Euro Greek Exit (UBS)

UBS Investment Research

European Weekly Economic Focus

Greek exit: the cost for Europe In a publication last year (Euro break up – the consequences, 6 September, 2011), we looked at the cost of exit from the euro zone for a country. We concluded thatthe cost for Greece would be considerable and that the legal challenges wereoverwhelming.

Central scenario: Greece stays in the euro; debt restructuring In this article, we address another question: what would be the cost of a Greek exit for Europe? In our central scenario (ie Greece staying in the euro), the cost wouldessentially be another debt restructuring, which we regard as close to unavoidable.We estimate its cost for European tax payer to be c€60Bn.

‘Exit scenario’: Could cost taxpayers nearly four times more In case of an exit, the capacity of Greece to repay would be badly impaired andTarget 2 imbalances would have to be added to the bill. We estimate that wouldcost European taxpayers almost four times more, at €225Bn.

Risk of second-round effects elsewhere in Europe in ‘exit scenario’

However, the above numbers only take into account the Greek debt writedowns. Inour view, the biggest risk is elsewhere: second-round effects and especially the potential for bank runs elsewhere in Europe. These could be considerably morepainful for European taxpayers. This note discusses the scenarios outlined aboveand the measures which could be taken to address the potential outcomes.

Global Economics Research

Europe Including UK

London

18 May 2012

www.ubs.com/economics

Stephane Deo

[email protected]

+44-20-7568 8924

Martin LueckEconomist

[email protected]+49-69-1369 8280

Amit KaraEconomist


Reto HuenerwadelEconomist


Matteo CominettaEconomist


Jennifer MillerAssociate Economist


This report has been prepared by UBS Limited ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 15.

ab

mailto:[email protected]






European Weekly Economic Focus 18 May 2012

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Greek exit: The cost for Europe In a recent publication (Euro break up – the Consequences, 6 September, 2011), we looked at the cost of exit from the euro zone for a country. We concluded that the cost for Greece was considerable and that the legal challenges were overwhelming. In this article, we address another question: what would be the cost of a Greek cost for Europe? In our central scenario, (ie Greece staying in the euro area), the cost would essentially be another debt restructuring, which we regard as close to unavoidable. We estimate the cost for the European taxpayer at c€60Bn. In case of an exit, the capacity of Greece to repay would be badly impaired and Target 2 imbalances would have to be added to the bill. We estimate that would cost European taxpayers almost four times more, at €225Bn. Part of that would be ECB losses which would consume all the capital of the bank (the ECB) and the national central banks would need to be recapitalised. However, the above numbers only take into account the Greek debt writedowns. In our view, the biggest risk is elsewhere: second-round effects and especially the potential for bank runs elsewhere in Europe. These could be considerably more painful for European taxpayers.

Table 1: Cost for euro area of Greek debt restructuring

With a 1/3 hair cut With a 1/2 hair cut

If Greece stays in the Euro Eur Bn 60.63 90.95

% of Euro GDP 0.5% 0.7%

If Greece leaves the Euro Eur Bn 225.27 240.43

% of Euro GDP 1.8% 1.9%

Source: UBS estimates

We published a piece before the Greek election to voice our concern on the situation (see “Greece, be worried, be very worried” 2 May 2012). The result of the election is clearly worse than expected, so that an exit from the euro zone can no longer be ruled out. We still believe that an exit is not the central case scenario, as it would be extremely expensive for Greece, but also because it is not in the interests of Europe to force an exit. If there is such a thing as rationale behaviour, the outcome should thus be that Greece stays in. On the cost of Greece leaving, we published several pieces last year (see Euro breakup – the consequences, 6 September 2011 and Valuing insanity, 12 September 2011). In our opinion, the arguments we put forward are still valid and the number we produced is still applicable. In the following, we look at the other side of the argument: what it would cost Europe to keep Greece in, and what it would cost if Greece leaves.

The central case: Greece stays, but needs a debt restructuring. Our view is that the current debt dynamic in Greece is not sustainable. We have written about this issue in the past and anecdotal evidence suggests that this view is widely shared. The question, however, is how much debt restructuring is needed to put back Greece on a sound path. It is difficult to answer this question for at least two reasons. The first reason is that the debt sustainability

Debt restructuring unavoidable


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simulations rest on a number of hypotheses which include the future growth path, the ability of the government to privatise, the level of interest rate charged, etc… The second reason is more political in nature: there is no clear theoretical guidance on what is a sustainable debt level, for each level of debt it is possible to find a primary surplus that would stabilise the trajectory. The question is then “what primary surplus is acceptable over the medium term by a country”. This is essentially a political question.

The point of this paper is not to analyse the debt dynamic of Greece. We thus propose two “reasonable” scenarios, one with a haircut of one-third of the existing debt, a second with a half haircut.

How much would that one third or a half haircut cost the European taxpayer? The following chart shows a breakdown of current Greek debt. It becomes clear that a further restructuring of the debt would inevitably involve the public sector. On our numbers, indeed, the private sector accounts for only about one quarter of the Greek debt and any restructuring would be insufficient if it involves only the private sector. We think the next step is a Paris Club solution. In our view, the question is “when?” not “if?”.

Chart 1: Greek debt, who owns what?

Priv ate sector, 70.5, 26%

Bilateral loans, 52.9, 19%

ECB, 55.0, 20%

IMF, 21.7, 8%

Q1 2012 disbursement,

74.0, 27%

Source: UBS, IMF, EC, Bloomberg

Here again, this adds a layer of complexity to our estimate of losses for European taxpayers. Indeed, even if one assumes with us that a one-third haircut is needed, the restructuring does not need to apply the same haircut to all participants. Private debt could be more affected, but we believe that the IMF would argue that it is senior and cannot be restructured. On that basis, the European loans would thus enjoy an intermediary status. It is thus not irrational to expect the haircut applied to European loans to be more or less in line with the average.

The math is simple. Europeans have lent in various forms to Greece: via bilateral loans, and via EFSF more recently but also via the ECB’s SMP. The total exposure is currently €181.9Bn. A one-third haircut on this debt would thus mean a €60.6Bn loss of the European taxpayer, or 0.5% of Euro Area GDP. A 50% haircut on this debt would thus mean a €91.0Bn loss for the European taxpayer, or 0.7% of Euro Area GDP.

1/3 or 1/2 haircut

Paris club

€60.6Bn loss


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In case they leave: the cost is more than tripled In a scenario where Greece leaves the Euro Area, one would need to make an assumption concerning the depreciation of the currency. We assume that the newly introduced drachma could lose half of its value when introduced. This could seem like a large number, but it is consistent with past experience and we would look on it as conservative. In the case of Argentina for example, the peso went from 1 versus USD to 3 in a short period of time. (For more information on this subject, please see “Euro Break-up: The consequences” dated 6 September 2011)

Greek public debt is denominated in euros, so the euro face value of the debt would not change if Greece leaves. But the 50% depreciation of the currency means that Greek GDP in euro would be halved too. As a consequence, the debt to GDP ratio would double. This means that, in order to reduce the ratio by one third, our original target to make the trajectory “sustainable”, the haircut needed is now two-thirds. This simply doubles the loss for foreign investors. In the case of a ½ haircut, it would have to become a 3/4 haircut.

Hence the estimated cost for the European taxpayer of a one-third haircut is no longer €60.6Bn, but potentially €121.3Bn. The cost for the European taxpayer in case of a 50% haircut is no longer €91.0Bn, but €136.4Bn.

This approach obviously does not take into account the GDP disturbances that would likely follow an exit. It can be argued that the reduction of the debt would not be enough after an exit as the GDP trajectory could become significantly worse. We leave this debate aside in order to limit complications, but we need to keep in mind that the situation could be worse than the simple approach we propose.

The story, however, does not end there. If Greece leaves, €104Bn of debt will appear. Where from? Target 2 imbalances. As long as Greece stays in the Euro Zone, the Target 2 imbalances are a mere accounting line which, when aggregated at the Eurosystem level, cancels out. If Greece leaves, this becomes a genuine liability that has to be repaid. In our view we have to assume that the recovery rate would be zero on Target 2, either because it will not be repaid, or because if it is repaid in part, it would be in hard currencies that would not be available for public debt repayment.

We thus need to add €104Bn to the number above mentioned, the total cost for the European taxpayer of a Greek exit would then be €225.3Bn in the case of a one-third haircut (1.8% of the Euro Area GDP), €240.4Bn in the case of a 50% haircut (1.9% of the Euro Area GDP).

A 50% depreciation

Double the cost

Add €104Bn for Target 2

€225.3Bn loss


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Chart 2: Cost of a debt hair cut with no Greek exit Chart 3: Cost with exit of Greece, depending on depreciation

60.691.0

0

50

100

150

200

250

300

Cost of a 1/3 haircut Cost of a 1/2 haircut

Eur Bn

225.3

240.4

0

50

100

150

200

250

300

0 20 40 60 80 100

Depreciation of the Drachma

Loss

for E

urop

eans

Cost of a 1/3 haircut Cost of a 1/2 haircut

Eur Bn

Source: UBS estimates Source: UBS estimates

In the above chart, we provide more simulations depending on the extent of drachma depreciation. The number consistent with the 50% depreciation are shown; the chart goes from a theoretical 0% (Greece leaves the Euro Area, but the drachma remains at parity versus the euro) to an equally theoretical 100% (the drachma is worth zero, hence Greece is unable to repay any debt).

As an aside, but an important one, the losses for the ECB would come from the €55Bn SMP portfolio, but also from the €104Bn Target 2 imbalances. Assuming that Greece is able to repay only one-third or even less of its debt after exiting, this would easily eat up all the capital of the Eurosystem, which currently stands at €83Bn. On that basis, we believe the ECB and national central banks would have to be recapitalised.

And more? Bank run? The above approach looks at the accounting argument of an exit. We showed that it is considerably more expensive for Europeans if Greece exits rather than stays in. However, the above arguments miss what we would regard as the main risk: indirect spillover effects to other countries. The mechanism that worries us the most would be the likelihood of bank runs in the periphery. If Greece indeed leaves and the drachma loses half of its value, or more, it would become obvious to depositors in other parts of Europe that their deposits are at risk and we may thus see a bank run as a possible scenario. The two IMF countries, Portugal and Ireland, appear to be the most at risk. In this scenario Spain would also be a possible candidate, in our view, and Italy could also come under pressure. But bank runs are difficult to predict and although we believe the risk is high, it is not certain; depositors might regard Greece as a special case.

The following chart compares the size of the issue: the outstanding Greek debt held by European authorities, the deposits in the banking sector of different countries and the total size of the balance sheet. It shows that an exit by Greece could make the problem considerably bigger if the banking sector was indeed to be dragged into the crisis and if deposits are to be protected.

Bank run?

Considerably bigger


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Chart 4: Greek debt and bank balance sheets, potential size of a bank run vs a Greek default

2392 2270

3728 4159

182 5253501250

583

0500

10001500200025003000350040004500

Gree

kde

bt

Portu

gal

Irelan

d

Spain Ita

ly

Portu

gal

Irelan

d

Spain Ita

ly

Deposits Banks balance sheet

Bn Eur

Source: UBS, ECB

How should a bank run be tackled? We think the immediate answer would be liquidity provision by the ECB. This would technically save the banks. Some adjustment in terms of collateral eligible would certainly be needed, but banks which are victims of the bank run would find the funding they may need at the ECB. This would provide support but it would not solve the problem as a number of banks would need to fund a quarter or more of their balance sheet at the ECB. Although the banks would survive, there would be an obvious impact on the availability of bank credit throughout the economy.

A better solution in our view would be to provide a credible guarantee for deposits. A country cannot provide this kind of guarantee on a credible basis: the size of the deposits is too large for a government to back them. It seems to us that the only option would thus be a European guarantee for deposits. This would probably work and reassure depositors. But this also means taxpayers in one country (for example, Germany or Holland) would be backing bank depositors in another (such as, for example, Portugal or Spain). The idea of a European guarantee scheme was debated by the EC last year, but was not implemented for the above-mentioned moral hazard issues. If the solution is technically feasible, we believe it would be an enormous step towards European integration and risk sharing. We are not sure that such a mechanism could be put in place in the short period of time during which bank runs happen. It would have to be put in place pre-emptively. If that was the case, it would presumably apply to all European countries - hence to Greece. This would be yet another incentive for Greece to stay in as they would not be covered by the guarantee if they exit.

Here is the issue, however: imagine you believe that the Euro Zone will break up. The European guarantee would be, by definition, void if a country exits the Euro Area, but that is precisely when you need that guarantee. So you have a guarantee that can be used only when it is of no value. It disappears as soon as you need it. It is a car insurance that becomes void in case of accident; it is thus by no way sure that even a European guarantee would stop a bank run.

ECB to the rescue

A European guaranty?

Like a car insurance that becomes void in case of accident


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Finally, note that capital control is forbidden in Europe. This European rule was introduced even before the Maastricht treaty, as it was a prerequisite for a common currency. So Greece or any other country cannot rely on that measure. In the case of an exit, the measure would almost certainly be introduced, however. Exit from the euro zone implies exit from the EU and therefore could abrogate the free movement of other factors of production, such as the mobility of labour and capital.

Deposit freeze is also a dangerous route, in our view. A full freeze is obviously not workable, as it would mean people have no money to spend. Limit to deposit withdrawals usually acts as a signal that the authorities are trying to stop a bank run, which is a powerful signal to depositors that they need to take their money out. This becomes very counterproductive, as the Argentinean experienced showed.

Capital control, illegal

Deposit freeze, bad idea


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What and why? The sovereign crisis Main message - Systemic risks reduced considerably as Greece is ring-fenced and banks have LTRO cash. Main risk is Spain. Greece: - We are worried about what will happen post elections. We see the risk of a clash between IMF/EC and the new Greek government (see Greece: be worried, be very worried, 2 May). Portugal: - Bailout plan likely to need extension. - We have little doubt that there is political willingness in Europe to extend support to Portugal; at worst, negotiation of the bailout #2 could entail some short-term volatility in the market. - A Portuguese PSI this year or next is highly unlikely. Italy: - Ticking all the right boxes: (1) delivery on deficit reduction, (2) structural reforms, (3) privatisations soon to come. - We think Italian spreads will converge further towards Germany. Next rating move could be up, but not soon. Spain: - Three risks: (1) the 2012 budget is encouraging, but delivery is now key; (2) deep recession; (3) banking problem a big unresolved issue. - Spain is, for us, the key risk in Europe. France: - Elections won’t change much. - Posturing between presidential election (6 May) and parliamentary elections (10 and 17 June) could hurt the market.

Forecast - We still expect GDP growth in 2012 for the euro zone at -0.4%: still bad, and still a recession, but a mild one. - Country dispersion to remain large: Germany at +1%, Spain at -1.6%.

ECB - Wait and see for the time being. LTRO had a big impact on markets, but impact on the real economy is still unclear. - If our forecasts for next year materialise (growth at c1% and inflation close to 2%), talks are likely to emerge about rate hikes. Rate cuts are out of the question unless there is a re-escalation of the crisis.

Markets - Bear market for Bunds. Fundamental models suggest Bund yields are too low. If extraordinary factors such as liquidity provision, flight to quality, wane, then Bunds should converge back closer to fundamental value.

- De-correlation between assets. Last was risk-on/risk-off as market was pricing in and out systemic risks. If systemic risks are less important, assets prices should be driven more by fundamentals rather than a large swing in risk aversion. This means de-correlation.


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Central bank watch European central banks’ monetary policy decision announcement schedule

ECB Bank of England Swedish Riksbank Norwegian Norges Bank Swiss National Bank Bank of Israel 2011 9 Jun (Unchanged) 9 Jun (Unchanged) 22 Jun (Unchanged) 16 Jun (Unchanged) 27 Jun (Unchanged) 7 Jul (25bp hike) 7 Jul (Unchanged) 5 Jul (25bp hike) 25 Jul (Unchanged) 4 Aug (Fcst: Unchanged) 4 Aug (Unchanged) 10 Aug (Unchanged) 29 Aug (Unchanged) 8 Sep (Unchanged) 8 Sep (Unchanged) 7 Sep (Unchanged) 21 Sep (Unchanged) 15 Sep (Unchanged) 26 Sep (25bp cut) 6 Oct (Unchanged) 6 Oct (Unchanged) 27 Oct (Unchanged) 19 Oct (Unchanged) 24 Oct (Unchanged) 3 Nov (25bp cut) 10 Nov (Unchanged) 28 Nov (25bp cut) 8 Dec (25bp cut) 8 Dec (Unchanged) 20 Dec (25bp cut) 14 Dec (50bp cut) 15 Dec (Unchanged) 26 Dec (Unchanged) 2012 12 Jan (Unchanged) 12 Jan (Unchanged) 23 Jan (25bp cut) 9 Feb (Unchanged) 9 Feb (Unchanged) 16 Feb (25bp cut) 27 Feb (Unchanged) 8 Mar (Unchanged) 8 Mar (Unchanged) 14 Mar (25bp cut) 15 Mar (Unchanged) 26 Mar (Unchanged) 4 Apr (Unchanged) 5 Apr (Unchanged) 18 Apr (Unchanged) 23 Apr (Unchanged) 3 May (Unchanged) 10 May (Unchanged) 10 May (Unchanged) 28 May (Fcst: No change)

Source: ECB, BoE, Riksbank, Norges Bank, SNB, BoI Note: The brackets show the outcome for that meeting.

UBS European and US rate forecasts

Current Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13

Euro Area ECB refi rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 UK MPC repo rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Sweden Riksbank repo rate 1.50 1.50 1.50 1.50 1.50 1.75 2.00 2.25 Norway Norges Bank deposit rate 1.50 1.50 1.50 1.50 1.75 2.00 2.25 2.25 Switzerland 3M Libor target rate 0.11 0.00 0.00 0.00 0.00 0.00 0.00 0.00 US Fed funds rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25 0.50 0.75 Israel Discount rate 2.50 2.50 2.50 2.50 2.50 2.50 3.00 3.50 Euro Area 10 years 1.51 2.20 2.30 2.40 2.50 2.60 2.70 2.80 UK 10 years 1.96 2.50 2.60 2.65 2.75 2.85 3.00 3.15 Sweden 10 years 1.51 2.40 2.30 2.20 2.50 2.65 2.80 2.95 Norway 10 years 2.00 2.95 3.00 3.10 3.25 3.35 3.40 3.50 Switzerland 10 years 0.64 1.25 1.25 1.25 1.50 1.60 1.70 1.75 US 10 years 1.84 2.40 2.60 2.70 2.85 3.00 3.15 3.30

Source: Bloomberg, UBS estimates

UBS FX forecasts

Current End-2012E End 2013E

EUR/USD 1.27 1.15 1.10EUR/JPY 102.27 98.0 99.0 EUR/GBP 0.80 0.80 0.75 EUR/SEK 9.09 8.70 8.90 EUR/NOK 7.57 7.30 7.10 EUR/CHF 1.20 1.20 1.20 USD/ILS 3.82 3.80 3.75

Source: Bloomberg, UBS estimates


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Data and events calendar Date Time Country Indicator Units Forecast Prior Consensus Importance

18-May-12 G-8 Summit, Camp David (Data Due: 18-19 May) **

20-May-12 23:01 UK Rightmove House Prices (May) m-o-m 0.0% 2.9% ** 23:01 UK Rightmove House Prices (May) y-o-y 2.0% 3.4% ** Israel Inflation Forecast (May) % 2.5%

21-May-12 05:45 Switzerland Consumer Confidence Index (Q2) -17.0 -19.0 ** 07:00 Switzerland SNB issues statistical monthly bulletin 07:00 Switzerland Money Supply M0 (Apr) y-o-y 201.6% 193.6% ** 07:00 Switzerland Money Supply M3 (Apr) y-o-y 6.0% 6.6% * 07:00 Switzerland Publication of monthly SNB banking statistics * 07:30 Netherlands House Price Index (Apr) m-o-m -1.0% -1.2% 07:30 Netherlands House Price Index (Apr) y-o-y -4.7% 09:00 Euro Zone Construction Output wda (Mar) y-o-y -12.9% 09:00 Italy Current Account (Mar) EUR mn -5138

22-May-12 07:30 Netherlands Consumer Confidence (sa) (May) -32.0 -32.0 08:00 Norway GDP sa (Q1) q-o-q 0.3% 0.5% ** 08:00 Norway GDP Mainland Norway sa (Q1) q-o-q 0.4% 0.6% *** 08:30 UK DCLG UK House Prices (Mar) y-o-y 0.3% 08:30 UK Public Finances (PSNCR) (Apr) GBP bn 16.5 ** 08:30 UK PSNB ex Interventions (Apr) GBP bn -23.0 18.2 ** 08:30 UK Public Sector Net Borrowing (Apr) GBP bn 18.6 15.9 ** 08:30 UK CPI (Apr) m-o-m 0.6% 0.3% ** 08:30 UK CPI (Apr) y-o-y 3.0% 3.5% ** 08:30 UK Core CPI (Apr) y-o-y 2.5% ** 08:30 UK Retail Price Index (Apr) 240.8 08:30 UK RPI (Apr) m-o-m 0.6% 0.4% ** 08:30 UK RPI (Apr) y-o-y 3.3% 3.6% ** 08:30 UK RPI Ex Mortgage InterestPayments (Apr) y-o-y 3.7% 09:00 Euro Zone OECD Economic Outlook 14:00 Euro Zone Consumer Confidence (Provisional) (May) -20.1 -19.9

23-May-12 07:30 Netherlands Consumer Spending (Mar) y-o-y -1.0% -1.3% 07:30 Sweden Unemployment Rate (Apr) % 7.7% 7.7% 08:00 Euro Zone Current Account nsa (Mar) EUR bn -5.9 08:00 Euro Zone Current Account sa (Mar) EUR bn -1.3 08:00 Italy Consumer Confidence Industrial sa (May) 89.0 08:30 UK Bank of England Minutes - Rates 9-0 *** 08:30 UK Bank of England Minutes - QE 7-2 *** 08:30 UK Retail sales Ex Auto Fuel (Apr) m-o-m -1.3% 1.5% ** 08:30 UK Retail sales Ex Auto Fuel (Apr) y-o-y -0.1% 2.8% ** 08:30 UK Retail sales w/Auto Fuel (Apr) m-o-m -1.5% 1.8% ** 08:30 UK Retail sales w/Auto Fuel (Apr) y-o-y 0.2% 3.3% ** 10:00 UK CBI Trends Total Orders (May) -8.0 10:00 UK CBI Trends Selling Prices (May) 7.0

24-May-12 06:00 Germany GDP nsa (Final) (Q1) y-o-y 1.7% * 06:00 Germany GDP sa (Q1) q-o-q 0.5% -0.2% * 06:00 Germany GDP wda (Q1) y-o-y 06:00 Switzerland Trade balance (Apr) CHF mn 1688 ** 06:00 Switzerland Real Exports (Apr) y-o-y -3.4% * 06:00 Switzerland Real Imports (Apr) y-o-y -6.0% * 06:45 France Own-Company Production Outlook (May) -4.0


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Date Time Country Indicator Units Forecast Prior Consensus Importance 06:45 France Production Outlook Indicator (May) -14.0 06:45 France Business Confidence Indicator (May) 95.0 95.0 07:00 France PMI Manufacturing (Provisional) (May) 47.4 46.9 *** 07:00 France PMI Services (Provisional) (May) 44.4 45.2 *** 07:00 Spain Mortgages-capital loaned (Mar) y-o-y -49.6% 07:00 Spain Mortgages on Houses (Mar) y-o-y -47.1% 07:30 Germany PMI Manufacturing (Provisional) (May) 46.8 46.2 *** 07:30 Germany PMI Services (Provisional) (May) 50.9 52.2 *** 07:30 Netherlands Unemployment Rate (sa) (Apr) % 5.9% 5.9% 08:00 Euro Zone PMI Composite (Provisional) (May) 46.9 46.7 *** 08:00 Euro Zone PMI Manufacturing (Provisional) (May) 46.5 45.9 *** 08:00 Euro Zone PMI Services (Provisional) (May) 45.6 46.9 *** 08:00 Germany IFO - Business Climate (May) 109.9 109.9 *** 08:00 Germany IFO - Current Assessment (May) 118.0 117.5 *** 08:00 Germany IFO - Expectations (May) 102.2 102.7 *** 08:30 UK BBA Loans for House Purchase (Apr) 31888 08:30 UK GDP (Provisional) (Q1) q-o-q -0.3% -0.2% *** 08:30 UK GDP (Provisional) (Q1) y-o-y -0.1% 0.0% *** 08:30 UK Private Consumption (Provisional) (Q1) q-o-q 0.4% * 08:30 UK Government Spending (Provisional) (Q1) q-o-q 0.5% *

08:30 UK Gross Fixed Capital Formation (Provisional) (Q1) q-o-q -0.6% *

08:30 UK Exports (Provisional) (Q1) q-o-q 1.6% * 08:30 UK Imports (Provisional) (Q1) q-o-q 0.9% * 08:30 UK Total Business Investment (Provisional) (Q1) q-o-q -3.3% * 08:30 UK Total Business Investment (Provisional) (Q1) y-o-y 1.6% * 08:30 UK Index of Services (Mar) m-o-m 0.1% -0.4% ** 08:30 UK Index of Services (3mth/3mth) (Mar) 3M/% 0.6% 0.2% ** Germany Import Price Index (Data Due: 24-30 May) (Apr) m-o-m 0.5% 0.7% Germany Import Price Index (Data Due: 24-30 May) (Apr) y-o-y 3.1%

25-May-12 06:00 Germany GfK Consumer Confidence Survey (Jun) 5.6 5.6 06:45 France Consumer Confidence Indicator (May) 88.0 07:00 Spain Producer Prices (Apr) m-o-m 0.8% 07:00 Spain Producer Prices (Apr) y-o-y 3.3% 07:00 Switzerland Employment (Q1) y-o-y 0.6% 0.5% * 07:00 Switzerland Employment fte (Q1) Thousand 3415 3432 * 07:00 Switzerland Employment fte (Q1) y-o-y 1.0% 1.0% ** 07:15 Switzerland Employment (Q1) Thousand 4020.0 4043.7 * 08:00 Italy Retail sales (Mar) y-o-y 0.1% 09:00 Italy Hourly Wages (Apr) y-o-y 1.2%

Norway Manufacturing Wage Index (Data Due: 25-29 May) (Q1) q-o-q 1.4% 1.4%

Source: Bloomberg, UBS estimates Note: Three asterisks in the importance column represent the most important and potentially market-moving data. Time zone used for events and releases is GMT.


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Next week in Europe

Final German Q1 GDP data is due Thursday, and is likely to remain unchanged from its advance estimates of 0.5% QoQ. Thursday should also see advance May PMI data for the Euro zone, Germany and France. We expect the manufacturing indices to improve to 46.5 (from 45.9), to 46.8 (from 46.2) and to 47.4 (from 46.9) respectively. The services indices may show some weakness and fall to 45.6 (from 46.9), 50.9 (from 52.2) and 44.4 (from 45.2) for the Euro zone, Germany and France respectively. The German IFO data for May is due Thursday and the business climate index is likely to remain unchanged at 109.9 in April. Q1 GDP data for Norway is due Tuesday and the mainland economy is likely to expand 0.3%QoQ slower form the 0.5% QoQ growth seen in Q4, 2011. In the UK, April inflation and public finances data are due Tuesday. We expect inflation as a measure of RPI to fall to 3.3%YoY from 3.6% in March. The BoE publishes the minutes of its meeting on Wednesday, and its likely that we see an unanimous decision on rates and a 7-2 split on the asset purchase programme. Provisional GDP data and its components is due to be published Thursday and we may see a slight downward revision from its first release of -0.2%QoQ.


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UBS forecasts % yoy 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013EDemand & OutputConsumers' expenditure 1.4 1.8 2.2 1.7 0.3 -1.2 0.8 0.2 -0.2 0.6Government consumption 1.6 1.6 2.1 2.2 2.3 2.6 0.5 0.1 -0.3 -0.3Fixed investment 1.8 3.4 6.0 4.6 -1.3 -12.0 -0.7 1.6 -1.5 2.4Stocks1 0.1 -0.1 0.2 0.3 -0.2 -0.9 0.6 0.0 -0.5 -0.1Domestic demand 1.7 1.9 3.2 2.7 0.2 -3.6 1.1 0.5 -1.0 0.6Exports 7.3 5.4 9.1 6.7 0.8 -12.7 11.1 6.3 1.5 3.8Imports 6.7 6.0 8.9 6.2 0.7 -11.6 9.4 4.0 0.2 3.0Net exports1 0.3 -0.1 0.2 0.3 0.0 -0.7 0.8 1.0 0.6 0.5GDP 2.0 1.8 3.4 3.0 0.3 -4.2 1.8 1.5 -0.4 1.1Industrial production 1.8 2.1 4.1 3.5 -2.2 -13.6 4.3 2.8 -2.0 2.3Labour MarketUnemployment rate (%) 9.1 9.1 8.4 7.6 7.6 9.6 10.1 10.0 10.5 10.2Workforce in employment 0.8 1.0 1.7 1.8 0.8 -1.9 -0.5 0.3 -0.4 0.5Nominal wage growth 2.2 1.9 2.3 2.5 3.2 1.4 1.6 2.2 2.0 1.8Unit wage costs 0.9 1.1 0.6 1.3 3.8 4.0 -0.7 0.9 2.0 1.2InflationProducer prices 2.3 4.1 5.1 2.7 6.1 -5.1 2.9 6.0 1.0 2.8HICP 2.1 2.2 2.2 2.1 3.3 0.3 1.6 2.7 2.2 2.0GDP Deflator 1.9 1.9 1.8 2.4 2.0 0.9 0.7 1.2 1.9 1.6FinanceCurrent account (% of GDP) 0.8 0.1 -0.1 0.1 -1.6 -0.3 -0.5 -0.5 0.6 1.3Budget balance (% of GDP) -2.9 -2.5 -1.4 -0.7 -2.1 -6.4 -6.2 -4.1 -2.3 -1.3General government debt (% of GDP) 69.5 70.1 68.5 66.3 70.1 79.8 85.3 87.5 88.9 88.4Broad Money 5.9 7.5 8.8 11.4 9.0 2.6 0.7 1.0 -0.3 -1.5Interest and exchange rates (end period)ECB refi rate 2.00 2.25 3.50 4.00 2.50 1.00 1.00 1.00 1.00 1.0010-year bund yield 3.60 3.40 3.80 4.30 3.20 3.20 2.90 2.00 2.40 2.80EUR/USD 1.36 1.18 1.32 1.47 1.39 1.44 1.34 1.29 1.15 1.10EUR/JPY 139.9 139.1 156.7 164.4 126.4 134.1 108.4 99.6 98.0 99.0

2012 2013% yoy Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13Demand & OutputConsumers' expenditure -0.6 -0.2 -0.4 0.2 0.3 0.6 0.7 0.8Government consumption -0.3 -0.4 -0.3 -0.1 -0.3 -0.3 -0.3 -0.3Fixed investment -2.1 -2.0 -1.6 -0.4 1.4 2.1 2.9 3.2Stocks1 -0.5 -0.7 -0.4 -0.2 -0.2 -0.1 -0.1 -0.1Domestic demand -1.3 -1.3 -1.0 -0.2 0.1 0.6 0.8 1.0Exports 2.2 1.3 0.5 1.7 2.8 3.6 4.3 4.7Imports 0.0 -0.3 -0.4 1.5 2.1 2.8 3.3 3.7Net exports1 1.0 0.7 0.4 0.2 0.4 0.4 0.6 0.6Real GDP (% qoq) -0.2 -0.2 0.1 0.2 0.3 0.3 0.4 0.4Real GDP -0.3 -0.6 -0.6 0.0 0.5 1.0 1.3 1.5Industrial production -2.3 -2.6 -2.7 -0.4 1.3 2.1 2.6 3.1Labour Market & InflationUnemployment rate (%) 10.3 10.5 10.7 10.6 10.5 10.4 10.3 9.5Money GDP 1.5 1.1 1.4 1.9 2.2 2.6 2.9 2.9HICP 2.5 2.1 2.1 2.0 2.0 2.2 2.1 1.9Interest and exchange rates (end period)ECB Refi rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.0010-yr bund yield 2.10 2.20 2.30 2.40 2.50 2.60 2.70 2.80EUR/USD 1.26 1.22 1.19 1.15 1.14 1.13 1.11 1.10

Source: Eurostat, ECB, Bloomberg, Haver, UBS estimates


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Global economic analysts Larry Hatheway +44-20-7568 4053 [email protected] Chief Economist & Head of Asset Allocation Global Economics Paul Donovan +44-20-7568 3372 [email protected] Senior Global Economist Andrew Cates +44-20-7568 6892 [email protected] Senior Global Economist Sunil Kapadia +44-20-7567 4090 [email protected] Asset Allocation Ramin Nakisa +44-207 567 6861 [email protected] Asset Allocation Sophie Constable +44-20-7568 3105 [email protected] Global Database Manager Lucy Coomer +44 20-7568 3217 [email protected] Administrative Assistant George Magnus +44-20-7568 3322 [email protected] Senior Economic Adviser US Maury Harris +1-203-719 7301 [email protected] Chief Economist US Drew Matus +1-203-719 8378 [email protected] Senior Economist Samuel Coffin +1-203-719 1252 [email protected] Economist Kevin Cummins +1-203-719 1676 [email protected] Economist Jessy Moya +1-212-713 2471 [email protected] Administrative Assistant Canada George Vasic +1-416 3502 232 [email protected] Senior Economist Garry Cooper +1-416 3502 252 [email protected] Strategist Europe Stephane Deo +44-20-7568 8924 [email protected] Chief Economist Europe Amit Kara +44-20-7568 3522 [email protected] UK Martin Lueck +49-69-1369 8280 [email protected] Germany, ECB, Scandinavia Reto Huenerwadel +41-1-239 6178 [email protected] Switzerland Matteo Cominetta +44-20-7567 4652 [email protected] European Economist Japan Takuji Aida +81 3 5208 7474 [email protected] Senior Economist Cameron Umetsu +81 3 5208 7344 [email protected] Economist Australasia Scott Haslem +61-2-9324 3663 [email protected] Chief Economist Australia George Tharenou +61-2-9324 2189 [email protected] Economist Asia (ex Japan) Duncan Wooldridge +852-2971 6046 [email protected] Head of Asian Economics, Korea Tao Wang +86 10 5832 8922 [email protected] China Philip Wyatt +852-2971 8135 [email protected] India, Pakistan, Vietnam Edward Teather +65 6495 5965 [email protected] ASEAN Silvia Liu +852-2971 8121 [email protected] Hong Kong, Taiwan Harrison Hu +86 10 5832 8847 [email protected] China Amy Tang +852-2971 8461 [email protected] Statistician Isabella Leung +852-2971 8193 [email protected] Administrative Assistant Latin America Javier Kulesz +1-203-719 1603 [email protected] Latin America Andre Carvalho +55-11-3513 6522 [email protected] Brazil Economics Rafael de la Fuente +1-203-719 7127 [email protected] Mexico Economics Mariano Szafowal +54 1143 160311 [email protected] Argentina Economics Gustavo Arteta +1 203 564 6379 [email protected] Latam Economics EMEA Reinhard Cluse +44-20-7568 6722 [email protected] Senior EMEA Economist Jennifer Miller (previously Aslin) +44-20-7568 6585 [email protected] Junior Analyst Marie Antelme +27-21-431 8649 [email protected] South African Economist Gyorgy Kovacs +44-20-7568 7563 [email protected] Economist Anna Zadornova +44 20-7567 4212 [email protected] Russia/CIS Economist Currency Strategy Mansoor Mohi-Uddin +44-20-7567 2472 [email protected] Head, FX Strategy Bhanu Baweja +65-836 5287 [email protected] FX Strategist Fixed Income Strategy Michael Schumacher +1-203-719-9004 [email protected] Head, Rates Strategy Chris Lupoli +44-20-7567 7589 [email protected] Fixed Income Strategist Matthew Johnson +61-2-8121 5907 [email protected] Fixed Income Strategist, Australia Justin Knight +44-20-7568 8450 [email protected] EMEA Rates Strategist

We would like to thank Rohan Todarwal, employee of the Cognizant Group, for their assistance in preparing this research report. Cognizant staff provide research support services to UBS.














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UBS 16

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UBS 17

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