Post on 15-Oct-2018
3Macro updatePictet Asset Management
Eurozone (im)balances: a Small World
Eurozone current accounts (% Eurozone GDP) by major EMU member
-1.6
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
1.6
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Austria Belgium Finland France Germany Ireland Italy Netherlands Portugal Spain Greece
%GDP
Rising imbalances since the creation of the euro
euro
Northern Europe to rest of the world Northern Europe to southern Europe
4Macro updatePictet Asset Management
Fiscal Revenue for Advanced and Emerging Countries
Fiscal revenue to GDP ratio in 2010
10.9 13
.417
.217
.417
.5 18.3 20
.720
.820
.9 22.4
22.7
23.1 24
.324
.324
.624
.725
.0 25.7 27
.231
.932
.332
.933
.133
.833
.934
.2 35.7
35.8 37
.537
.5 38.4
38.9
39.0 39.9
40.5 41.5
41.5 43
.8 44.8 46
.146
.2 48.0
48.6 49.6 52
.752
.9 54.5 56
.0
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Indi
aPh
ilipp
ines
Peru
Taiw
anIn
done
sia
Thai
land
Vene
zuel
aM
alay
sia
Chin
aTu
rkey
Mex
ico
Emer
ging
Sout
h Af
rica
Arge
ntin
aEg
ypt
Chile
Braz
ilKo
rea
Colo
mbi
aUn
ited
Stat
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stra
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itzer
land
Japa
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man
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land
Spai
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Gree
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ited
King
dom
Portu
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Czec
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icGe
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lyNe
ther
land
sAu
stria
Belg
ium
Fran
ceFi
nlan
dSw
eden
Denm
ark
Norw
ay
5Macro updatePictet Asset Management
Debt-to-GDP Ratio: Developed Economies
General government debt-to-GDP ratio: major advanced (21) economies
23.6 33
.9 37.8
39.8
42.6
43.4
44.7 49
.7 61.1
62.9 65.8 71
.9 82.4
83.4
85.1 92
.6
93.3
96.2
96.7 101.
1 119.
4
144.
9
200.
0
0
50
100
150
200
Aust
ralia
Emer
ging
New
Zeal
and
Swed
en
Switz
erla
nd
Denm
ark
Finl
and
Norw
ay
Spai
n
Neth
erla
nds
Unite
d Ki
ngdo
m
Aust
ria
Fran
ce
Germ
any
Cana
da
Irela
nd
Portu
gal
Belg
ium
Unite
d St
ates
Adva
nced Ita
ly
Gree
ce
Japa
n
2010 General Government Debt Maastricht Criteria (60%) Fitch criteria (80%)
%GDP
6Macro updatePictet Asset Management
Euro Countries: GDP Shares
Eurozone countries: GDP in billion of euros and in percentage of total eurozone GDP
Germany; 2481; 27%
France; 1931; 21%
Italy; 1547; 17%
Spain; 1062; 12%
Netherlands; 591; 7%
Belgium; 346; 4%
Austria; 281; 3%Greece; 230; 3%
Finland; 180; 2%Portugal; 172; 2%Ireland; 153; 2%
7Macro updatePictet Asset Management
Euro Countries: Public Debt Shares
Eurozone countries: public debt in billion of euros and in percentage of total eurozone debt
Austria; 205.9; 3%
Greece; 333.7; 4%
Belgium; 340.7; 4%
Netherlands; 369.9; 5%
Spain; 641.9; 8%
Germany; 2061.8; 27%
Italy; 1854.9; 24%
France; 1591.2; 20%
Portugal; 161.0; 2%
Ireland; 144.4; 2%Finland; 80.5; 1%
10Macro updatePictet Asset Management
Central Government Fiscal Balance
-20.0
-15.0
-10.0
-5.0
0.0
5.0
07 08 09 10 11 12
Italy Spain Portugal Greece Ireland
%GDP, 12-month moving average
Central fiscal balances have generally improved. Eurozone on average better than the UK & the US
Central fiscal balances: Italy, Spain & EFSF-3 countries Central fiscal balances: Eurozone (average), UK & US
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
07 08 09 10 11 12
Germany Eurozone France UK US
%GDP, 12-month moving average
Source: Pictet Asset Management, CEIC, Datastream, as at 25.02.2012
12Macro updatePictet Asset Management
Italy & Spain debt/GDP Evolutions under Various Interest Rates
119
132
154
80
90
100
110
120
130
140
150
160
2010 2011 2012 2013 2014 2015 2016
Interest rate at 5% Interest rate at 7% Interest rate at 10%
%GDP
98
106
120
20
40
60
80
100
120
140
2010 2011 2012 2013 2014 2015 2016
Interest rate at 5% Interest rate at 7% Interest rate at 10%
%GDP
Insert key message
Italian debt/GDP simulated for various interest rates Spanish debt/GDP simulated for various interest rates
13Macro updatePictet Asset Management
Sovereign Debt Long and Short-term Scores
Sovereign debt long and short-term scores for developed economies: a scatter diagram view
Bad long and short-term positions
Good long and short-term positions
Australia
Sweden
Austria
Belgium
Canada
Denmark
FinlandFrance
Germany
GreeceIreland
Italy
Japan
Netherlands
New ZealandNorway
Portugal
Spain
SwitzerlandUnited Kingdom
United States
-3.5
-2.5
-1.5
-0.5
0.5
1.5
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Sustainability (long-term) Score
Dyn
amic
(sh
ort-
term
) S
core
14Macro updatePictet Asset Management
Euro Endgame: Multiple Equilibria
Monetary union Fiscal autonomy
Current state
One country opts outNational currencies
Euro breakup
Source: Pictet Asset Management
Fiscal integration
Rising number of new national currencies
No EurobondSmall central fiscal authority
EurobondStrong central fiscal authority
Increasing fiscal federalism
Risk Scenario Main Scenario
15Macro updatePictet Asset Management
Solving the Debt Problem – Four Ways Out
Official default and debt restructuration
Low short-term cost / high long-term costHigh short-term cost / low long-term cost
Solution
Debt solving mechanism
Sovereign defaultBail-out MonetizationDebt repayment
Bilateral agreements orsupranationalbail-out
Central Bank Intervention to usethe inflation channelto solve the debtproblem
Primary balancedeficit reduction
Domestic consequences
International consequences
Limited if no accessto the internationalmarket of capitalsfor an extended period
Loss of economicindependence
Loss of the Central Bank’s credibility
Currency depreciation
Lower economicnominal growth
Social imbalances andconflicts between taxpayers and publicworkers
Sovereign crisiscontagion
Banking system crisis
Bilateral agreements:higher spreads for thecountry that fundsthe bail-out
Possible socialconflicts
Competition oncurrency depreciation
Weaker externaldemand coming fromthe indebted country
16Macro updatePictet Asset Management
EU/IMF Financial Aid Package
– €80bn from EMU countries (funding according to countries’ quotas in the ECB’scapital)
– €30bn from the IMF
Fiscal policy Monetary policy
Greek packageEUR 110bn
Unconventional monetary policy tools
Additional packageEUR 720bm
– First loan tranche of €14.5bn was sent to Greece on 18th of May while second tranche of €9bn was sent on 9th of Sept.
– Total package covers Greek debt service until Dec 2012 (i.e. interest payments + principal but excluding primary deficits financial needs)
– €60bn available under the existing European Commission balance-of-payments lending facility (Funded and guaranteed by the 27 EU members)
– €440bn available through the creation of the European Financial Stabilisation Fund (EFSF) funded according to countries’ quotas in the ECB’s capital and guaranteed by the 16 Eurozone members
– €220bn from the IMF
– Irish package: EUR85bnEFSM/EFSF/IMF: EUR22.5bn eachDomestic sources: EUR17.5bn
– Portuguese package: EUR78bnEFSM/EFSF/IMF: EUR26bn each
– Remaining effective lending capacity: EUR575bn (Spanish debt service is about EUR350bn until Dec 2014)
– The EFSF pave the way towards a closer fiscal union in Europe
– Outright purchases in the Euro area public and private debt securities markets
– Reactivation of 1Y, 6-month and 3-month refinancing operations at fixed rate with full allotment
– Reactivation of liquidity swap lines with the Fed
– Outright bonds purchases of €165bn (as of Oct. 14th), absorbed with one-week fixed-term deposit
Quarterly conference call 17Fixed Income Outlook
Source: Bloomberg, Pictet Asset Management. Updated 2011-10-14
0
5'000
10'000
15'000
20'000
25'00000
.01.
1900
04.0
6.20
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6.20
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16.0
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06.0
8.20
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27.0
8.20
10
17.0
9.20
10
08.1
0.20
10
29.1
0.20
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19.1
1.20
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2.20
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31.1
2.20
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21.0
1.20
11
11.0
2.20
11
04.0
3.20
11
25.0
3.20
11
15.0
4.20
11
06.0
5.20
11
27.0
5.20
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6.20
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€ bn
0
25'000
50'000
75'000
100'000
125'000
150'000
175'000
200'000
225'000
€ bn
Weekly Amount (ls) Cumulated Amount (rs) 4 week moving average (ls)
ECB Government Bonds PurchaseAccelerating ECB interventions mainly focused on Italy, but to be continued with stronger commitment
ECB Eurosystem securities market program-weekly and cumulated amounts
18Macro updatePictet Asset Management
EU/IMF Packages & Financing Needs for Countries at Risk
Debt servicing until Dec. 2014 for EFSF-3, Spain & Italy & remaining packages
168
42
431
843
80
0
200
400
600
800
1'000
1'200
Gre
ece
Irel
and
Por
tuga
l
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Ital
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Fina
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eds
until
Dec
. 2
01
4 (
bn o
f €
)
Greek remaining package, 37
+ Irish remaining package, 46+ Portugal remaining package, 66
+ EU/IMF remaining lending capacity, 575
Current lending capacity just enough to cover EFSF-3 & Spain until Dec. 2014
19Macro updatePictet Asset Management
Euro Sovereign Risk
Italy
Spain
Portugal
Ireland
Greece
Euro area
Greece is bankrupt and by no mean can muddle through whatever the measures taken. Significant losses have to be taken through a set of orderly haircuts ultimately amounting to circa 70%.
Disorderly default
Ireland will have to resort to a second bailout plan in the coming months. The widely nationalised banking sector is still threatening dramatically public finances. An orderly default going forward can not be ruled out.
No stabilisation of the current negative fiscal balance trend
Portugal can muddle through but will be highly dependant on the whole zone growth and the ECB monetary policy.
Lack of growth endangering the current positive trend in terms of public finances adjustment
Spain has made significant efforts on the fiscal front but a banking sector recapitalisation will be needed. The latter is manageable provided the real estate necessary adjustment is done gradually.
Lack of growth
Brutal adjustment of the real estate loans value on the banks balance sheets
Italy has already a primary balance almost at equilibrium. The stabilisation of its debt /GDP ratio is highly achievable especially with the newly decided fiscal measures. But the ECB then EFSF/ESM will have to maintain an active SMP to avoid contagion through government refinancing rates.
Lack of growth
Government rates pushed significantly and structurally above 5%
The cost of the Euro breakup option is so high that the already started transfer between the strongest and the weakest countries will continue. More fiscal discipline and a painful adjustment process will lead to low growth over a 5 to 7 years cycle.
Euro breakup. Disorderly default from Greece triggering a round of contagion to other Eurozone countries and the whole banking sector.
Our ViewMain risks
Source: Pictet Asset Management
Themes & risks to dominate the market in the short and long run
20Macro updatePictet Asset Management
Eurozone: Key Messages
• Eurozone contracted in 2011Q4. No collapse in 2012, the zone might even avoid a recession
• Germany is recovering, while Greece is entering into its 4th year of declining activity.
• Biggest risk remains a Greek downward spiral, notably in Spain: contracting activity – lower fiscal revenues – more fiscal austerity –additional contraction in activity
• Inflation to decline: no reason for the ECB not to continue loosening conventional & possibly unconventional monetary policy
• Euro debt crisis:
– no euro break-up, but more fiscal integration
– EFSF/ESM not a solution for Spanish/Italian financing needs, only the ECB can afford it (monetization… indirect QE)
– ECB further non-conventional monetary policy to depend on two conditions:
– a political commitment to fiscal federalism with credible fiscal rules (that will not be breached)
– Complete disorderly market conditions
– Greece, Portugal and Ireland to default … orderly
Recession in the Eurozone, no euro break-up but more fiscal federalism
24Macro updatePictet Asset Management
What Should Be Done ?
Surgery in Greece
A wall – ECB – better than a firewall
Control supranational (European) of the budgets of the euro area countries
Lower interest rates in Europe
Second phase: policies that promote growth consistent with the reduction of public expenditure
25Macro updatePictet Asset Management
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