vlerick event chief economists 17 01-2012
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MFM Alumni partner:
Debate4 Chief economists
17/01/2012
MFM Alumni present:
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MFM Alumni partner:
Edwin De Boeck, Chief Economist KBC
Frank Lierman, Chief Economist Dexia Bank
Bart Van Craeynest, Chief Economist Petercam
Peter Vanden Houte, Chief Economist ING
Keynote speakers
Alain Deneef, Bank Degroof
Moderator
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MFM Alumni partner:
Banking in the new era – Edwin De Boeck, KBC
National governments in trouble – Frank Lierman, Dexia
The perilous Belgian budget – Bart Van Craeynest, Petercam
PIIGS countries – Peter Vanden Houte, ING
Role of the European Union – Frank Lierman, Dexia
Role of the ECB – Bart Van Craeynest, Petercam
The IMF , the USA & the importance of emerging economies – Peter Vanden Houte, ING
Favourite asset class for 2012 – Edwin De Boeck, KBC
Agenda
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MFM Alumni partner:
Banking in the new era
Edwin De Boeck, Chief
Economist KBC
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EMU crisis Spilling
over…
18/01/20125
…into
the core
countries… … and the banking sector5 year
CDS premia
bank
sector
(in bps)Intra-EMU
interest differentials
(yield
10 y. gov. bonds
vs. Germany
in bps.)
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EMU crisis Spilling
over…
18/01/20126
…into the core countries… … and the banking sectorIntra-EMU interest differentials (yield 10 y. gov. bonds vs. Germany in bps.)
Banks’
exposure on peripheral countries (% of GDP)
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European banks Need to strenghten capital base
18‐1‐20127
Regulatory Capital
(Regulatory capital / Risk-Weighted Assets)
Leverage Ratio(Capital / Total Assets)
Source: IMF, Financial Soundness Indicators, September 2011
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European banks Strengthening of capital base...
8
MSCI price index banks
(1/1/10 = 100, nat. currency) EBA Policy response to the debt crisis:
“exceptional and temporary”
capital buffers� against sovereign debt exposure� to reach core tier 1 capital ratio of 9% by
30/6/2012
EU banks’
capital shortfall to reach EBA targets
(bn. €)
* Provided for in the second EU-support package
...in difficult markets ... ...earlier than initially foreseen
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European banks Struggling for long-term funding
9
Corporate bond spreads
(EMU, in bps.)
Government funding needs (bn EUR)
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European economy At the edge of a credit crunch
10
Tightening
Easing
Factors contributing to tightening
(EMU –
net % of banks contributing to tightening standards)
Bank Lending Conditions for non-financial corporations
(tightening –
easing)
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ECB lending to banks (in bn. EUR)ECB “Securities Markets Programme“
ECBIncreasing willingness to play its role as lender of last
resort ?
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MFM Alumni partner:
National governments in trouble
Frank Lierman, Chief
Economist Dexia
Bank
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Governments facing huge fiscal challenges.Crisis
government
finances.
o Budget balance (in % of GDP)
Source
: European
commission, Autumn
Forecasts
2011.
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14
Governments facing huge fiscal challenges.
o Debt of general government (in % of nominal GDP)
Source
: European
commission, Autumn
Forecasts
2011. OESO, economic
outlook, december 2011.
Crisis
government
finances. (2)
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15
Governments facing huge fiscal challenges.
Source
: ECB, financial
Stability
Review, december 2011
o Euro area o US
General
government
gross
debtFederal
debt
held by
the public
Crisis
government
finances. (3)
o Debt of general government (in % of nominal GDP)
BE 97,2DE 81,7EE 5,8 IE 108,1EL 162,8ES 69,6FR 85,4IT 120,5CY 64,9LU 19,5MT 69,6NL 64,2AT 72,2PT 101,6SI 45,5SK 44,5FI 49,1EA 88,0
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Governments facing huge fiscal challenges.
Source
: Eurostat
Crisis
government
finances. (4)
o Debt of general government (in % of nominal GDP)
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17
Governments facing huge fiscal challenges.Debt
of households
: start of downsizing.
o Debt of households (in % of nominal GDP)
o Euro area o US
Total
liabilitiesResidential
mortgagesConsumer
credit
Source
: ECB, financial
Stability
Review, december 2011
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18
Governments facing huge fiscal challenges.
Source
: ECB
Debt
of households
: start of downsizing. (2)
o Debt of households (in % of nominal GDP)
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19
Governments facing huge fiscal challenges.Debt
of companies : ceiling reached.
o Euro area o US
Debt-to-GDP
ratio (left-hand
scale)Debt-to-financial
assets
ratio(left-hand
scale)Debt-to-equity
ratio (right-hand
scale)
Ratio of liabilities
to
financial
assetsRatio of liabilitiesRatio of credit market
liabilities
to
GDP
Source
: ECB, financial
Stability
Review, december 2011
o Debt of companies (in % of nominal GDP)
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20
Governments facing huge fiscal challenges.
Source
: ECB.
Debt
of companies : ceiling reached. (2)
o Debt of companies (in % of nominal GDP)
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21
Governments facing huge fiscal challenges.Why
such
huge
deterioration
?
Debt financing economic growth up to 2007
Violation of stability and growth pact by Germany and France in 2004
Rescue of the financial sector since 2008« general interest »
too big to fail of systemic intitutions
bail outs
nationalisations
guarantees
Recession 2008 - 2009Lesser tax revenues (more unemployed, reduced profits, less VAT, …)
Higher expenditures (stimulate the economy, unemploment compensation, …)
Rescue packages for Southern European countries
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22
Governments facing huge fiscal challenges.Savings
packages
Reduction of expenditures (pensions, salaries, health care, investments, socialadvantages, subsidies, …)
Increase of revenues (existing taxes, new taxes, privatisations, battle againstsocial and fiscal fraude, …)
Structural measures on labour market and in welfare state
Deleveraging private sector (households and companies)
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23
Governments facing huge fiscal challenges.Estimated
financing
needs
of the euro area countries in 2012.
Source
: ECB, financial
Stability
Review, december 2011
General
government
deficitMaturing
sovereign
debt
in % of nominal GDP
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24
Governments facing huge fiscal challenges.Impact on the economy
: the seven
lean
years.
Lesser economic growthlower expenditures government
decreased purchasing power households
lesser corporate investments
higher saving ratio households and corporates
Economy supported byextremely low interest rates (ST and LT)
euro not soo expensive
declining spreads on bonds
better performance economy US and China
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MFM Alumni partner:
The perilous Belgian budget
Bart Van Craeynest, Chief
Economist Petercam
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40
60
80
100
120
140
160
180
1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Public debt Doing
nothing
Primary
balance (incl
ageing
costs) Towards
primary
surplus of 4%
Source: Input gezondheidszorg
dec
2011 ‐
layout
AWI.xls –
sheet
overheidsschuldAs a % of GDP
Doing nothing is not an option
Public debt
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‐8
‐6
‐4
‐2
0
2
4
6
8
1979 1983 1987 1991 1995 1999 2003 2007
Cyclically
adjusted
primary
balance (as a % of GDP)
Fiscal stimulus
Serious efforts required
Reversal in fiscal policy required
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Single, no children, AW Married, 2 children, AW + 67% AW
0 10 20 30 40 50 60
MexicoNew Zealand
KoreaAustraliaIcelandIrelandJapan
SwitzerlandUS
CanadaUK
LuxemburgPolandOECD
PortugalNorwayTurkey
SlovakiaNetherlands
SpainDenmarkGreece
Czech
RepublicFinlandSweden
ItaliyAustriaFrance
GermanyHungaryBelgium
0 5 10 15 20 25 30 35 40 45 50Mexico
New ZealandKoreaIreland
LuxemburgAustraliaIceland
SwitzerlandUS
JapanCanada
UKPolandSlovakiaOECD
NetherlandsPortugalNorway
Czech RepulicSpain
DenmarkFinlandTurkeySwedenAustriaGreece
ItalyGermanyFrance
HungaryBelgium
No room for higher taxes on labour
Tax on labour(income tax + social security, OECD)
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Primary spending
35
40
45
50
55
60
1970 1975 1980 1985 1990 1995 2000 2005
As a % of GDP
Looking for spending cuts
Required fiscal effort
2012: weaker 2011 + weaker
economic growth
1%
(3.7 bn)
By 2020: debt reduction + ageing
costs
4.4%
(16.3 bn)
By 2030: debt reduction + ageing
costs
8.5%
(31.5 bn)
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0
10000
20000
30000
40000
50000
60000
70000
80000
Federalgovernment
Regional government
Localgovernment
Social security Health care
Primary spending
Looking for spending cuts
Spending
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MFM Alumni partner:
PIIGS countries
Peter Vanden Houte, Chief Economist ING
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ING BELGIUM 33
THEME IV: Fears of EMU exit have hit peripheral countries
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ING BELGIUM 34
The difficult combination
•
Peripheral countries have both a competitiveness problem and a fiscal problem
•
Deflationary policy cannot be the solution to both problems
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ING BELGIUM 35
European capital market is fracturing again
0
1
2
3
4
5
6
7
8
-15 -10 -5 0 5 10
Average CA balance in % GDP 1997-2006
Ave
rage
dom
estic
dem
and
grow
th 1
997-
2006
ES
PT
GR
IR
FN
NLFR
BEITAT
DE-10
-8
-6
-4
-2
0
2
4
6
-15 -10 -5 0 5 10
CA balance in % GDP 2011D
omes
tic d
eman
d gr
owth
201
1
GR
ES
PT
IT
FR
IR
FNAT
BE DENL
Era of reallocation of savingswithin the whole of the EMU Era of renewed home country bias
Today the risk of credit crunch is the highest in countries with a lack of savings
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ING BELGIUM 36
ECB’s monetary policy not equal for everyone
2008 2009 2010 20113.00
3.50
4.00
4.50
5.00
5.50
6.00
6.50
7.00
7.50
Greece
Spain
Germany
Interest rate on short term loans to non-financial companies
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ING BELGIUM 37
What would happen in a break-up scenario?
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ING BELGIUM 38
GDP impact of a break-up of the Eurozone
85
90
95
100
105
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Germany AUT, FIN, BENELUX Southern -Europe (GIPS)
Real GDP (2011 = 100)
After 5 years Belgian GDP would be 11.5% lower than in the
base case. Unemployment would be 3.5% higher.
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ING BELGIUM 39
Debt dynamics would hardly improve
40
506070
8090
100
110120130
140
2000 2002 2004 2006 2008 2010 2012 2014 2016
Italy Germany Base case Breakup
(% of GDP)
After 5 years, Belgian debt/GDP ratio would be 17.5% higher than
in the base case.
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MFM Alumni partner:
Role of the European Union
Frank Lierman, Chief Economist Dexia Bank
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41
Towards a real European economic / fiscal union?A pact for the euro.
Basic principleseconomic governance
prioritisation of specfic actions
each country engaged to make concrete steps yearly
completing internal market
Goalsincrease of competitiveness
stimulation of employment
sustainable public finance
increase of financial stability
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42
Towards a real European economic / fiscal union?Six-pack.
Goal : strenghtening economic governance and improved fiscal sustainabilitysurveillance mechanism for prevention and correction of macroeconomic imbalance (European semester)
government debt criterion (60% of GDP)
expenditure benchmark (no longer finance growth out of revenue windfalls)
new quasi-automatic financial sanctions if budget deficit exceeds 3% of GDP
new minimum requirements for rules and procedures governing national budgetary frameworks
adoption national fiscal rules introducing balanced budgets in structural terms (annual structural deficit shall not exceed 0,5% of nominal GDP)
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43
Towards a real European economic / fiscal union?Which future for the euro area ?
Header and footer options
Monetary Union
Fiscal / Economic Union
Governments have to clean up their deficits
Governments have to stimulate the growtheducation
innovation
employment
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44
Towards a real European economic / fiscal union?Alternatives.
Header and footer options
Split up of the euro area
Smaller euro area (‘ light ‘ version)exit problem countries; euro area ≈ German euro area
exit strong countries; euro area ≈ Weak European monetary union
floating of weak and or strong currencies against euro
New Bretton Woods system with more or less fixed rates between USD, EUR and YUAN or YEN
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MFM Alumni partner:
Role of the ECB
Bart Van Craeynest, Chief Economist Petercam
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ECB
Objectives
"The primary objective of the ESCB shall be to maintain price stability".
And: "without prejudice to the objective of price stability, the
ESCB shall support the general economic policies in the Community with a
view to contributing to the achievement of the objectives of the
Community as laid down in Article 2." (Treaty article 105.1)
The
objectives
of
the
Union
(Article
2
of
the
Treaty
on
European
Union)
are
a
high
level
of
employment
and
sustainable
and
non‐inflationary growth.
Further tasks
Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area. Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary for fulfilling the tasks, either from national
authorities or directly from economic agents.
Financial
stability
&
supervision:
the
Eurosystem
contributes
to
the
smooth
conduct
of
policies
pursued
by
the
authorities
in
charge related to the prudential supervision of credit institutions and the stability of the financial system. International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and fora both within
the EU and internationally in respect of tasks entrusted to the Eurosystem.
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G940
99 00 01 02 03 04 05 06 07 08 09 10 11 127.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
UNEMPLOYMENT RATE
ECB meets its primary objective
Inflation under control
‐1
0
1
2
3
4
5
Jan‐99 Jan‐01 Jan‐03 Jan‐05 Jan‐07 Jan‐09 Jan‐11
CPI
Core
Source : Input vlerick debat 17 Jan 2012.xls
‐
Sheet balance sheet 1
Unreasonably high unemployment
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Source: Slides US Layout AWI.xls–
sheet EMU Spreads
12/01/2012
0
5
10
15
20
25
30
35
40
Aug‐09 Nov‐09 Feb‐10 May‐10 Aug‐10 Nov‐10 Feb‐11 May‐11 Aug‐11 Nov‐11
Belgium
ItalySpain
Portugal
Ireland
Greece
Germany
Eurocrisis: financial stability at risk
Eurozone bond yields
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ECB bond purchasesLooking to Frankfurt
Mandate: financial stability in the
eurozone
Unlimited means
RisksInflationMoral hazard
Alternative???
Source: Eco strat August2011.xls – Sheet ECB
0
5000
10000
15000
20000
25000
Dec‐10 Mar‐11 Jun‐11 Sep‐11 Dec‐11
Eurocrisis: waiting for the ECB
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0
500000
1000000
1500000
2000000
2500000
3000000
Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11
ECB
0
500000
1000000
1500000
2000000
2500000
3000000
Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11
Fed
Source : Eco strat April2011 ‐
sheets world inflation ‐
Core Inflation ‐
Inflation Asia.xls ‐ Sheet balance sheet Source : Eco strat April2011 ‐
sheets world inflation ‐
Core Inflation ‐
Inflation Asia.xls ‐
Sheet balance sheet
Mln USDMln USD Mln EURMln EUR
Massive monetary expansion
Central bank balance sheet
+ 200%
+ 90%
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52/2517‐01‐2012 | Vlerick Alumni Financial Debate |52
Bart Van Craeynest
+32 (0)2 229 62 32
Petercam N.V.Sint Goedeleplein 19
1000 BrusselTel.: +32 (0)2 229 63 11
Fax : +32 (0)2 229 65 98
Brussels –
Frankfurt – London ‐
Luxemburg ‐
Madrid ‐
Geneva
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MFM Alumni partner:
The IMF , the USA & the importance of emerging economies
Peter Vanden Houte, Chief Economist ING
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ING BELGIUM 54
THEME VII: Slowdown or recession in the US and emerging world?
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ING BELGIUM 55
Signs of improvement in the US
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201280
85
90
95
100
105
110 250
300
350
400
450
500
550
600
650
700
Unemployment claims(inverted scale)
US small business optimism
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ING BELGIUM 56
Debt households, companies and government
100
150
200
250
300
350
1980 1990 2000 2010
Source: BIS
(Weighted average debt in % GDP)
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ING BELGIUM 57
Increase in total debt (2000-2010)
0
20
40
60
80
100
120
140G
E
CA
SW AT NL JP FI IT BE
Avg GR
US FR ES
UK PT
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ING BELGIUM 58
Emerging markets lead the way…
90
100
110
120
130
140
150
160
170
08 09 10 11 12 13
Index
90
100
110
120
130
140
150
160
170
China
India
B razil
P o land
US
Russia
Euro zo ne
Fo recasts1Q08=100
Emerging
world
output surges
ahead
of developed
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ING BELGIUM 59
Chinese economy
is softening
2005 2006 2007 2008 2009 2010 2011 20125
10
15
20
25
30
35
40
90
95
100
105
110
115
120
125
130
135
140
145Chinese Business Confidence
Chinese M1 growth
3m lead
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MFM Alumni partner:
Favourite asset class for 2012
Edwin De Boeck, Chief
Economist KBC
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Equity …and improving growth prospects
Stabilisation
of OECD leading
indicators… …supports equities
3-monthly change
in % 3-monthly change
in %
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Equity Attractive valuation…
Expected earnings growth Forward PE ratios well below long-term average
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Equity Globalisation
of regional equity markets
Expected earnings growth converges to Developed Markets
Valuation discount has largely disappeared
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Government bonds Extremely expensive as safe haven…
Real 10 year benchmark yields are negative… … but high risk premia
may offer opportunities
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Corporate bonds …but corporate spreads are offering value
Non-financial corporates… …offer attractive spread
EMU, Spread to
benchmark, in basis points
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Commodities over their peak
Oil price rises again on Iran worries
(January 2007=100 in USD)
Commodity prices
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MFM Alumni partner:
Thank
youMFM Alumni, Your Financial Network
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MFM Alumni partner:
ReceptionMFM Alumni, Your Financial Network