Decision Time for the Euro zone

Decision Time for the Euro zone

Jan von Gerich12/6/2012

Markets

2

Also longer German bond yields following in the footsteps of Japan

Source: Reuters EcoWin

00 02 04 06 08 10 12 14 16

0

1

2

3

4

5

6

7

8

9

10-year Japanese benchmark yield, %, 1/1/1986 -->

10-year German benchmark yield, %, 1/1/1999 -->


00 02 04 06 08 10 12

0

1

2

3

4

5

6

Japanese 2-year benchmark yield, %

German 2-year benchmark yield, %

3

The Euro zone will survive, but notable bumps still ahead• A Greek Euro-exit threatening to push the Euro-zone

into a deeper recession– The recent development of leading indicators

worrying

• Spain will need external help with its bank• Bonds to remain well supported in the near future

– With short rates zero or negative in many cases, longer bonds still with pick-up

– Stay within the core countries for now

• More determination needed to build a longer-term future for the euro

– Euro-zone governments need to pave the way for a tighter monetary union

– In the end, the ECB will do what is needed to save the euro

– Pressure to let inflation accelerate– Risk of an uncontrolled chain of events not zero,

although still small

4

The recent falls in Euro-zone confidence numbers worrying

Source: Reuters EcoWin 00 02 04 06 08 10 12

30

35

40

45

50

55

60

65

USA

Eurozone

Manufacturing PMIs

China

5

Weak loan demand point to a weakening economy in the near term


04 05 06 07 08 09 10 11

-30

-10

10

30

50

70-6

-4

-2

0

2

4

Euro-zone GDP, % y/y, left Net percentage of banks reporting weaker demand, right

Net percentage of banks reporting tighter credit conditions,reversed right

Tighter credit standards, weaker demand(for companies)

6

The biggest drag from fiscal consolidation this year

Source: Nordea Markets and Reuters Ecowin

00 02 04 06 08 10 12-8

-6

-4

-2

0

2

Public balance

Euroalue

% of GDP

Change in public balance Drag on growth≈

Note: European Commission Spring 2012 Economic Forecasts

7

US banking system looking much healthier compared to Europe


00 02 04 06 08 10 12

-7.5

-2.5

2.5

7.5

12.5

Euro-zone consumer credit, % y/y

US consumer credit, % y/y

8

Many banks very reliant on ECB funding


08 09 10 11

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

EUR tn

Securities Markets Programme

Main refinancing operations

Estimated emergency liquidity assistance

Covered bond purchases

Longer-term refinancing operations

9

Also progress seen, but still a long road ahead

• Restoring competitiveness will take years

• Ireland in external balance already, while also Spain come a long way

02 04 06 08 10 12

-17.5

-15.0

-12.5

-10.0

-7.5

-5.0

-2.5

0.0

2.5

Current account balance, 12-month moving average, % of GDP

Irlannin vaihtotase

Greece

Spain

Portugal

Italy

Ireland


00 02 04 06 08 10 12

90

100

110

120

130

140

150

160

Unit labour costs (1/1/1999 = 100)

Spain

Germany

Italy

Ireland

10

A Greek exit threatening to escalate the debt crisis once again


03 04 05 06 07 08 09 10 11

120

140

160

180

200

220

240

Greek deposits (excluding government), EUR bn, left

Greek real GDP, 4 quarter sum, EUR bn, right

11

Bank run in Spain much more difficult to handle than one in Greece

Source: the ECB

0

250

500

750

1000

1250

1500

1750

2000

J an-99 May-01 Oct-03 Mar-06 Aug-08 Dec-10

Greece Spain I taly

Deposits excluding monetary financial institutions and the central

government, EUR bn

12

Deposit outflows so far been relatively limited

-20%

-15%

-10%

-5%

0%

5%

10%

Euro

zon

e

Belgi

um

Germ

any

I rela

nd

Greec

e

Spain

Fran

ceI ta

ly

Nethe

rland

s

Austri

a

Portu

gal

Finla

nd

y/ y change in bank deposits excluding monetary financial institutions and the

central government

Source: the ECB

13

LTRO support already behind for Spanish and Italian government bonds

Source: the ECB

0

50

100

150

200

250

300

350

400

450

Jan-99 Sep-01 Jun-04 Mar-07 Dec-09

Germany I taly Spain

Government bond holdings of banks, EUR bn

14

Central bank system financed the capital flight from Spain


00 02 04 06 08 10 12-200

-100

0

100

200

300

400

Spanish financial account balance, 12-month sum, institutional sector, EUR bn

Borrowing of Spanish banks from the ECB, EUR bn

15

In Spain the housing market remains a big source of uncertainty


00 02 04 06 08 10 12

100

125

150

175

200

225

250

275

Spain

House price indices (1999 = 100)

US, S&P / Case-Shiller

Ireland

16

Spanish construction sector a drag for the economy for a long time


90 95 00 05 107.5

10.0

12.5

15.0

17.5

20.0

22.5

% of GDP

Construction investment

Spain

Euro zone

Germany

Italy


80 85 90 95 00 05 104

6

8

10

12

Spain% of GDP

Other construction

Housing construction

Other investment

17

The gap between public expenditure and income still great


96 98 00 02 04 06 08 1034

36

38

40

42

44

46

Spain% of GDP

General government expenditure

General government income

18

Weak structural growth a problem for Italy


00 02 04 06 08 10 1290

100

110

120

130

140

150

160

Italy

GDP indices (1999 = 100)

Greece

Germany

Spain

Ireland

France

Portugal

19

Economic growth an important variable in debt sustainability

60%

80%

100%

120%

140%

160%

180%

200%

220%

240%

260%

0 10 20 30 40 50

Time / years

Deb

t /

GD

P

4% nominal economic growth 2% nominal economic growthNo nominal economic growth

Development of debt to GDP with starting debt of 100% of GDP and 3%

public sector deficit

20

The weakening Italian economy to receive added attention again


96 98 00 02 04 06 08 10 1270

80

90

100

110

120

-7

-5

-3

-1

1

3

5

Italian GDP, % y/y, left

Italian economic sentiment indicator, right

21

Italy learned to live with a high debt


95 00 05 10

-1

0

1

2

3

4

5

6

0

15

30

45

60

75

90

105

120

Gross government debt, % of GDP, left

Italy

General government primary balance, % of GDP, right

22

Flattening Spanish and Italian curves implying increasing near-term worries


08 09 10 11 12

1

2

3

4

5

6

7

8

10Y Italy

10Y Spain

2Y Spain

2Y Italy

Government benchmark bond yields, %

23

The number of core countries fallen


09 10 11 12

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

France

Netherlands Finland

10-year benchmark spreads to Germany

Austria

Belgium

24

Belgian and Irish bonds provided the best YTD return this year

Source: iBoxx bond indices, Reuters EcoWin

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Finla

nd

Germ

any

Austri

a

Nethe

rland

s

Fran

ce

Euro

zon

eI ta

ly

I rela

nd

Spain

Belgiu

m

iBoxx government bond index year-to-date total returns by country

25

Euro-zone not with huge problems on an aggregate basis

Source: European Commission Spring 2012 Economic Forecasts

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

Belgiu

m

Germ

any

I rela

nd

Greec

e

Spain

Fran

ceI ta

ly

Nethe

rland

s

Austri

a

Portu

gal

Finla

nd

Euro

are

aUSA

Unite

d Ki

ngdo

m

Public balance, 2012, % of GDP,Primary balance, 2012, % of GDPCurrent accout balance, 2012, % of GDP

26

The recent weakening in the euro only in line with the development of interest rate differentials


08 09 10 11 12

0.00

0.25

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

1.15

1.25

1.35

1.45

1.55

EUR/USD, left

EUR - USD 2-year swap rate, %-points, right

27

How can the debt crisis end?

• The ECB/EFSF buys bonds as needed, increased IMF/EFSF/ESM resources try to provide a sufficient backstop

– Euro zone countries continue austerity measures and structural reforms– Economic growth weak for a long time– Gradually closer co-operation between the members– An individual member may decide to leave the Euro zone

• Economic growth (and structural measures) given higher priority– More time to implement austerity measures– Moving towards euro bonds, banking and a political union– The ECB a permanent lender of last resort for governments– Higher inflation part of the solution

• Managed debt restructuring on a wide scale– Very challenging to implement without breaking the Euro zone

• Break-up of the Euro zone– Individual currencies make a comeback– Several Euro zone countries default on their debt or re-denominate in a new currency– Financial crisis II– The real safe havens in non-EUR investments

28

Notable risk of higher inflation ahead not being priced

Sources: Reuters, Nordea

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

J an-05 May-06 Sep-07 Feb-09 J un-10 Nov-11

5-year inflation starting in 5 years' time as implied by EUR inflation swaps

5-year inflation starting in 5 years' time as implied by USD inflation swaps

29

The Euro zone will survive, but notable bumps still ahead• A Greek Euro-exit threatening to push the Euro-zone

into a deeper recession– The recent development of leading indicators

worrying

• Spain will need external help with its bank• Bonds to remain well supported in the near future

– With short rates zero or negative in many cases, longer bonds still with pick-up

– Stay within the core countries for now

• More determination needed to build a longer-term future for the euro

– Euro-zone governments need to pave the way for a tighter monetary union

– In the end, the ECB will do what is needed to save the euro

– Pressure to let inflation accelerate– Risk of an uncontrolled chain of events not zero,

although still small

30

No quick solutions to debt problems in store…

31

Thank you!Jan von Gerich

Chief Strategist, Developed marketsGlobal Research

+358 9 165 [email protected]

Nordea Markets is the name of the Markets departments of

Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank

Finland Plc and Nordea Bank Danmark A/S.

The information provided herein is intended for the sole use of

the intended recipient. The views and other information provided

herein are the current views of Nordea Markets as of the date of

this document and are subject to change without notice. The

views have been provided solely based on the information made

available to Nordea Markets and for the purposes of presenting

the services made available by Nordea Markets. This notice

does not substitute the judgement of the recipient.

Nordea Markets is not and does not purport to be an adviser as

to legal, taxation, accounting or regulatory matters in any

jurisdiction. Relevant professional advice should always be

obtained before making any investment or credit decision.

This document may not be reproduced, distributed or published

for any purpose without the prior written consent from Nordea

Markets.

Date post:	04-Feb-2016
Category:	Documents
Upload:	elita
View:	52 times
Download:	0 times

Decision Time for the Euro zone

Documents