EIU Webinar_European Debt Crisis_Nov 23 2010
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Transcript of EIU Webinar_European Debt Crisis_Nov 23 2010
Prepare for opportunity.
The European debt crisis: Will confidence be restored?
An EIU webinar analyzing the risk outlook for Europe
John BowlerDirector, Country Risk Service
Matteo NapolitanoSenior Editor / Economist
November 23, 2010
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About the Economist Intelligence Unit (EIU)
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Today’s Presenters
John BowlerDirector, Country Risk Service
Matteo NapolitanoSenior Editor, Economist
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Weak public finances
0
20
40
60
80
100
120
140
-12 -10 -8 -6 -4 -2 0
Budget balance (% of GDP)
Pu
bli
c d
ebt
(% o
f G
DP
)Italy
Greece
Ireland Portugal
Spain
UK
2010 data. Source: EIU, Country Data.
- 30%
Prepare for opportunity.
0
2
4
6
8
10
12
14
Jan 1
201
0
Jan 1
3 20
10
Jan 2
5 20
10
Feb 4
201
0
Feb 1
6 20
10
Feb 2
6 20
10
Mar
10
2010
Mar
22
2010
Apr 1
201
0
Apr 1
3 20
10
Apr 2
3 20
10
May
5 2
010
May
17
2010
May
27
2010
Jun
8 20
10
Jun
18 2
010
Jun
30 2
010
Jul 1
2 20
10
Jul 2
2 20
10
Aug 3
201
0
Aug 1
3 20
10
Aug 2
5 20
10
Sep 6
201
0
Sep 1
6 20
10
Sep 2
8 20
10
Oct 8
201
0
Oct 2
0 20
10
Nov 1
201
0
Nov 1
1 20
10
Greece Ireland Germany Portugal Spain Italy
Market perception of eurozone sovereign risk
2010 data. Source: Haver Analytics.
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Euro zone: Private-sector debt
0
500
1,000
1,500
2,000
2,500
3,000
Sp
ain
Po
rtu
ga
l
Ire
lan
d
Gre
ec
e
NL
Ita
ly
Ge
rma
ny
Fra
nc
e
1999 (Greece 2001) 2009
Bank claims on private sector, € bn. Source: IMF, International Financial Statistics.
211% of GDP
112%
111%
92%
234% 192% 150%
110%
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Periphery has lost competitiveness
90
95
100
105
110
115
120
125
130
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Germany Greece Portugal
Spain Italy France
Average real wage index, 1999 Q1=100. Source: Economist Intelligence Unit, CountryData.
Prepare for opportunity.
Greece: Fiscal adjustment on track but is it sufficient?
• January-September 2010 versus 2009 Revenue + 3.3% Spending – 10.0%
◦ Primary spending – 11.6%◦ Interest charges + 8.0%
Budget deficit € 16.3bn (€ 23.6bn in 2009)
Public debt (end June) € 316bn (135% of GDP)• Fiscal tightening
Economic contraction, undermining debt sustainability Austerity fatigue, social unrest
• Market access still closed for government and banks• In Greece’s interest to default earlier rather than later ? • B rated for sovereign risk
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Ireland: the cost of a property and banking bust
• Anglo-Irish bail-out Fiscal deficit in 2010 33% of GDP Risk of further losses
• Public debt/GDP 24% in 2007, 98% in 2010
• Run on banks Half of banks’ non-deposit
funding (€83bn) from ECB • EU/IMF loan
More spending cuts Raise corporate tax from 12.5% ? Recapitalise/restructure banks
• Can Ireland grow fast again ? Average GDP growth 5.5% in
2001-07• Downgraded to BB in October
-10
-8
-6
-4
-2
0
2
4
6
8
2001
2003
2005
2007
2009
2011
GDP growth
Real GDP growth, %. Source: EIU, Country Data.
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• 2010 fiscal deficit 7.5% of GDP
• Public debt 82% of GDP• Political agreement to cut
2011 deficit by 3% of GDP• Banks dependent on ECB
liquidity• Borrowing costs
unsustainable EU/IMF funding ?
• Lack of competitiveness, low growth, low savings
• Downgraded to BB in October -14
-12
-10
-8
-6
-4
-2
0
2001
2003
2005
2007
2009
2011
Current account (% of GDP)
Portugal: finally a greater sense of urgency
Current-account (% of GDP). Source: EIU, Country Data.
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Saving the eurozone
• Funding pressures eased by €750bn EU-IMF financing How costly will it be to draw on €440bn EFSF? ECB bond purchases (around €65bn to date)
• Restoring solvency Economic growth
◦ Competitiveness Fiscal consolidation Fiscal transfers Default
• Tougher fiscal surveillance• New debt resolution mechanism
Burden sharing for new creditors
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Is leaving the eurozone the solution?
• Boost to competitiveness Would this materially change growth
prospects ? Not a substitute for reform
• How to manage an orderly devaluation ? Printing of banknotes Redenomination of banks’ euro liabilities
◦ Depositors suffer losses Problem of insolvency exacerbated
• Not a rational choice but one which could be made in extremis
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East-central Europe: An uneven recovery…
80
85
90
95
100
105
110
115
120
125
130
q1
06
q2
06
q3
06
q4
06
q1
07
q2
07
q3
07
q4
07
q1
08
q2
08
q3
08
q4
08
q1
09
q2
09
q3
09
q4
09
q1
10
q2
10
q3
10
Poland Czech Republic Slovakia Hungary Romania Latvia
Seasonally adjusted GDP, rebased to Q1 2006=100Source: Eurostat/Haver Analytics.
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… that is stronger in countries with milder imbalances…
-25
-20
-15
-10
-5
0
Cze
ch
Re
pu
blic
Slo
va
kia
Hu
ng
ary
Ro
ma
nia
La
tvia
GDP in Q3 2010 relative to peak (% difference, seasonally adjusted)
Source: Eurostat/Haver Analytics.
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…but which may now have peaked
-20
-15
-10
-5
0
5
10
15
20
Ja
n-0
6
Ap
r-0
6
Ju
l-0
6
Oc
t-0
6
Ja
n-0
7
Ap
r-0
7
Ju
l-0
7
Oc
t-0
7
Ja
n-0
8
Ap
r-0
8
Ju
l-0
8
Oc
t-0
8
Ja
n-0
9
Ap
r-0
9
Ju
l-0
9
Oc
t-0
9
Ja
n-1
0
Ap
r-1
0
Ju
l-1
0
Oc
t-1
0
-20
-15
-10
-5
0
5
10
15
20
Industrial growth (unweighted average of Poland, Czech, Hungarian, Slovak andRomanian output; % change, y/y)German manufacturing inventories (% change, y/y, inverted scale)
Source: Eurostat/Haver Analytics.
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85
90
95
100
105
110
115
120
125
130
Jan
4 2
010
Jan
13
2010
Jan
22
2010
Feb
2 2
010
Feb
11
2010
Feb
22
2010
Mar
3 2
010
Mar
12
2010
Mar
23
2010
Ap
r 1
2010
Ap
r 12
201
0
Ap
r 21
201
0
Ap
r 30
201
0
May
11
2010
May
20
2010
May
31
2010
Jun
9 2
010
Jun
18
2010
Jun
29
2010
Jul
8 20
10
Jul
19 2
010
Jul
28 2
010
Au
g 6
201
0
Au
g 1
7 20
10
Au
g 2
6 20
10
Sep
6 2
010
Sep
15
2010
Sep
24
2010
Oct
5 2
010
Oct
14
2010
Oct
25
2010
No
v 3
2010
No
v 12
201
0
Polish zloty Hungarian forint Czech koruna Romanian leu Thai baht
Currencies rally, but less than other emerging markets
Currencies versus US$, Index Jan 4 2010= 100, Source: Haver Analytics
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Sounder public finances than in eurozone periphery…
0
20
40
60
80
100
120
140
-12 -10 -8 -6 -4 -2 0
Budget balance (% of GDP)
Pu
bli
c d
ebt
(% o
f G
DP
)
Poland
Greece
IrelandPortugal
Spain
Czech Republic
2010 data. Source: EIU, Country Data.
- 30%
Romania
Latvia
Hungary
Slovakia
Prepare for opportunity.
… and sounder private finances as well
0
50
100
150
200
250
Sp
ain
Po
rtu
ga
l
Ire
lan
d
Gre
ec
e
Po
lan
d
Ro
ma
nia
Hu
ng
ary
Cze
ch
Re
pu
blic
La
tvia
2004 2009
Bank claims on private sector, % of GDP. Source: IMF, International Financial Statistics.
Prepare for opportunity.
Few ratings upgrades to date
0102030405060708090
100P
ola
nd
(BB
B)
Ro
ma
nia
(BB
)
Hu
ng
ary
(B)
Cze
ch
Re
pu
blic
(BB
B)
La
tvia
(B
)
Jan-09 Nov-09 Nov-10
Sovereign risk score and rating (latest rating in brackets) Source: EIU, Country Risk Service.
Upgraded to BBB
in September 2010
Downgraded to B
in April 2009
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Poland: good growth, but no urgency on fiscal policy
• Economy kept growing throughout the global crisis Large domestic market Avoidance of excesses previously; strong financial
supervision• But fiscal deficit got out of hand in 2008-09
Little consolidation planned in 2010-11… … and no sense of urgency afterwards
• Public debt likely to break through legal ceilings, forcing action • However, markets could punish Polish assets, particularly if
global mood turns against emerging markets
Prepare for opportunity.
Czech Republic/Slovakia: export dependency
• Economies tracked slump and recovery in global trade FDI-driven economies Tied into German supply chain, allowing them to tap into
more dynamic markets Small domestic markets will continue to be a weakness Avoided excesses previously; strong financial supervision
• Both are front-loading fiscal adjustment Less insulated than Poland, therefore less complacent? But coalition politics could force a watering down
Prepare for opportunity.
Hungary/Romania/Latvia: domestic imbalances still to be worked through
• Hungary Domestic economy is still weak; households exposed to
currency risk Government is strong, but uncertainties over policy direction May yet need to strike a deal with the IMF if investor mood
sours• Romania
Fiscal austerity to hold back recovery Political instability is hampering policy execution Social unrest could escalate
• Latvia Suffered an enormous contraction, has begun timid recovery Still at risk of political instability Will need further wage adjustment to become competitive
again
Prepare for opportunity.
What about the euro accession process?
• There is scepticism on both sides of the divide Enthusiasm in candidate countries has waned The future of the euro area still hangs in the balance Until new governance rules are in place, no appetite for expansion The crisis showed the value of a floating currency Larger countries could adopt a Sweden-type stance
• Only Latvia has a firm accession target date (2014) Encouraged by Estonia’s accession, scheduled for January 2011 Low political weight; little change to euro zone’s structure
Euro accession would entrench currency board • There is a serious risk that Estonia will be the last
country to enter the euro area in this decade
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Questions and Answers
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Economist Intelligence Unit analysts have been featured in the media for their analysis of the European debt crisis.
You can keep up on our latest thinking around this subject and other international economic and political affairs on 187 countries for free by registering at www.eiu.com
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Thank you.
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