Ekonomika Evropa 2013 (Dokument v AJ)

7/30/2019 Ekonomika Evropa 2013 (Dokument v AJ)

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See Disclosure Appendix A1 for the analyst certification and other important disclosures.

Nomura Securities International plcJanuary 2013

No solidarity without conditionality

European Economics

Jacques Cailloux

Chief European Economist+44 (0)20 7102 2734

[email protected]


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1

Key views

1. Fiscal consolidation, financial deleveraging and tight real economy funding conditions should lead

to a deeper-than-expected recession

2. Spain to continue free riding the OMT thus delaying call for ECCL, our baseline remains an ECCL

will be called during the course of the year

3. Italy remains very exposed and might require ECCL too. Given ECBs credibility, none of the

countrys risk is likely to trigger an imminent call for help

4. GDP contraction and higher NPLs remain the key policy challenge in the short term

5. Debt trajectory to continue rising faster than expected

6. Pressures could build around weak banks and sovereigns in H1, but also around negotiations for

Fiscal and Banking Union creation which could show lower level of solidarity than currently priced.

7. Absent a growth strategy, Europe will experience very low growth over next decade

Sovereign bond market tensions are easing but the economic and social crisis in the euro area

is deepening. Financial market stress could come back absent a sustained return to growth


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2

Global demand environment


4/60

3.

Source: CPB

The great divide post crisis

Industrial production by key regions, levels, 100 = Jan 2008 (Last obs = Oct 2012)

70

80

90

100

110

120

130

140

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

World IP

US IP

Euro area IP

Asia IP

% increase in Industrial output

Since Trough Since Jan 05

World 19.0 16.7

US 15.6 1.8

Asia 48.0 72.6

Euro 7.1 -1.7


5/60

Contraction in global trade showing signs of stabilisation

Source: Markit, CPB

But strong recovery needed to provide some offset to weak euro area domestic demand

World manufacturing export orders, PMI index (Last Obs Jan) Euro area GDP lags global trade cycle by one quarter

4

-7

-5

-3

-1

1

3

32

37

42

47

52

57

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

Global export ordersEuro area GDP (%, y/y, rhs)

Dot is average of Q4

Last Obs: 48.9, avg pre crisis 51.3, avg inc crisis 50.6


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German apparent rebalancing hides EA/non EA split

Periphery: Italy, Spain, Greece, Ireland and Portugal

Source: Datastream, Nomura

Germany

German current account surplus widening vs non euro area

(last obs. Q3 2012, seasonally adjusted using Eviews)

... And current a/c improvement inside EA due to weak demand

(last obs. Q3 2012)

5

-4

-3-2

-1

0

1

2

3

4

5

6

1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12

EA

Non EA

% GDP

0

1

2

3

4

5

6

7

1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12

Exports to China

Imports from periphery

Exports to Periphery

% GDP


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As Germany looks outside the euro area for sources of growth

Source: Datastream, Nomura, Periphery: Italy, Spain, Greece, Ireland and Portugal

German exports outside EA are taking off

(last obs. Q3 2012)

Foreign demand not key driver of periphery performance

Results come from our recently published estimations

6

GDP impact from different assumptions

Non EA GDP

2ppts stronger

relative to baseline

Ger & FR domestic

demand 1 ppts

higherGermany +1.0

France +0.4

Italy +0.7 +0.3

Spain +0.2 +0.2

Portugal +0.3 +0.2

0

5

10

15

20

25

30

1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q12

Exports to EA

Exports to non EA

% GDP


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7

Watch out for the big fiscal multipliers

1. Currency adjustment is more modest

2. Zero bound for interest rates

3. Broken monetary policy transmission channel

4. Liquidity constraints in the private sector

5. Starting point has large output gaps *

With already high debt ratios, the impact of fiscal consolidation plans on debt ratios is likely to be more than

offset by the indirect effect of lower GDP (IMF, 2012)

Fiscal multipliers are larger in stressed EMU countries

Public C

Transfers

to h/h Investment

Indirect

tax

Personal

inc. tax

Germany 0.6 0.5 1 -0.3 -0.5

France 0.8 0.6 1 -0.3 -0.6

Italy 0.8 0.6 1 -0.3 -0.6

UK 0.7 0.6 1 -0.3 -0.6

US 0.9 0.7 1.1 -0.4 -0.7

Source: OECD

RevenueExpenditure

Estimates of short term fiscal multipliers in normal circumstances

Recent research suggests that the above multipliers might be

underestimated in the case of Italy & Spain


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Easier financing conditions required

Source: Datastream, ECB, EC and Nomura Global Economics.

Note: HH stands for houshold and NFC stands for non financial corporations.

Should lending rates fail to decline, we think responses at a decentralised level will be soon required,especially for Italy and Spain

8

Euro-area rate band suggested by Taylor rules Euro area lending rate spreads (vs ECB policy rates)

0

1

2

3

4

Jan-03 Jun-04 Nov-05 Apr-07 Sep-08 Feb-10 Jul-11

HH spread

NFC spread

%

-3

-2

-1

0

1

2

3

4

5

6

7

1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

Band

ECB

%


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9

Source: ECB and Nomura G lobal Economics.

Note: 1. The additional easing required is measured as the difference between the average of our five Taylor rule implied policy rates in Q4 2013 and that predicated by the average of the five rules in Q4 2012. It is not

computed as the difference between the predicated rate in Q4 2013 and the current actual policy rate.

2. The average spread before the crisis is c omputed over the 2003-end 2007 period.

Change in policy rate required in 2013 in percentage points

Policy rates more appropriate for core than peripheral countries

Additional easing / tightening required

on average (excluding changes in

bank lending rates spreads)

Average spread of

bank lending rates to

ECB before crisis

Current

spreads

Additional eas ing / tightening

required controlling for changes in

bank lending rate spreads

Euro area 1.3 1.7 2.4 2.0

Germany 0.9 2.1 2.1 0.9

France 0.7 1.6 2.4 1.5

Italy 2.3 1.6 3.1 3.8

Spain 2.4 1.6 2.7 3.5

Netherlands 1.5 1.5 2.3 2.3

Ireland 1.3 1.9 3.0 2.4

Portugal 1.4 2.2 4.1 3.3

Greece 1.7 4.0 5.2 3.0


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Bank Lending Survey (1): Tighter from already tight conditions

Source: ECB and Nomura G lobal Economics.

Note: Balance-sheet constraints include capital, access to financing, and liquidity position. Cyclical factors include general economic activity, industry outlook, and collateral risks. The sum of the bars has been adjusted to equal the

corresponding overall value. 10

Aggregate credit conditions in the euro area Bank lending conditions for enterprises

-10

0

10

20

30

40

50

60

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Supply: present Supply: future

% balance, net tightening

Tighter credit conditions

-10

0

10

20

30

40

50

60

70

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Cyclical factors

Competition

Balance sheet constraint

Overall

% balance, net tightening

Tighter conditions

Ourcomposite credit standard index (based on the ECB banklending survey (BLS) assuming a 50/50 split between households and

corporates), rose from 11% to 13% in Q3, suggesting most banks

tightened credit standards more in Q3 2012 than in Q2.

Survey conducted between 20 September and 9 October 2012, sothe accelerating deterioration in credit standards seems to suggest only

a limited positive impact from OMT announcement, at least so far

However, most of the deterioration in credit standards led by a

deteriorating economic cycle (eg. general economic activity orindustry-specfiic risks) rather than balance-sheet constraints

Despite the very significant improvement in market conditionscredit standards continued to tighten


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Bank Lending Survey (2): Germany the only country seeing demand

Source: ECB and Nomura G lobal Economics11

Aggregate demand conditions in the euro area Demand conditions across countries

-60

-50

-40

-30

-20

-10

0

10

20

30

40

1Q07 1Q08 1Q09 1Q10 1Q11 1Q12

Demand: present Demand: future

% balance

Weaker demand

-100

-80

-60

-40

-20

0

20

40

60

4Q02 3Q04 2Q06 1Q08 4Q09 3Q11

Euro area Italy

Germany Spain

% balance

Demand conditions remain weak across the euro area as a whole, but

mainly concentrated in the periphery, with business cycle

considerations the key driver of the deterioration in both supply and

demand

Easing credit conditions in countries under most stress is complicated

by the breakdown in the transmission mechanism and the deepening

recession in those countries.

Despite the very significant improvement in market conditions, credit standards continued to tighten. This begs the question as to whether thebailout mechanisms, as they have been devised, will successfully reach the end-users in those economies or whetherother tools shouldbe used to generate a more direct easing in credit conditions.


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12

ECB still at the centre of the policy response: from SMP to OMTs (i)

While ECB says amounts involved might be unlimited, they will de facto

be constrained by maturities target and free float available

ECB Outright Monetary Transactions (OMTs)

i. Secondary market bond purchases that aim at safeguarding an appropriate monetary policy transmission

and singleness of monetary policyii. Necessary condition is strict and effective conditionality attached to appropriate EFSF/ESM programme:

- Full macroeconomic adjustment programme

- Precautionary programme Enhanced Conditions Credit Line (ECCL)

- Both must include the possibility of EFSF/ESM primary market purchases

- Involvement of IMF sought for country-specific conditionality design and monitoring

iii. Focused on short end of yield curve and in particular on sov bonds with maturity between 1-3 yrs

iv. No ex-ante quantitative limits set on the size

- But purchases will be limited by maturity and free float constraints

- ECB could buy an average of Eur 5bn SPGB a week and be in the market for 5 months

without hitting free float limits (SPGB secondary mkt up to 3yrs: Eur 200bn)

- Might be difficult for the ECB to buy more than Eur 100bn, on top of the Eur 44bn we estimate

the ECB already holds of SPGBs

v. ECB to stop purchases during quarterly review and full market access required

- No intervention for countries that have lost market access could be very concerning for Ita/Spa

- Short-term issuance monitored very closely


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13

ECB still at the centre of the policy response: from SMP to OMTs (ii)

Policy response based on conditionality shifts the

focus onto implementation risks

1. OMT is a tail risk instrument and not aiming to reduce bond yields aggressively

Yield-capping, not yield-crushing could become the biggest bone of contention with the Spanish govt.

Draghi7 Nov 2012: The ECB has produced the OMT. The OMT is a fully effective backstop mechanism that is devised to remove the tail risk while at

the same timenot removing the incentive for fiscal disciplineand delivering price stabilitythats there - and the conditions for accessing that are

also very very clear. The ball is completely in the courts of the government, not with the ECB.

1. Contradictions in ECB intervention:

i. Despite its intention, ECB is in no position to eradicate the cross-currency exchange rate risk

premiums now embedded in the Monetary Union:

- risk premium ultimately in the hands of the economy, populations and politiciansii. A tool designed to address failing monetary policy transmission should be unconditional and not have

fiscal conditionality attached to it

2. Buba concerned over lack of political and legitimacy of ECB actions: one can understand Buba Pdt

Weidmanns worry about long term implications of the ECB becoming the institution that will decide

on the fate of banks, sovereigns, governments and the Monetary Union itself

3. While it is easy to blame the ECB for not going unlimited and unconditional in its support, its

behaviour reflects the constraints under which it is operating politicians are to blame, not the ECB


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14

Our baseline scenario: ECB intervention buys time but no game changer

Spain and Italy to resist calling for help prompting renewed market deterioration

Aggressive fiscal consolidation in Italy and Spain will likely lead to greater economicweakness than expected

EFSF/ESM not credible to provide funding for Spain and Italy

ECB intervention under strict conditionality & on short term maturities is not sufficient ECB not credible in defending irrevocability of the currency when membership is now

revocable (due to politicians statements)

Banking/fiscal union discussion to precipitate decision on the ins and outs

Exit risks, intra regional FX risks cant be tackled by central bank

After period of calm, renewed stress expectedTiming: 3 months after activation of rescue

EFSF/ESM

ECB intervention

insufficient

Exit risks remain high

- various drivers

Spain & Italy: External

support in focus


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15

Spain


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16

Spain: Conditions for call to be made (currently not met)

Spain has laid out 3 conditions to call for help which are currently not met.

1. Call should take place only if absolutely needed: Market conditions currently notseen by Spain bad enough especially when they have no clarity on how low yields

would be post OMT. Rajoy (Nov 7th, COPE) said calling for help would make little

sense if it does not help reduce the spread from the current 435bp to a much

narrower 200bp.

2. European countries should unanimously back the call: Press reports have reported

that the Bundestag does not currently see the urgency of a sovereign bail out forSpain. Germany may want to bundle together the bail outs for Greece, Cyprus and

Spain. Finnish PM also said in Madrid on Sep 11thThe main thing is to try and avoid

to request help.

3. Conditionality should be appropriate: This might be the least contentious item with

most of the emphasis on structural reforms rather than on nominal deficit targets.

Delay in request for help should test markets patience


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17

Spain: Conditions required for bail out to work (currently not met)

1. Cost of funding of households & Cies needs to drop to as close to 0 as possible

2. Banking sector needs to regain market access at viable cost

3. Assets should be transferred at credible clearing price to AMC

4. Deleveraging of the economy needs to be mitigated by shock absorbers

5. Fiscal consolidation should not be too front loaded

6. Deposit and capital flights need to abate; availability of collateral needs to be ample

With nominal growth likely to remain around 0 at best for the next few years

The cost of capital of the real economy needs to collapse, an unlikely scenario


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Spain monetary conditions should ease by more than 300bps



Spain requires much easier monetary conditions due to economic contraction and wide lending rate spreads

18

Spains rate band suggested by Taylor rules Spain lending rate spreads (vs ECB policy rates)

-5

-3

-1

1

3

5

7

9

1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

Band

ECB

%

0

1

2

3

4


HH spread

NFC spread

%


20/60

19Source: BdE and Nomura Global Economics.

Backstop still too costly for Spain

Spain funding cost still too high even in best case scenario, %

After OMT starts

assuming 2 year

rate at 2% and

10 year rate at

4% (our bestcase scenario)

Eur bn 2009 Before Draghi Post OMT

ECB rate 1.25 0.75 0.75

Marginal cost of funding of the sovereign 3.0 7.0 3.5

Marginal cost of funding of banks 1.7 2.8 2.0

ECB 350 1.0

Wholesale 550 3.5 9.0 5.5

Household Deposits 757 1.2 1.5 1.5

Corporate deposits 229 1.7 1.1 1.1Other deposits (FIs ) 1400 1.2 1.3 1.3

Marginal cost of real economy 3.3 3.9 3.5

Household real estate 646 2.5 3.3

Household consumer credit 65 9.3 8.5

Household other 128 4.5 6.0

Corporates 825 3.2 3.8

Memo i tems

Compensation per employee 4.2 1.5 1.0

Employment -6.0 -5.0 -5.0Consumption deflator -1.0 2.0 2.0

Compensation of employees (nominal) -1.8 -3.5 -4.0

Compensation of employees (real) -0.8 -5.5 -6.0

Real consumption -4.0 -2.5 -4.0

Real GDP -3.7 -1.3 -3.0

Nominal GDP -3.6 -1.0 -3.0

Cost of funding

of the real

economy

unlikely to gobelow sovereign

cost of funding


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0

500

1000

1500

2000

2500

3000

3500

4000

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Total Assets Banking Sector

Nominal GDP

20Source: ECB and Nomura Global Economics.

Banking sector deleveraging has a long way to go!

Eur bn

Annual changes in assets of Spanish banks

Eur, bnLoans Sov bonds Other assets Total assets

Dec-09 -59.3 61 35.7 37.4

Dec-10 -4.2 -7.7 36.1 24.2

Dec-11 -33.7 35 148.9 150.2

Nov-12 -64.8 54.2 -16.4 -27

But this might free up

space for sovereign

bond purchases by

banks


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21Source: ECB and Nomura Global Economics.

Decomposing the Spanish Target 2

Changes in Spanish Target 2 and balance of payment by sector , bn euros

-80

-60

-40

-20

0

20

40

60

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Other Sectors

General governmentFinancial Institutions

Target2 m/m


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External position improving as demand for imports has stalled

Source: Datastream, and Nomura Global Economics.

Spanish exports continue to do well but unclear if current account improvement is sustainable

22

Spanish exports and imports (Nominal, annualised Eur, bn) Import content of domestic production still high (shares as %)

130

180

230

280

330

380

Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

Imports

Exports

40

50

60

70

80

90

100

110

120

130

Mar-02 Sep-03 Mar-05 Sep-06 Mar-08 Sep-09 Mar-11 Sep-1

Intermediate & cap goods imports /Manuf & construction VA

Intermediate goods imports /

Manufacturing VA


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23

Spain bail out: Conditionality and limited resources are key limitations

1. Call for help to take place later than expected

2. Spain to request first ECCL but full bail out with strict conditionality needed

eventually

3. Combination of ECB and EFSF/ESM to support Spain initially

4. Weak economy, ongoing worries about banking sector & capital flight toquestion credibility of backstop

5. Debt trajectory to continue rising faster than expected

For as long as there is no evidence of sustainable economic recovery & real estate asset

price stabilisation, foreign investors will stay away from Spain


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24

Italy


26/60

Italian and Spanish bond markets have been highly correlated

Source: Bloomberg

Spanish and Italian bond yield spreads 2 year Spanish and Italian bond yield spreads 5 year

25

Back to post LTRO levels

0

1

2

3

4

5

6

7

8

Jan-10 Jan-11 Jan-12 Jan-13

Italy Spain

0

1

2

3

4

5

6

7

8

Jan-10 Jan-11 Jan-12 Jan-13

Italy Spain


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26Source: National Central Banks and Nomura Global Economics.

Sudden stop also happened in Italy

Target 2 imbalances

-500

-400

-300

-200

-100

0

100

200

Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12

Italy

Spain

bn


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Italy requires the largest additional monetary easing in the euro area



Average lending rates for households and companies higher than in Spain

27

Italys rate band suggested by Taylor rules Italy lending rate spreads (vs ECB policy rates)

-4

-2

0

2

4

6

8

1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

Band

ECB

%

0

1

2

3

4

5


HH spread

NFC spread

%


29/60

Reform implementation takes time

In vigour since 6 Dec-11

Source: Il Sole 24 Ore, 30 Dec 2012

Only 25% of the reforms approved by the parliament were fully effective by the end of 2012

In vigour since 24 Jan-12 In vigour since 10 Feb-12

In vigour since 18 Jul-2012 In vigour since 9 May-12 In vigour since 26 Jun-2012

47%

53%

0%

20%

40%

60%

80%

100%

Save Italy

Pending

Enacted

26%

74%

0%

20%

40%

60%

80%

100%

Grow Italy

Pending

Enacted

15%

85%

0%

20%

40%

60%

80%

100%

Simplification

Pending

Enacted

15%

85%

0%

20%

40%

60%

80%

100%

Labour Market

PendingEnacted

17%

83%

0%

20%

40%

60%

80%

100%

Spending Review

PendingEnacted

22%

78%

0%

20%

40%

60%

80%

100%

Development

PendingEnacted


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Fiscal space:

Broaden tax bases, in particular by cutting the number of tax expenditures

Incorporate a spending review process into the normal budget and expenditure

control systems

Operationalise the rules for a balanced budget and fiscal council in a timely and

appropriate manner

Enhance the privatisation programme to contain growth in debt if fiscal targets are

substantially overshot

Public sector:

Embed -including by the adoption of the Anticorruption Bill- integrity and

anticorruption tools within current structures of the Italian public administration by

clearly defining roles and responsibilities for implementation of integrity measures

among complementary functions

Financial system:

Strengthen banks capital bases in relation to assets by raising equity, or by

disposing noncore assets rather than restricting lending

Sever the adverse feedback from the sovereign to the banking sector by continuingboth fiscal consolidation and structural measures

Use, as planned, the bank failure resolution instruments available when required,

regardless of the size of the bank

Encourage banks to adopt a ring-fenced non-operating holding company structure to

strengthen the structural resilience of its banking system

Reforms in Italy: more needs to be done

Source: IMF, European Commission OECD

Additional suggested reform priorities

IMF / European Council : OECD:

29

Product markets:

Well-targeted and timely executed infrastructure projects in the area of main network

bottlenecks could further increase productivity in the economy

Labour Market:

Additional measure to strengthen the recent reform: more firm-level arrangements

that favour employment rather than wages and to bridge the gap between permanent

and temporary workers

Tax reform to lower the labour tax wedge and remove disincentives for labour

supply, especially for second earners

Fiscal space:

Growth friendly fiscal reform, prioritising public expenditure away from general

transfers toward more public spending towards targeted infrastructure

Public sector:

Liberalisations of the area where the central government is the major stake holder

(for example the gas sector)

Liberalisation and competition where the local government play major roles (public

services)

Regional differentiation and more flexibility in the public sector employment and

wages

Other reforms:

Improving the efficiency of the judicial system, streamline procedures for labour

disputes, strengthening contract enforcement


31/60

Impact of structural reforms on the Italian economy

Source: Nomura European Economics, IMF

Findings in the literature

30

Authors Result

Italian Government (2012)Key measures to improve competition, cut regulatory costs and improve public

administration efficiency taken up to the spring of 2012, could increase GDP growth by

around 0.3% per year until 2020.

OECD (2012)Related to the government estimate, including some further measures taken after the

NRP was published, might be slightly higher, 0.3-0.4% on the average growth

potential until 2020.

OECD (2009) Italys labourproductivity could increase by about 14 percent over 10 years if its

product market (especially professional services) regulation is aligned to international

best practice.

OECDProduct market reforms adopted in Italy over 200812 could potentially increase TFP

by 23 percent in 2020

Bouis and Duval (2011) and OECD (2012)Under an ambitious and broad reform agenda to close the gap with the best practice or

most liberal cases (labor market reforms), Italys GDP per capita could increase by

about 7 percent after 5 years and close to 15 percent after a decade.

Forni and others (2011)

Increasing competition in services sector in Italy could raise its real GDP by up to 11percent in the long run, half of which comes in the first three years.

IMF (2012)All product and labour market reforms have a positive impact in the medium term, and

together, could raise real GDP in Italy by 5.75 percent after 5 years and by 10.5

percent in the long run


32/60

Italian elections: mind the Senate

Source: Nomura European Economics

Lack of absolute majority in the Upper House is a tangible risk due to uncertainty over key regions

Plausible seats allocation in the Senate Number of elected Senators in Italy Total Senators including foreign and for life

1. IBC wins all regions 177 182

2. IBC wins all regions but Lombardia and

Veneto 155 160

3. IBC wins all regions but Lombardia, Veneto,

Campania and Sicily 138 143

Possible seats Monti could win 35 38

Seats of a possible Bersani & Monti alliance

under scenario 3 173 181

IBC is Italia.Bene Comune. Seats allocation assumes IBC gets majority premium in all the regions but in those indicated in each scenario as lost. Absolute majority in the Senate implies 160 seats.

For the latter regions the number of seats allocated to the coalition is given by poll published by il Sole 24 ore on 8 January and based on IPSOS poll results.

Numbers in green indicate absolute majority is achieved. Numbers in red indicate absolute majority not achieved. For regions where polls are not available we use our own assumptions based on

consensus of each party in the national polls.

The centre-left coalition led by Bersani is very likely to secure an absolute majority in the Lower House, but the lack of an absolute majority in the Upper House is

a tangible risk for the next national elections.

We continue to expect a centre-left coalition to lead the next parliament. Should it fail to achieve an absolute majority in the Upper House we expect a broad

Bersani and Monti coalition to be forged rather than new elections. This is likely to be viewed positively by the market.

The risk of ungovernability remains but at this stage, Italian politics in our scenarios is unlikely on their own to trigger a broad and severe return of stress in theregion.


33/60

32

France


34/60

.Source: Datastream and Nomura Global Economics.

France's worrying labour market situation (i)

Unemp. rate in Germany and France (%, Eurostat definition) French unemployed, millions

33

1.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-1

Job seekers bene fits

Total unemployment benefits

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5

11.5

12.5

Mar-83 Mar-87 Mar-91 Mar-95 Mar-99 Mar-03 Mar-07 Mar-11

Germany

France

F ' i l b k t it ti (ii)


35/60


France's worrying labour market situation (ii)

Days needed to find a job, average for total unemployed

Days needed to find a job, unemployed who have lost their

job for economic reasons

34

200

250

300

350

400

450

200

250

300

350

400

450

500

550

600

C dit diti fi l i d i ifi tl


36/60


Credit conditions confirm economy slowing down significantly

Loan growth to Households and Corporates Corporate treasurers survey on operating cash position

35

-5

0

5

10

15

20

Jan-04 Jul-05 Jan-07 Jul-08 Jan-10 Jul-11

Household

NFC

% y-o-y

-30

-25

-20

-15

-10

-5

0

5

10

15

20

Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

Operating cash (sa)

Operating cash (trend)

Balance

Shift from foreign to domestic holdings has not led to market turmoil


37/60

.Source: Datastream, BIS, AFT , BIS and Nomura Global Economics.

Note: French banks holdings of French bonds is sourced from EBA and might not be completely consistent with BIS methodology

Shift from foreign to domestic holdings has not led to market turmoil

Foreign ownership of French sovereign bonds Banks holdings of French sovereign bonds

36

54

56

58

60

62

64

66

68

70

72

Mar-08

Jul-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jul-10

Nov-10

Mar-11

Jul-11

Nov-11

Mar-12

0

20

40

60

80

100

120

140

Q4-11 Q2-12

French banks UK banks

Other EU Japanese banks

Other foreign banks German banks

French and Japanese banks have been the largest buyers in 2012


38/60

.

Source: EBA, Datastream , MOF and Nomura Global Economics.

French and Japanese banks have been the largest buyers in 2012

Japanese buying and selling of sovereign bonds

Eur bns

37

French banks' exposure to sovereigns

Exposure to France

Dec-11 Jun-12 Dec-11 Jun-12

BNP 16.4 16.6 10.9 6.6

Credit Ag. 23 32 20 28

BPCE 36 44 28.9 32

Soc Gen 17.7 21.7 13.4 16.6Big 4 93.1 114.3 73.2 83.2

Total exposure

Dec-11 Jun-12 Dec-11 Jun-12

BNP 92.7 90.2 69.5 61.1

Credit Ag. 38 55.6 30 37.6

BPCE 54.6 71.8 34.5 42.6Soc Gen 49 52.6 28.7 31.6

Big 4 234.3 270.2 162.7 172.9

Gross Net

Gross Net

-20

-15

-10

-5

0

5

10

15

Q1-11 Q4-11 Q3-12

Germany

FranceOct/Nov

France


39/60

France



Frances rate band suggested by Taylor rules France lending rate spreads (vs ECB policy rates)

-3

-2

-1

0

1

2

3

4

5

6

7

1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

Band

ECB

%

0

1

2

3

4

5


HH spread

NFC spread

%


40/60

39

Netherlands

Netherlands: Consumer facing increasingly significant headwinds


41/60

Source: Nomura Euroepan Economics, European Commission, National Statistics Institute

Uncertainty about future tax take, housing and labour market dampen current spending

Consumer confidence (Last obs: Dec 12) Business confidence in the construction sector (Last obs : Dec 12)

40

-40

-30

-20

-10

0

10

20

30

40

Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

-60

-50

-40

-30

-20

-10

0

10

20

30

40

Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-1

Netherlands: Housing Price and Demand Conditions


42/60

Netherlands: Housing Price and Demand Conditions

Source: Nomura Euroepan Economics, European Commission, National Statistics Institute

Uncertainty about the economy and future effect of policy changes discourages buyers

House prices fell 16% from peak, transactions more than 50% Intention to purchase a home over the next 12 months at historic low

41

40

50

60

70

80

90

100

110

120

23000

28000

33000

38000

43000

48000

53000

58000

Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

Number of sold dwellings

Price index purchase prices (rhs)

-93

-88

-83

-78

-73

-68

-13

-8

-3

2

7

12

17

22

Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

House price inflation, % y/y

Intention to buy a house over the next 12 months (rhs)

Netherlands: Price decline hitting young segment of the population


43/60

Netherlands: Price decline hitting young segment of the population

Source: DnB

Liquid household assets below outstanding mortgages

Young population in negative home equity Household deposits by age, main income earner (2011, Eurbn)

42

0

20

40

60

80

100

120

140

up to 25 yrs between 25 and

45 yrs

between 45 and

65 yrs

Over 65yrs

Netherlands


44/60

et e a ds


Note: HH stands for houshold and NFC stands for non financial corporations.43

Dutch rate band suggested by Taylor rules Dutch lending rate spreads (vs ECB policy rates)

-4

-2

0

2

4

6

8

10

1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 1Q13

Band

ECB

%

0

1

2

3

4

Jan-03 Jun-04 Nov-05 A r-07 Se -08 Feb-10 Jul-11

HH spread

NFC spread

%


45/60

44

Medium term challenges

The North / South divide in the euro area is getting wider

Core / Periphery divide (i)


46/60

Note: Core includes Germany, France, Austria, Finland, Luxembourg, Netherlands and Belgium. Periphery includes Spain, Italy, Portugal, Greece and Ireland.

Source: Datastream and Nomura Global Economics.

p y ( )

Unemployment rate Unemployment levels

45

0

2

4

6

8

10

1214

16

18

20

Jan-93 Mar-96 May-99 Jul-02 Sep-05 Nov-08 Jan-12

Core Periphery

%

0

2

4

6

8

10

12

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

Core Periphery

Millions

Core / Periphery divide (ii)


47/60

Note: Periphery includes Spain, Italy, Portugal, Greece, Ireland.

Source: Eurostat and Nomura Global Economics.

Social expenditures in the periphery, % of GDP Social expenditures in the periphery, level

46

12

13

14

15

16

17

18

19


% of GDP

300

350

400

450

500

550

600


bn

Core / Periphery divide (iii)


48/60

Note: Core includes Germany, France, Austria, Finland, Luxembourg, Netherlands, Belgium. Periphery includes Spain, Italy, Portugal, Greece, Ireland, Slovakia, Slovenia, Cyprus, Estonia, Malta.

Source: Datastream, Eurostat and Nomura Global Economics.

Manufacturing production GDP

47

80

85

90

95

100

105

110

115

120

Jan-05 Jul-06 Jan-08 Jul-09 Jan-11

Core Periphery

Index (Jan 05=100)

98

100

102

104

106

108

110

112

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12

Core Periphery

Index (1Q05 = 100)

Core / Periphery divide (iv)


49/60

Note: Core includes Germany, France, Austria, Finland, Luxembourg, Netherlands, Belgium. Periphery includes Spain, Italy, Portugal, Greece, Ireland, Slovakia, Slovenia, Estonia, Malta.

Source: Datastream and Nomura Global Economics.

M3 M1

48

-4

-2

0

2

4

6

8

10

12

14

Oct-02 Oct-04 Oct-06 Oct-08 Oct-10

Core Periphery

% y-o-y

-10

-5

0

5

10

15

20

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Core Periphery

% y-o-y

Core / Periphery divide (v)


50/60

49Note: Core includes Germany, France, Finland, Luxembourg, Netherlands, Belgium. Periphery includes Spain, Italy, Portugal, Greece, Ireland, Slovenia, Malta.

Source: National Central Banks and Nomura Global Economics.

Target 2 imbalances

-1,500

-1,000

-500

0

500

1,000

1,500

Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

Core Periphery

bn

Key medium term challenges


51/60

50

1. Banking union to fast forward debate on fiscal & political union

2. Non euro area members to face immediate challenge on banking union

3. Lack of deposit guarantee schemes & of resolution mechanisms key limits to

banking union

4. Further integration on banking, fiscal and political fronts to require consultation with

population in next two years

5. Lack of growth strategy risks turning population against the euro

6. Exchange rate risk premium cannot be eradicated, a major systemic weakness

High unemployment in structurally challenged economiesmain risk to stability of the Union

Are you in favour or against EMU and the euro: Core


52/60

Germany Finland

51

Austria Netherlands

Source: European Commission.

40%

50%

69% 72%71% 69%

45%

36%

39%

27% 24%

26%

26%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Nov-97 May-99 Nov-00 May-02 Nov-03 May-05 Nov-06 May-08 Nov-09 May-11 Nov-12

For Against

33%

49%

79%83%

76%

62%

46%

20%15%

19%22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


For Against

44% 48%

74% 73%

67%

66%

66%

43% 38%

20%

23%

27%

28%

0%

10%

20%

30%

40%

50%

60%

70%

80%


For Against

57%

66%

62%

83%

71%

75

37% 30%

39%

15% 25%22%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Nov-97 May-99 Nov-00 May-02 Nov-03 May-05 Nov-06 May-08 Nov-09 May-11 Nov-

For Against

Are you in favour or against EMU and the euro: Semi Core


53/60

78%82%

62%58%

64%

57%

11% 12%

28%31%

24%

31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov-97 May-99 Nov-00 May-02 Nov-03 May-05 Nov-06 May-08 No v-09 May-11 Nov-12

For Against

61%

75%78%

69%

58%

68%

55%

63%

23%

13%

19%

32%

21%

30%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


For Against

France Spain

52

Italy Belgium


58%

63%

78%

72%

63%

69%

36%

30%

19%

25%

31%27%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


For Against

57%

75%

89%85%

78%69

32%

18%10%

15%

15%

29%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Nov-97 May-99 Nov-00 May-02 Nov-03 May-05 Nov-06 May-08 Nov-09 May-11 Nov-

For Against

Are you in favour or against EMU and the euro: Periphery


54/60

Portugal Greece

53

Ireland Cyprus


45%

59%

69%

57%61%

55%

29%

30%

25%

32%

25%

37%

0%

10%

20%

30%

40%

50%

60%

70%

80%


For Against

75%

78%

47%

63%

75%

65%

27%

17%

16%

52%

36%

21%

31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


For Against

67%

78%75%

83%87% 86%

67%

18%

12%14%

8% 8%

23%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


For Against

59%

43%

59%

67%

57%

35%

48%

37%

31%

40%

48

0%

10%

20%

30%

40%

50%

60%

70%

80%

Oct-04 Oct- 05 Oct-06 Oct- 07 Oct-08 Oct- 09 Oct-10 Oct- 11 Oct-12

For Against

Are you in favour or against EMU and the euro: Non euro countries


55/60

UK Denmark

54

Sweden Latvia


29%

36%

23% 24%28%

14%

59%

48%

65%67%

65%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%


For Against

32%

56%

50%53%

42%29%

30

62%

56%

36%

45%

69%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%


For Against

34%

29%

50%

44%

34%

23%

56%

62%

40%

53%

62%

76%

0%

10%

20%

30%

40%

50%

60%

70%

80%


For Against

59%

46%

54%

47%

55%

35%

31%

43%

36%

44%

36%

56%

0%

10%

20%

30%

40%

50%

60%

70%

Oct-04 Apr-06 Oct-07 Apr-09 Oct-10 Apr-12

For Against


56/60

55

Appendix

Euro area forecast


57/60

Source: Nomura Global Economics

Growth outlook significantly weak in peripheral countries

56

Real GDP Consumer Prices Policy Rate(% y-o-y) (% y-o-y) (% end of period)

2012 2013 2014 2012 2013 2014 2012 2013 2014

Euro area -0.5 -0.8 0.0 2.5 1.8 1.5 0.75 0.50 0.50

Austria 0.8 0.2 0.8 2.6 2.3 2.0 0.75 0.50 0.50

France 0.1 -0.5 0.5 2.2 1.4 1.7 0.75 0.50 0.50

Germany 0.9 0.2 0.7 2.1 1.7 1.4 0.75 0.50 0.50

Greece -6.1 -4.4 -1.8 1.0 0.3 0.0 0.75 0.50 0.50

Ireland 0.4 0.5 1.3 1.9 0.3 0.6 0.75 0.50 0.50

Italy -2.1 -2.5 -1.5 3.3 2.0 1.4 0.75 0.50 0.50

Netherlands -0.8 -0.5 0.1 2.8 2.7 2.1 0.75 0.50 0.50

Portugal -3.0 -2.8 -0.1 2.8 1.2 0.5 0.75 0.50 0.50

Spain -1.4 -3.0 -1.5 2.4 2.1 1.1 0.75 0.50 0.50

DISCLOSURE APPENDIX A1


58/60

ANALYST CERTIFICATIONSWe, Jacques Cailloux and Nick Matthews, hereby certify (1) that the views expressed in this report accurately reflect my personal views about any or all of the subje ct securities or issuers referred to

in this report, (2) no part of my compensation was, is or will be directly or indirectly related to the specifi c recommendations or views expressed in this report and (3) no part of our compensation is

tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

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Research are detailed in the disclaimer below.

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Republic of Italy A10,A13

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Ekonomika Evropa 2013 (Dokument v AJ)

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