1

European sovereign debt crisesDecember 2010

SEB Research

Daniel Daniel BergvallBergvall ((daniel.bergvall@seb.sedaniel.bergvall@seb.se),), Robert Robert BergqvistBergqvist, , HåkanHåkan FrisénFrisén, , Carl Hammer, Carl Hammer, JussiJussi HiljanenHiljanen, , OlleOlle HolmgrenHolmgren, Johan , Johan JaveusJaveus, , ElisabetElisabet KopelmanKopelman & Tomas & Tomas LindströmLindström

SEB Economic ResearchSEB Economic Research

2

In this package…

� Macro and fiscal outlook for PIIGS

� Three scenarios for the coming 6-12 months

� Key macro data

� Euro-zone crises: financial safety nets

� Consolidation measures

� Financing need 2011-2013

� Rising cost of servicing sovereign debt is not the main problem

� Political agenda

� Exposure of banking system

� Renegotiation of debt: A comparison with Argentina (2001) and Russia (1998)

3

Macro and fiscal outlook for PIIGS

4

Growth: Greece still in recession, Spain returns to growth

Percent y/y

� Sharpest and most prolonged drop in GDP so far in Ireland

� Consolidation packages will dampen growth in the years ahead – Greece has the weakest outlook

� Highest unemployment increases in Spain and Ireland, Greece will probably move higher before peaking

� Crises has moved NAIRU higher

� Wage pressure will be low looking ahead

� Getting GDP back to growth is important to prevent debt ratio from growing out of control

Percent

5

PIIGS household debt lower than average

Household sector debt, % of GDP

Source: Eurostat

40

50

60

70

80

90

100

110

120

130

140

150

40

50

60

70

80

90

100

110

120

130

140

150ItalyBelgiumAustriaGermanyFinlandGreeceSweden

SwitzerlandNorwaySpainPortugalUKIrelandNetherlands

USDenmark � Very low household debt in Italy

� Spain in line with average

� Bank sector problems more connected to strong economic downturn than high debt levels

6

Small export sectors in PIIGS

Export, goods and services, % of GDP

Source: OECD

10

20

30

40

50

60

70

80

90

10

20

30

40

50

60

70

80

90JapanGreeceSpainFranceItalyUK

PortugalCanadaFinlandGermanyNorwaySweden

DenmarkSwitzerlandAustriaNetherlandsIrelandBelgium

� Small countries usually have relatively larger export sectors => Greece and Portugal worse off than implied by chart (smaller help from global recovery)

� Spain and Italy similar to France and UK. However Spain is only half the size of these countries

7

Bank sector major Irish headache

� Bank sectors in Italy and Greece relatively small, Spain close to average

� Bank sector problems in many cases not caused by extensive balance sheets

700

600

500

400

300

200

100

0

700

600

500

400

300

200

100

0Source: The Riksbank

Bank sector assets, % of GDP

GR

SE

BE

AU ES

PTMean LU

SW

FI

DKFRDEIE

UKNL

IT

400

300

200

100

0

400

300

200

100

0Source: BIS

Bank sector foreign liabilities, % of GDP

GR

SEBE

AUES

PT

US

NO

CAJP

SWFI

DKFR

DE

IR

UK

NL

IT

8

Competitiveness: Lost decade for PIIGS

� Higher wage and price increases and lower productivity have eroded the competitiveness for all PIIGS compared to Germany

� Some improvements can be noted for Ireland

� We expect Germany to allow somewhat higher wage increases ahead which will help with rebalancing

� Lowered wages for public sector workers are part of all PIIGS consolidation measures, flexibility in private sector differs between countries

9

Current account balance: Most PIIGS countries heavily reliant on foreign capital

Percent of GDP

� Large current account deficits in Portugal, Spain and Greece which makes deficits more difficult to finance

� Improving situation in most PIIGS during 2009, especially for Spain, but still far from satisfactorily

� International net investment (difference between country's external financial assts and liabilities) position almost -100% of GDP in Spain and Portugal, 85% in Greece, Ireland 66%. Italy in a better position -22%

15

10

5

0

-5

-10

-15

15

10

5

0

-5

-10

-15

Current account balance (2010), % of GDP

GR

SE

BEAT

ES

PT

US

JA

NO

FI

DK

FR

DE

IR

UK

NL

IT

10

Public finances: worst situation in Greece, fastest increase for Ireland

Government debtper cent of GDP

0

20

40

60

80

100

120

140

160

180

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Portugal IrelandItaly GreeceSpain

� Increase compared to pre-crises: Ireland (+90%), Greece (+51%), Spain (+37%), Portugal (30%)and Italy (16%)

� The Irish development shows that a low government debt can not save you from quickly getting in trouble

� The larger difference between interest rates and nominal GDP growth, the better primary deficit/surplus (balance excluding interest cost) is needed for debt not to snowball.

� Additional savings will be needed to stabilise debt

Source: OECD

10

0

-10

-20

-30

-40

10

0

-10

-20

-30

-40Source: OECD

General government budget (2010), % of GDP

GR

SE

BEAT

ESPT

NO

USJA

FI DK

FR

DE

IR

UK

NLIT

11

Comparing the countries…

� Index ranking based on public deficit and debt, CA balance, banksector exposure and economic performance

� Low risk score in Nordic Countries

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5Source: SEB

Country risk score

GR

SE

BEAT

ESPTUS

JP

NO

FI

DK

FR

DE

IR

UK

NL

IT

12

The road ahead

� ECB– With policy rates at historical lows, the use of the alternative toolbox

must be increased– Increased intervention in government debt market to ease pressure and

show commitment. ECB (asset purchases of 1.5% of GDP) still has a long way to go to match interventions by Fed (19%) and BoE (14%)

� Euro zone stability and growth pact (SGP)– The crises strengthens the position of Germany– EMU is too important to fail, default by any member will be seen as a

failure � crises will have to become much worse before EMU countries (Germany) stop supporting weaker countries

– If necessary, European crisis fund (EFSF) will get more resources. EMU/IMF support gives slow moving political process time to consolidate public finances and avoid the short term funding need that most often is the trigger to default

– In a longer term perspective regulations has to be changed. This should include harder SGP rules, an heir to EFSF, national budget frameworks and elements that will increase the markets’ role in evaluating the healthiness of public finances like a write-down clause/postponement of payment clause in government borrowing contracts

13

QE: Interventions by ECB much lower than Fed and BOE

Central banks asset purchases as % of GDP

14%

(£200bn)

19%

($2600bn)

1.5%

(€130bn)

ECB BOE Fed

Source: ECB, BoE, Fed, SEB

14

Sovereign debt crises- Three scenarios for the coming 6-12 months

15

Three possible scenarios in coming 6-12 months

1. Quicker than expected relief (probability: 15%)• Improved crises awareness in PIIGS, implemented

consolidation measures successful• Global recovery eases pressure • Market perception of PIIGS risk decreases

2. Muddling through (main scenario – prob: 70%)• Crises not solved in near future• Portugal and Spain needs assistance – more financial

resources from EMU/IMF necessary

3. Heavy turbulence and default in some countries (prob: 15%)• Present turbulence turns to the worse• Pressure extended to Italy, Belgium and France• Consolidation packages creates a negative spiral

16

Quicker than expected relief (prob: 15%)

� Improved crises awareness in PIIGS, implemented consolidation measures successful both in terms of effect on deficit and debt and returning market confidence

� Global recovery improves situation and eases pressure on unemployment and public finances

� Market perception of PIIGS risk decreases, Portugal needs assistance, Spain manages without support

� Key factors: Decisive German/EU/ECB/IMF strategy ahead, offensive ECB liquidity and bond-purchase program, political sobering up and crises awareness in countries.

Summary: Real and financial effectsRisk spread Significant reduction but still markedly higher than pre-crises level

German gov't bonds Up 100 bp

Spread SWE/NOR to GER Up somewhat due to higher short-spread

EUR/USD Staying in high end of 1.20-1.40 range

EUR/SEK SEK to trade stronger than our bearish end 2011/2012 8.75/8.60 EUR/SEK forecasts

Equities Up 20%

GDP growth ~2.0% in Euro-zone 2011, 0.5 p.e. higher per year compared to NO Nov

17

Muddling through(main scenario, prob: 70%)

� Main scenario in NO Nov – crises is not solved in near term, new elements are added but not to the extent that a slow recovery is stopped

� Portugal and Spain needs assistance – more financial resources from EMU/IMF necessary

� Threat of default lives on but actions from ECB/IMF makes muddle through possible � creates turbulence but avoids implosion

� Political protests in troubled countries but consolidation continues with international support/pressure

� A full scale European banking crises is avoided but stress remains

Summary: Real and financial effects

Riskspread

Varies depending on news-flow and dynamics of crises, falls somewhat

in IRL and and GRE, increases in others including FRA

German gov't bonds Up 20-30 bp end-2011

Spread SWE/NOR to GER Increases but less than in relief-scenario

EUR/USD Targeting 1.25 mid-2011

EUR/SEK No large deviations from NO Nov path

Equities Up 10-15%

GDP growth 1.5% 2011 (NO Nov forecast)

18

Heavy turbulence and default in some countries (prob: 15%)

� Present turbulence turns to the worse – Zero growth in Euro-zone, recession in several countries, Greece and possibly more countries defaults

� Portugal and Spain needs assistance, pressure extended to Italy, Belgium and France

� Consolidation packages create a negative spiral, government savings depress growth that further worsen government balances. Deficits, low growth and low inflation make debt spiral out of control

� Even Germany has to pay a price: large commitments pushes interests up –when will Germany get tired of supporting weak countries?

Summary: Real and financial effectsRisk spread At crisis levels in countries troubled at present, sharply rising spreads

in Italy but also to some extent France

German gov't bonds Up 100 bp on contagion and large committments

Spread SWE/NOR to GER Falling

EUR/USD Heading towards 1.10

EUR/SEK Substantial risk trading above 9.50 on surging riskaversion

Equities Sharp fall

GDP growth Zero growth in Euro-zone, recession in several troubled countries

19

Currency implications should Spain seek financial assistance

� In our main scenario of muddling through, Spain will enter the EFSF

� Such scenario is not compatible with a rising euro.

� On the contrary as markets start to price this outcome the euro will suffer and we now forecast EUR/USD back at 1.25 by mid-2011.

� The US will according to our forecast show good growth momentum during the coming quarters. Markets will likely favour USD over EUR as the "growth gap" between the regions increases.

� Near-term EUR/USD may continue higher on positive seasonality pattern (December is the best euro-month of the year) and hence we still forecast a slow grind higher in the coming weeks.

� The very expansionary US fiscal policies however (the US is the only G10 country to ease fiscal policy next year) will not pass unnoticed by financial markets. If Europe presents a "good and credible" solution to the underlying problems the risks then move back again towards the US and the USD. Hence our long-term held view that EUR/USD will continue to trade the 1.20/25-1.40/45 range as the "most ugly contest" continues remains.

20

Key macro data

21

Basic facts about PIIGS and major economies – one EMU, situation very diverse

2010-12-03 EU27 EMU Germany France€bn 11 783 8 956 2 397 1 943

% of EMU 132% 100% 27% 22%

% of EU 100% 76% 20% 16%

€bn -50 120 -37

% of GDP -1% 5% -2%

Assets €bn 14 932 5 251 4 337

% of GDP 167% 219% 223%

Liab. €bn 16 318 4 308 4 568

% of GDP 182% 180% 235%

Net. €bn -1 386 944 -231

% of GDP -15% 39% -12%

AAA AAA

stable stableSovereign rating S&P

International

investment

position

(2009)

GDP

Current account

balance

UK USA Japan1 572 11 917 4 434

18% 133% 50%

13% 101% 38%

-20 -264 100

-1% -2% 2%

10 473 13 768 4 093

666% 116% 92%

10 721 16 268 2 315

682% 137% 52%

-248 -2 500 1 778

-16% -21% 40%

AAA AAA AA

negative stable stable

2010-12-03 PIIGS Italy Spain Greece Ireland Portugal€bn 3 135 1 521 1 054 233 160 168

% of EMU 35% 17% 12% 2.6% 1.8% 1.9%

% of EU 27% 13% 9% 2.0% 1.4% 1.4%

€bn -156 -49 -58 -26 -5 -17

% of GDP -5% -3% -6% -11% -3% -10%

Assets €bn 5 936 1 845 1 370 258 2 175 288

% of GDP 189% 121% 130% 111% 1362% 172%

Liab. €bn 7 727 2 180 2 333 458 2 303 452

% of GDP 246% 143% 221% 197% 1442% 270%

Net. €bn -1 791 -335 -963 -201 -128 -164

% of GDP -57% -22% -91% -86% -80% -98%

A+ AA BB+ AA A-

stable negative negative negative negativeSovereign rating S&P

International

investment

position

(2009)

GDP

Current account

balance

22

EMU public finances outlookEach data point represents one year. 2010-12 EU COM forecasts

Government budget balance (% of GDP)

Ireland 2009

Portugal 2009

France

2009Italy 2009

Belgium 2009

Greece 2009

Germany 2009

Spain 2009

Source: EU KOM

23

Consensus 2011 GDP forecasts

y/y percentage change

2.1

1.51.5

1.0

0.6

-0.2

-2.5

1.71.5

2.2

1.1

0.60.3

-1.9

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jul Aug Sep Oct Nov

Germany

Belgium

France

Ireland

Italy

Spain

Portugal

Greece

Consensus 2011 GDP forecasts since August

24

The Spanish economy in brief – high unemploy-ment, improving current account balance

Percent of GDP

Percent

Net balance

Percent y/y

25

The Portuguese economy in brief –diverging business and consumer confidence

Percent of GDP

Percent

Net balance

Percent y/y

26

The Italian economy in brief –muddling through?

Percent of GDP

Percent

Index

Net balance

Percent y/y

27

The Greek economy in brief – when will GDP stop falling?

Percent of GDP

Percent

Net balance

Net balance

Percent y/y

28

The Irish economy in brief – largest fall in GDP, confidence still low

Percent of GDP

Percent

Percent y/y

Net balance

Net balance

Percent y/y

29

Lost decade in competitiveness

3030

Countries' net exposure to foreignersInternational net investment position. % of GDP. SEB estimates

-17

37

-12

-57

-98

-66

-22

-85-95

-20 -21

4712

12

59

-6

-100

-80

-60

-40

-20

0

20

40

60

EU

-16

Ge

rma

ny

Fra

nc

e

PIIG

S

Po

rtu

ga

l

Ire

lan

d

Ita

ly

Gre

ec

e

Sp

ain

UK

US

Ja

pa

n

Ch

ina

Sw

ed

en

No

rwa

y

De

nm

ark

Fin

lan

d

59

-5

31

Yield spreads against Germany10-year government bonds. Percentage points

32

Rates elevated but no “default pricing” as with Greece in April

� Market confidence for Irish, Portuguese and Spanish debt is nowhere near as poor as it was for Greece at the height of the crisis in late April

� None of the countries have the classic default pricing with inverted yield curves as Greece had in April

� Probably this is a result of the EU/IMF rescue mechanisms now in place

Percent

33

Euro zone crises: Financial safety nets

34

Euro zone crises: Financial safety nets

� Euro zone financial safety net – total EUR 550bn– EFSM: EUR 60bn (guaranteed by the EU budget)– EFSF: EUR 440bn (guaranteed by EMU countries)– (Balance of payment assistance: EUR 50bn for non-EMU countries)

� IMF– EUR 250bn committed to match EFSM and EFSF support– Has more resources available

� ECB toolkit– Regular tool: Interest rates– Capital corresponding to EUR 375bn to cover possible credit losses– Toolkit to ease the crisis (Enhanced credit support)

- Securities Market Programme and covered bond purchases: Ensure depth and liquidity in private and public debt market (end of Nov EUR 67bn and EUR 61bn respectively) - Fixed rate full allotment refinancing operations (extended until at least April 2011)- More generous terms for what is acceptable collateral- Longer term liquidity provision- Swap facilities between central banks (to meet demand of FX,

especially USD)

35

Composition of the EFSF (European Financial Stability Facility)

� Maximum amount EUR 440bn

� Individually guaranteed by E-Z members states in relation to their share of ECB capital +20%

� Countries with active programmes do not provide guarantees (at present Greece and Ireland)

� Terms and conditions for loans similar to the IMF

� Note: Greece does not receive support from EFSF but from separate ad hoc support facility

Share of

paid-up

capital of

the ECB,

%

Guarantee

commitments

(bn EUR)

Maximum

guaranteed (bn

EUR)*

Belgium 3.5 15 18

Germany 27.1 119 143

Ireland 1.6 7 8

Spain 11.9 52 63

France 20.4 90 108

Italy 17.9 79 95

Cyprus 0.2 0.9 1.0

Luxemburg 0.3 1.1 1.3

Malta 0.1 0.4 0.5

Netherlands 5.7 25 30

Austria 2.8 12 15

Portugal 2.5 11 13

Slovenia 0.5 2 2

Slovakia 1.0 4 5

Finland 1.8 8 9

Greece 2.8 12 15

Total 100 440

*120% of proportional amount

Source: ECB, SEB

36

More on the EFSF/EFSM

� Own legal entity. Shareholders: the 16 euro area members

� Will raise necessary funds by issuing bonds (carried out by the German Debt Management Office) in order to provide loans to member states in financial difficulty (this is different to the Greek support which consists of bilateral loans pooled by the EU Commission). Issuance will start in second half of January 2011; EUR 5-8bn (for Irish support)

� Loans are envisaged to have a maturity of three to five years. EFSF borrowing structure should be similar of lending

� Interest rates similar to Greek package* => 3-mth Euribor or swap rates for the relevant maturity + charge of 300bps for maturities up to three years and an extra 100bps per year for loans with longer maturities + one time service fee of 50bps => cost of three year loan currently around 5.0% (1.9% euro swap rate + 300bps)

� The EFSF does not have any currency limitation but is expected to issue the majority in euro. The EFSM only issues in euro.

� EFSF will not be a preferred creditor to other sovereign claims on the borrowing country (unlike the IMF)

� EFSF bonds will be eligible as collateral to the ECB

� A cash buffer will be deducted from the cash amount remitted to a borrower. The cash buffer will be invested in ”safe and liquid assets” managed by the German DMO

� See also http://www.efsf.europa.eu/attachments/faq_en.pdf

37

Eurozone credit sovereign credit ratings

� The EFSF has been assigned the best possible ratings from the S&P, Moody’s and Fitch (AAA and Aaa respectively)

� Only 6 out of 16 member states have a AAA-rating

� Total maximum guarantee from AAA member states is EUR 306bn or 70% of the maximum size of the EFSF

Euro area credit ratings* Outlook

Belgium AA+ stable

Germany AAA stable

Ireland AA- negative (w)

Spain AA negative

France AAA stableItaly A+ stable

Cyprus A negative

Luxemburg AAA stableMalta A stable

Netherlands AAA stable

Austria AAA stablePortugal A- negative (w)

Slovenia AA stableSlovakia A+ stable

Finland AAA stable

Greece BB+ negative (w)*S&P (w) on watch

38

IMF resources will be enough

� Conclusion: Our assessment is that IMF will have enough funds to assist countries in need. Practice has shown that whenever there is political will to help a country, IMF resources are almost unlimited. If IMF needs more funds, they will most probably get it. Liquidity problem are more likely to come from the EU/EMU

� Resources:– Quota based (main IMF funding arrangement): approx USD 380bn.

Proposal exist to double quota resources– GAB (General Agreement to Borrow) – agreement between IMF

and countries/central banks ~ USD 26bn– NAB (New Arrangements to Borrow) – agreement between IMF and

countries. Currently under expansion to up to USD 600bn (from pre-crises USD 250bn; not all agreements in place yet)

� Member countries can borrow up to 200% of their quota annually and 600% cumulative. Access can be higher in exceptional circumstances

� IMF has committed to match EFSF and EFSM support by providing 1/3 of overall funding (EUR 250bn)

� In August 2010, IMF had USD 215/EUR 165bn in one-year forward commitment capacity, excluding prudential balance

39

PIIGS consolidation measures- on the right track, but additional measures might be necessary

40

Fiscal consolidation measures- on track, but more will probably come

� Majority of consolidation for all PIIGS on expenditure side – in line with international experience that expenditure cuts are more efficient consolidation measures

� Packages in all countries are frontloaded

� Countries with low taxes (especially Ireland) have more room for increased taxes

� We expect that some more measures will be necessary for most countries going ahead for them to meet their targets

Measures until 2010-12-01

Source: National Finance Ministries, SEB

PIIGS: Fiscal consolidation measures, % of GDP

2011 2012 2013 2014 2011-14

Greece

Lower expenditures 3.83 1.67 1.33 6.83

Higher revenues 1.92 0.83 0.67 3.42Total 5.75 2.50 2.00 10.25

Ireland

Lower expenditures 2.40 1.20 1.09 1.09 5.77

Higher revenues 1.30 1.00 0.81 0.81 3.93Total 3.70 2.20 1.90 1.90 9.70

Italy

Lower expenditures 0.50 0.15 0.15 0.80Higher revenues 0.25 0.08 0.08 0.40

Total 0.75 0.23 0.23 1.20Portugal

Lower expenditures 2.70 0.66 0.46 3.82Higher revenues 1.40 0.34 0.24 1.98

Total 4.10 1.00 0.70 5.80Spain

Lower expenditures 2.00 1.45 3.45

Higher revenues 0.75 0.55 1.30Total 2.75 2.00 4.75

PIIGS

Lower expenditures 1.47 0.78 0.25 0.06 2.56

Higher revenues 0.66 0.35 0.14 0.04 1.19Total 2.13 1.13 0.39 0.10 3.75

41

PIIGS financing need 2011-2013- is EFSF/EFSM big enough to manage Portugal and Spain?

42

PIIGS financing need 2011-2013

Note: Refinancing need of maturing debt decreases over the years as short-term debt is only noted in data once (and to avoid double-counting of refinancing need).Before the support package to Ireland, Irish financing need was said (according to Irish officials) be met without further borrowing until mid-2011. Debt redemptions until mid-2011 is assumed to be already covered without further borrowing. EUR 3 bn for bank-support has been added to net lending each year as there is a bookkeeping difference between net lending and financing need.

EUR billion

Maturing

debt Deficit Total

Maturing

debt Deficit Total

Maturing

debt Deficit Total

Greece 38.5 20.0 58.5 31.7 18.9 50.6 27.7 11.4 39.2

Ireland 4.3 22.6 26.9 5.9 20.8 26.7 6.0 17.3 23.3

Italy 279.4 75.2 354.6 190.3 52.9 243.2 123.8 59.7 183.5

Portugal 26.2 13.1 39.3 9.5 10.7 20.2 9.8 7.7 17.5

Spain 124.5 90.4 214.9 73.8 76.7 150.5 66.3 63.5 129.8

Total 472.8 221.4 694.3 311.2 180.0 491.2 233.6 159.6 393.2

2011 2012 2013

Per cent of GDP

Maturing

debt Deficit Total

Maturing

debt Deficit Total

Maturing

debt Deficit Total

Greece 16.5 8.6 25.1 13.4 8.0 21.4 11.4 4.7 16.1

Ireland 2.7 14.0 16.6 3.5 12.4 15.9 3.4 9.8 13.2

Italy 17.5 4.7 22.2 11.5 3.2 14.7 7.3 3.5 10.8

Portugal 15.1 7.6 22.7 5.4 6.1 11.5 5.4 4.3 9.7

Spain 11.7 8.5 20.2 6.7 7.0 13.7 5.8 5.6 11.4

2011 2012 2013

Source: Bloomberg, SEB

43

What size of packages to Portugal and Spain in case of assistance from EU/IMF?

� Assuming:– A support package for Portugal and Spain of a similar size as Greece and Ireland

(approximately 50 % of GDP)– That IMF takes 1/3rd of the burden

� Portugal would then need roughly EUR 85bn and Spain EUR 530bn. Including Ireland, total support would be EUR 686bn, of which 457bn from EFSF/EFSM and bilateral lenders

� This would be within the EUR 750bn limit (EUR 452bn of the EUR 500bn EFSF/EFSM limit; EUR 5bn less than in the table, next page, provided by bilateral lenders), but too close to the limit given that use of the EUR 500bn EMU-support package might be capped at EUR 440-450bn due to:– 1) countries receiving support will not be part of the countries giving EFSF a guarantee

� the 500bn frame is lowered by ~10bn (in this case EMU-countries not receiving support will guarantee the full 120% of their EFSF-share)

– 2) the market might ask for a safety margin to keep the EFSF AAA rating (10% margin would reduce EFSF ~50bn)

– 3) EFSF needs a cash balance to operate; – This would reduce the present EFSF/EFSM 500bn to approximately 440-450bn

� To manage assistance to Portugal and Spain it is highly possible that EMU countries and IMF might have to commit more resources through increased overall support-frames or additional bilateral lending

44

Borrowing need from EU/EMU and IMF

� Greek and Irish package approximately 50 % of GDP

� 3 cases, borrowing need 2011-2013: 40, 50 and 60 % of GDP

Of the EU/EMU EUR 45 billion to Ireland, 5 billion is by bilateral lenders (primarily UK, also Sweden and Denmark).

Borrowing need from EMU/IMF

EUR Billion, 3 cases (Greek and Irish package approximately 50 % of GDP)EUR billion

EU/EMU IMF Total EU/EMU IMF Total EU/EMU IMF TotalGreece

Ireland 45.0 22.5 67.5Italy 426.8 213.4 640.3 533.5 266.8 800.3 640.3 320.1 960.4Portugal 46.1 23.1 69.2 57.6 28.8 86.5 69.2 34.6 103.8Spain 283.8 141.9 425.6 354.7 177.3 532.0 425.6 212.8 638.5Ireland,

Portugal

and Spain 374.9 187.4 562.3 457.3 228.7 686.0 539.8 269.9 809.7

Borrow 40% of GDP Borrow 50% of GDP

Support through other facility

Borrow 60% pf GDP

Source: Bloomberg, SEB

45

Is a 50% of GDP support enough to cover financing need 2011-2013?

� Given our forecast of public finances and debt redemptions, a 50% of GDP support package seems to be enough to cover financing need 2011-2013 for all PIIGS except for Greece, see table

� BUT, if Portugal and Spain receive support, and including support to Ireland, funds committed by EMU countries will be fully used. If additional EMU countries need assistance, EFSF/EFSM support frames have to be increased

Figures for 2011 is refinancing need for 2011, 2012 is refinancing need 2011 and 2012, 2013 is refinancing need for 2011, 2012 and 2013.

PIIGS refinancing needPer cent of GDP, accumulated 2011-2013

2011 2012 2013

Greece 25.1 46.5 62.7

Ireland 16.6 32.5 45.7

Italy 22.2 36.9 47.6

Portugal 22.7 34.2 43.9

Spain 20.2 33.9 45.4Source: Bloomberg, SEB

46

PIIGS: Rising cost of servicing sovereign debt not the main problem

- PIIGS are back to situation before joining the Euro

47

PIIGS’ cost of servicing sovereign debt

� Interest rates on marginal lending are high, but given maturity of government debt, the effect on gov’t total interest expenditure is limited � Rising cost of borrowing is a short term borrowing problem…...the cost as a share of GDP is comparable to the situation before joining the euro

� Deficits 2012 are expected to be broadly in line with pre-EMU, debt somewhat higher

� All PIIGS had a join-the-Euro-windfall with lower interest rates reducing cost of servicing sovereign debt dropping fast. Implicit interest rates were reduced by between 40-50 per cent

� At today's levels, nominal interest rates are still higher than pre-euro-days. One difference though is inflation that were higher in all PIIGS in the mid-1990s and pre-crises compared to today (nominal GDP will grow at a lower pace, real rates back at pre-euro-levels)

� Investors are now more focused on public finances – the era of one interest rate for all in the euro-club is over

� The problem for PIIGS of honouring borrowing agreements are more long term. If deficits develop as forecast, the big issue is to get growth back on track. The denominator effect (nominal GDP is the denominator) is a powerful tool to reduce debt burden (debt/GDP-ratio)

General government cost of servicing sovereign debt, deficit and debtPer cent of GDP

Interest Deficit Debt ∆ Nom GDP Interest Deficit Debt ∆ Nom GDP Interest Deficit Debt ∆ Nom GDP

Portugal 5.6 -5.0 61.0 8.1 3.0 -2.9 65.3 2.0 4.3 -5.1 92.4 1.7

Ireland 5.3 -2.1 82.1 13.3 1.4 -7.3 44.3 -5.0 5.2 -9.1 114.3 4.2

Italy 11.6 -7.4 121.5 7.9 5.1 -2.7 106.3 1.4 5.9 -3.5 119.9 3.2

Greece 11.2 -9.0 97.0 12.2 5.0 -9.4 110.3 5.6 7.6 -7.6 156.0 1.5

Spain 5.1 -6.5 63.3 7.7 1.6 -4.2 39.8 3.3 3.4 -5.5 73.0 3.0

1995 2008 2012

Source: OECD, SEB

48

General government interest costPer cent of GDP

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Portugal Ireland

Italy Greece

Spain Sweden

Source: OECD, SEB

49

Political agenda – key event 2011-2012

50

Some key events 2011/2012

Parliamentary election in RussiaDEC

New President of ECB; G20 Summit, FranceNOV

Presidential election in Ireland; Parliamentary election in PolandOCT

IMF/World Bank Annual meetings; Parliamentary election in GreeceSEP

AUG

Poland EU Presidency (H2); Parliamentary election in TurkeyJUL

BIS Annual meeting (meeting of central bankers), EU summit expected to decide on new ECB-president

JUN

Presidential election in Latvia; Referendum in UK (voting reform); Local/regional elections in SpainMAY

IMF/World Bank Spring meetings, Parliamentary elections in FinlandAPR

Parliamentary elections in EstoniaMAR

G20 finance ministers/central bankers meeting, FranceFEB

Hungary EU Presidency (H1); World Economic Forum; Presidential election in PortugalJAN

Events 2011

Key events 2012 Mexico G20 Presidency; Denmark EU Presidency (H1); Cyprus EU Presidency (H2) Presidential elections: Finland (Jan), Russia (Mar), France (spring), India (Jul) USA; (Nov), Korea (Dec) Parliamentary elections: Spain (Mar), Korea (Apr), Ireland (May), Canada (Oct)

51

Rising political risk premium- on Euro zone and G20 levels

� Global environment: Tensions within G20 over economic policies have emerged and intensified in recent months

� Euro zone: Last decade hasn't delivered an optimal currency area => more difficult to find optimal economic policy solutions

� Countries like France, Italy, Belgium have not yet delivered reasonable/credible fiscal consolidation programs

� The imbalances within the euro zone redistribute economic - and political - power in an unpredictable way; countries' sovereignty and independence are now questioned

� BIGGEST CHALLENGE: Do countries have governments/politicians that have the endurance to implement necessary (decided/upcoming) austerity measures? Do countries have the leaders that will continue to develop/reform the euro zone?

52

Exposure of the banking system

53

Household liabilities (Eurostat)Per cent of GDP

Liabilities, household sector

ItalyBelgiumAustriaGermany

FinlandGreeceSwedenSwitzerland

NorwaySpainPortugalUK

IrelandNetherlandsUSDenmark

Source: Eurostat

40

50

60

70

80

90

100

110

120

130

140

150

54

High corporate debt in Ireland according to Eurostat…Per cent of GDP

Liabilities, non-financial corporations

BelgiumGreeceUSSwitzerland

FinlandItalyGermanyAustria

FranceNetherlandsDenmarkUK

SpainPortugalSwedenIreland

Source: Eurostat

50

75

100

125

150

175

200

225

250

275

55

….not so high according to BISPer cent of GDP

Liabilities, non-financial corporations

BelgiumGreeceUSSwitzerland

FinlandIrlandItalyGermany

AustriaFranceNetherlandsDenmark

UKSpainPortugalSweden

Source:Eurostat, BIS

70

80

90

100

110

120

130

140

150

160

170

56

Bank sector assets – PIIGS-countries around mean-value

� Statistical sources differ (this is Riksbank). Assets are for both domestic and foreign assets, e.g. a large share of Nordea’sassets are classified as Swedish

700

600

500

400

300

200

100

0

700

600

500

400

300

200

100

0Source: The Riksbank

Bank sector assets, % of GDP

GR

SE

BE

AU ES

PTMean LU

SW

FI

DKFRDEIE

UKNL

IT

57

BIS statistics on banks foreign liabilities –Ireland clearly tops the league

400

300

200

100

0

400

300

200

100

0Source: BIS

Bank sector foreign liabilities, % of GDP

GR

SEBE

AUES

PT

US

NO

CAJP

SWFI

DKFR

DE

IR

UK

NL

IT

58

Banks exposure to PIIGSFrom Riksbanks’ latest MPR, per cent of GDP

59

Renegotiation of debt:A comparison with Argentina (2001) and Russia (1998)

60

Conclusions

� Most defaults occur against a background of debt sustainability issues, but are triggered by refinancing problems, often accompanied by large external shocks

� Large part of sovereign debt denominated in foreign currency makes the situation more difficult

� For PIIGS: Significant consolidation necessary even to reach a primary balance. A quick default would in the short term increase financing problems. For Greece and Portugal: in a few years a large part of sovereign debt will be guaranteed by fellow EMU-members � it will politically be difficult to default on that debt.

� Comparing the situation in Russia and Ukraine with PIIGS – some issues are similar, some are not:– Similarities: high indebtedness, fixed exchange rate, economy in recession– EMU/IMF safety net solves the main trigger for default – short term financing – Russia and Argentina could print money and inflate away own currency debt,

PIIGS cannot (large foreign debt reduces the power of this mechanism)– Russia and Argentina regained competitiveness through devaluation; PIIGS does

not have this possibility but have to pursue internal devaluation– Lack of confidence in the fixed exchange rate put pressure on Russia and

Argentina – that is not the case for PIIGS which are not vulnerable to speculative currency attacks

� Situation in especially Greece looks worse from the outset, but the country enjoys stronger support (from Euro zone countries and ECB) to manage the short-term financing situation that can buy time to solve longer term issues

61

Argentina

� The run-up to default– Currency pegged to a strengthening USD � loss of competitiveness

against major trading partners – Recession in 1999 caused vicious circle: tax revenue dropped,

widened budget deficit, concern about gov’t ability to service debt, markets dropped, even deeper recession etc

– High debt and contractive economic policy. IMF kept lending money and postponing repayments

– Inflow of funds made it easy to increase debt (note that public debt was only ~50 % of GDP in 2001)

– 2001: Less confidence in local currency � flight of money to USD� Late 2001 default on debt and ‘Pesoification’ of USD-accounts

� Debt restructuring:– Foreign investment fled the country, capital flows to Argentina

ceased– 2005: Deal with 76% of bondholders, redemption of 25-35% of

original value; now attempts to get agreement from ‘holdouts’

62

Russia

� The run-up to default– Background: lost competitiveness, floating-peg exchange

rate, fiscal deficit, government debt: 50% of GDP in 1996 rose to >100% in 1998, lack of confidence that situation would be solved � flight of capital

– Triggered by the Asian crises and decline in world commodity prices

– Restructuring of debt repayments and widening of exchange rate band in August 1998

� Debt restructuring: – Restructuring of debt falling due from Aug 1998-Dec 1999

(24% of GDP, reduced by 40-75%) – Quick bounce-back. Rising oil-prices 1999-2000, import

substitution after the devaluation, completed IMF repayments 2005 ahead of schedule