Recovering Under Stress

Manuel BalmasedaCEMEX Chief Economist

Rome, April 2011

Slower than usual recovery

-10

-8

-6

-4

-2

0

2

4

6

8

10

-7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7

Percent of Deviation of GDP from Potential GDP

Range (max-min) during 10 previous recessions

Average of previous 10 recessions

Current recession/recovery

quarters

Note: t=0 last quarter of recession

Source: St. Louis Fed, BEA and CEMEX

Slower than usual recovery. Surprising?

Source: IMF

0.0

2.0

4.0

6.0

8.0

All Financial crisis Financial crisis highlysynchronized

Recession

Recovery

-5.0

-3.0

-1.0

1.0

3.0

5.0

All Financial crisis Financial crisis highlysynchronized

Recession

Recovery

Average % change in real GDP by recession driver

Average duration by recession driver

(number of quarters)

Recessions triggered by financial crisis tend to be deeper and recoveries are milder and slower

Residential adjustments are particularly painful proccesses: excesses’ clean-up, perverse accounting and leads and lags between residential and other activities (banking sector, rest of construction, fiscal accounts,…)

Cross Border Synchronization: Housing, Recessions & Banking Crisis

(number of countries in a bust or recession as % of total)

20%

40%

60%

80%

100%

0%1970 74 78 82 86 90 94 98 2002

USA

Spa

USA

Nor

Fin

Swe

Pol

Jap

KorFra

Czh

Hun

Nz

MexMex

Tur

Tur

Housing price busts

Recessions

Systemic Banking Crisis

Non Systemic Banking Crisis

Source: Cemex Economics, IMF and Claessens. Klingeibel and Laeven (2004)

Slower than usual recovery. Surprising?

Advanced economies

Adjustment of pre-crisis excesses (housing, private leverage, financial)

Adjustment of excesses to cope with the crisis (fiscal, monetary)

Creative measures

Limiting growth dynamics (sub-par growth)

“There ain’t no free lunch”

Crisis resolution policies may have prevented “depression” but limit recovery

US Spain

Adjustment of bubble excesses well on course

Source: CEMEX

0

400

800

1200

1600

2000

2400

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

Equilibrium level

0

100

200

300

400

500

600

700

800

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

Equilibrium levelEquilibrium level

Housing Starts (Thousands)

Residential activity has suffered a very significant adjustment ...

... However, it will take time for excesses to be completely absorved

US: Saving and Investment by sectors (% of GDP)

-13%

-10%

-7%

-4%

-1%

2%

5%

8%

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

Fiscal Balance (CBO's forecast)

Private Gap (Private S-I)

Statistical Discrepancy

CA

Source: BEA and CEMEX

Adjustment of bubble excesses well on course

Private deleveraging replaced by public leveraging. Solving an excesive debt problem with debt?

8

In the solution (whether necessary or not) lies the problem.

Source: IMF. Fiscal Monitor update (January 2011)

0

2

4

6

8

10

12

Germany Italy Portugal France Spain UK US

2010 2011

Excesive deficit to prevent the “depresion” …

Fiscal deficit (% GDP)

20

30

40

50

60

70

80

90

100

110

120

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

USFrance

GermanyUKSpa

… have given rise to debt sustainability concerns.

General Government Public Debt (% GDP)

Deficit consolidation required in most countries.

9

Monetary excesses will also need to be withdrawn eventually

Source: Federal Reserve and ECB

0

400000

800000

1200000

1600000

2000000

2400000

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09M

ar-0

9

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10M

ar-1

0

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11M

ar-1

1

ECB́ s balance sheet has also expanded (M$)

Securities

Lending to Credit institutions

Total Claims

Gold and other assets

350000

750000

1150000

1550000

1950000

2350000

2750000

Nov-

07Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov-

08Ja

n-09

Mar

-09

May

-09

Jul-0

9Se

p-09

Nov-

09Ja

n-10

Mar

-10

May

-10

Jul-1

0Se

p-10

Nov-

10Ja

n-11

Mar

-11

US Treasuries

Other Bank credit

Off balance sheet securities lent to dealers

Other assets

Other securities

Fed’s balance sheet expanded (QE2)

Difficult to differentiate between monetary and fiscal policy.

ECB has also expanded its balance-sheet

10Source: IIF Source: ECB and CEMEX

0

500

1000

1500

2000

2500

3000

0

100

200

300

400

500

600

700

Jun-

10

Jul-1

0

Aug-

10

Sep-

10

Oct

-10

Nov-

10

Dec-

10

Jan-

11

Feb-

11

Mar

-11

ECB Security Market Program (right)

Spain 10 year spread

Ireland 10 year spread

Portugal 10 year spread

ECB interventions (Million €) and sovereign spread (bp)

Monetary excesses will also need to be withdrawn eventually

ECB Lending to Euro-Banks(% total assets)

Difficult to differentiate between monetary and fiscal policy.

11

Fiscal and banking excesses are two sides of the same coin, particularly in Europe

40

60

80

100

120

140

160

180

200

220

240

Oct

-09

Nov-

09De

c-09

Jan-

10Fe

b-10

Mar

-10

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0

Aug-

10Se

p-10

Oct

-10

Nov-

10De

c-10

Jan-

11Fe

b-11

Mar

-11

Apr-

11

Financial

Corporate

Sovereign

Europe. 5 year CDS (bp) by sectors

Source: Markit Itraxx Indices

0

200

400

600

800

1000

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11

Ger

Por

Spa

Gre

Ire

Ita

Source: Bloomberg

Europe. 5 year CDS (bp) by countries

High exposure of core Europe’s banking sector to sovereign debt and banking sector of the periphery

…and, particular, to Spanish banks

Exposure of German and French Banks to peripheral countries is

significant…

Source: BIS

0

100

200

300

400

500

600

700

800

GER FR UK JP US0%

5%

10%

15%

20%

25%

POR

GR

IRE

SP

IT

Foreign claims of European Banks vis a vis peripheralcountries at end of June 2010. Amounts outstanding. Inbillions of US$ and % of total foreign claims.

Foreign claims of European Banks vis a vis peripheralcountries by sector at end of March 2010. In billions ofUS$.

0

50

100

150

200

250

GER FR UK

Private Banks Public

GR

IR

POR

SP

GR

GRIR

IR

PORPOR

SP

SP

% total foreign claims (dcha.)

US Banks’ balance sheet are not fully repaired either.

Estimated total commercial real estate debt maturity schedules

in the US (B$)

Source: BIS

0

100

200

300

400

500

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2009-10 loan extensionsDebt maturity

Extended until 2011-13

0

50

100

150

200

250

300

350

400

Jan-

07

Apr-

07

Jul-0

7

Oct

-07

Jan-

08

Apr-

08

Jul-0

8

Oct

-08

Jan-

09

Apr-

09

Jul-0

9

Oct

-09

Jan-

10

Apr-

10

Jul-1

0

Oct

-10

Jan-

11

Apr-

11US

Europe

* Asset-weighted average of 5-year CDS spreads on senior Debt.

Source: Bloomberg

Still fragile banking systems*

14

Advanced economies

Adjustment of pre-crisis excesses (housing, private leverage, financial)

Adjustment of excesses to cope with the crisis (fiscal, monetary)

Creative measures

Collateral effects on banking sector and emerging markets

Emerging economies

No macro-imbalances

Improved fundamentals

China strenght (support for commodity prices)

Pressures on exchange rates, inflation, assets..

Large capital inflows to EMsAbunda

nt liquidity

Public support

Recovering Under Stress

Manuel BalmasedaCEMEX Chief Economist

Rome, April 2011