011, % of GDP

16 16

0

1

2

3

4

5

6

7

8

9

10

11

12

Ireland Greece Portugal Spain France Italy

2010 2011E 2012F 2013F 2014F 2015F

Further Sharp Fiscal Consolidation Required

Sources: Eurostat, Moody’s Analytics

Budget deficit, % of GDP

31.3%

Maximum deficit allowed

under EU fiscal rules

17 17

0

5

10

15

20

25

30

35

40

Greece Ireland Portugal Italy Spain

French banks German banks

French and German Banks Highly Exposed

Sources: Bank for International Settlements, Moody’s Analytics

Holdings of foreign debt, % of total, as of end Sep 2011

18 18

-16

-12

-8

-4

0

4

8

01 02 03 04 05 06 07 08 09 10 11E

Ratio of fiscal deficit to GDP

Annual GDP growth

Fiscal Tightening Has Hurt Greece’s Economy

%

Sources: OECD, Moody’s Analytics

19 19

97

98

99

100

101

102

103

104

105

10 11 12

OECD U.S.

Japan Russia

G7 Euro zone

Outside Strength May Provide a Bolster

OECD composite leading indicator index

Sources: OECD, Moody’s Analytics

20 20

41%

30%

29% Euro zone

Rest of Europe

Other

The Majority of Germany Exports Go to Europe

Sources: German Federal Statistics Office, Moody’s Analytics

Export share by destination, 2010

21 21

90

95

100

105

08 09 10 11 12F 13F 14F

Euro zone baseline Euro zone crisis


Euro zone Crisis Scenario Real GDP, rebased 2008Q1=100

22 22

90

95

100

105

110

115

08 09 10 11F 12F 13F

Euro zone Germany France

Italy U.K. U.S.

World

Sources: National Statistical Offices, Moody’s Analytics

Europe Falling Behind the Rest Real GDP, rebased 2008Q1=100

23 23

-8

-6

-4

-2

0

2

4

6

07 08 09 10 11 12F 13F 14F

Greece Ireland Portugal

Greece and Portugal Stuck Deep in Recession

GDP, % change yr ago

Sources: Eurostat, National Statistics Offices, Moody’s Analytics

24 24

-1

0

1

2

3

4

5

10 11 12F 13F

Poland

Czech Republic

Hungary

Germany

Polish Economy Outperforms CE

Real GDP growth, % change yr ago

Sources: National Statistical Offices, Moody’s Analytics

25 25

0 5 10 15 20 25 30 35 40 45

The HagueRome

BrusselsBerlin

CopenhagenLondon

ParisHelsinkiLisbonViennaMadridAthens

StockholmWarsaw

VilniusLjubljana

BratislavaRiga

BucharestPrague

CE Capitals Less Exposed to Fiscal Risk

Source: Eurostat

Employment, public admin. & community service, % of total 2008

Central

Europe

26 26

70

75

80

85

90

95

100

105

110

08Q1 08Q4 09Q3 10Q2 11Q1 11Q4* 12Q3* 13Q2*

Moscow Berlin

London Paris

Rome

European cities

Real GDP, SA, 2008 Q1=100


* forecasts

27 27

-15 -10 -5 0 5 10 15 20 25 30 35 40

Vienna

Gothenburg

Mosow

Stockholm

Bergen

Antwerpen

Oslo

Brussels

London

Budapest

Paris

St. Petersburg

Prague*

Barcelona

Warsaw*

Athens*

Madrid

Sofia

Tallin*

Dublin**

2003Q1-2008Q2

2008Q3-2011Q4

Notation:

* data begins after 2003Q1

** data until 2010Q4

Moscow & London Defy Country Trends

Source: Moody’s Analytics, Bank of International Settlements

Average quarterly y/y change of the house prices, %

28 28

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

02Q1 03Q1 04Q1 05Q1 06Q1 07Q1 08Q1 10Q3 11Q3

Bergen (NOR) Oslo (NOR)

Goethenburg (SWE) Stockholm (SWE)

Scandinavian House Prices Overtake GDP

Sources: Moody’s Analytics

Ratio of house prices to GDP per capita

29 29

90

95

100

105

110

115

120

125

130

02 03 04 05 06 07 08 09 10 11

Price To Per CapitaGDPPrice To Rent

Swiss Real Estate Prices Rise 2002Q1=100, Owner-occupied Houses

Sources: SNB, Moody’s Analytics

30 30

90

110

130

150

170

190

02 06 10

Zurich East Central

Northwest Bern South

Geneva West

Geneva and West Lead The Way Prices Single-Family Houses, 2002=100

Sources: SNB, Moody’s Analytics

31 31

85

90

95

100

105

110

115

120

08Q3 09Q3 10Q3 11Q3 12Q3

Birmingham Bristol CardiffLeeds London ManchesterNewcastle

Forecast

In the U.K., Only London Remains Buoyant…

Sources: DCLG, Moody’s Analytics

Median sales price, existing homes, 2008Q3=100

32 32

70

75

80

85

90

95

100

105

110

08Q3 09Q3 10Q3 11Q3 12Q3

Asturias BarcelonaBilbao MadridMalaga Las Palmas

…But in Spain, Madrid Is Almost the Weakest

Sources: INE Spain, Moody’s Analytics

Median sales price, existing homes

Forecast

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european sovereign debt crisis: still not contained

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