vlerick event chief economists 17 01-2012

MFM Alumni partner:

Debate4 Chief economists

17/01/2012

MFM Alumni present:

MFM Alumni partner:

Edwin De Boeck, Chief Economist KBC

Frank Lierman, Chief Economist Dexia Bank

Bart Van Craeynest, Chief Economist Petercam

Peter Vanden Houte, Chief Economist ING

Keynote speakers

Alain Deneef, Bank Degroof

Moderator

MFM Alumni partner:

Banking in the new era – Edwin De Boeck, KBC

National governments in trouble – Frank Lierman, Dexia

The perilous Belgian budget – Bart Van Craeynest, Petercam

PIIGS countries – Peter Vanden Houte, ING

Role of the European Union – Frank Lierman, Dexia

Role of the ECB – Bart Van Craeynest, Petercam

The IMF , the USA & the importance of emerging economies – Peter Vanden Houte, ING

Favourite asset class for 2012 – Edwin De Boeck, KBC

Agenda

MFM Alumni partner:

Banking in the new era

Edwin De Boeck, Chief

Economist KBC

EMU crisis Spilling

over…

18/01/20125

…into

the core

countries… … and the banking sector5 year

CDS premia

bank

sector

(in bps)Intra-EMU

interest differentials

(yield

10 y. gov. bonds

vs. Germany

in bps.)

EMU crisis Spilling

over…

18/01/20126

…into the core countries… … and the banking sectorIntra-EMU interest differentials (yield 10 y. gov. bonds vs. Germany in bps.)

Banks’

exposure on peripheral countries (% of GDP)

European banks Need to strenghten capital base

18‐1‐20127

Regulatory Capital

(Regulatory capital / Risk-Weighted Assets)

Leverage Ratio(Capital / Total Assets)

Source: IMF, Financial Soundness Indicators, September 2011

European banks Strengthening of capital base...

8

MSCI price index banks

(1/1/10 = 100, nat. currency) EBA Policy response to the debt crisis:

“exceptional and temporary”

capital buffers� against sovereign debt exposure� to reach core tier 1 capital ratio of 9% by

30/6/2012

EU banks’

capital shortfall to reach EBA targets

(bn. €)

* Provided for in the second EU-support package

...in difficult markets ... ...earlier than initially foreseen

European banks Struggling for long-term funding

9

Corporate bond spreads

(EMU, in bps.)

Government funding needs (bn EUR)

European economy At the edge of a credit crunch

10

Tightening

Easing

Factors contributing to tightening

(EMU –

net % of banks contributing to tightening standards)

Bank Lending Conditions for non-financial corporations

(tightening –

easing)

ECB lending to banks (in bn. EUR)ECB “Securities Markets Programme“

ECBIncreasing willingness to play its role as lender of last

resort ?

MFM Alumni partner:

National governments in trouble

Frank Lierman, Chief

Economist Dexia

Bank

13

Governments facing huge fiscal challenges.Crisis

government

finances.

o Budget balance (in % of GDP)

Source

: European

commission, Autumn

Forecasts

2011.

14

Governments facing huge fiscal challenges.

o Debt of general government (in % of nominal GDP)

Source

: European

commission, Autumn

Forecasts

2011. OESO, economic

outlook, december 2011.

Crisis

government

finances. (2)

15


Source

: ECB, financial

Stability

Review, december 2011

o Euro area o US

General

government

gross

debtFederal

debt

held by

the public

Crisis

government

finances. (3)


BE 97,2DE 81,7EE 5,8 IE 108,1EL 162,8ES 69,6FR 85,4IT 120,5CY 64,9LU 19,5MT 69,6NL 64,2AT 72,2PT 101,6SI 45,5SK 44,5FI 49,1EA 88,0

16


Source

: Eurostat

Crisis

government

finances. (4)


17

Governments facing huge fiscal challenges.Debt

of households

: start of downsizing.

o Debt of households (in % of nominal GDP)

o Euro area o US

Total

liabilitiesResidential

mortgagesConsumer

credit

Source

: ECB, financial

Stability


18


Source

: ECB

Debt

of households

: start of downsizing. (2)

o Debt of households (in % of nominal GDP)

19

Governments facing huge fiscal challenges.Debt

of companies : ceiling reached.

o Euro area o US

Debt-to-GDP

ratio (left-hand

scale)Debt-to-financial

assets

ratio(left-hand

scale)Debt-to-equity

ratio (right-hand

scale)

Ratio of liabilities

to

financial

assetsRatio of liabilitiesRatio of credit market

liabilities

to

GDP

Source

: ECB, financial

Stability


o Debt of companies (in % of nominal GDP)

20


Source

: ECB.

Debt

of companies : ceiling reached. (2)

o Debt of companies (in % of nominal GDP)

21

Governments facing huge fiscal challenges.Why

such

huge

deterioration

?

Debt financing economic growth up to 2007

Violation of stability and growth pact by Germany and France in 2004

Rescue of the financial sector since 2008« general interest »

too big to fail of systemic intitutions

bail outs

nationalisations

guarantees

Recession 2008 - 2009Lesser tax revenues (more unemployed, reduced profits, less VAT, …)

Higher expenditures (stimulate the economy, unemploment compensation, …)

Rescue packages for Southern European countries

22

Governments facing huge fiscal challenges.Savings

packages

Reduction of expenditures (pensions, salaries, health care, investments, socialadvantages, subsidies, …)

Increase of revenues (existing taxes, new taxes, privatisations, battle againstsocial and fiscal fraude, …)

Structural measures on labour market and in welfare state

Deleveraging private sector (households and companies)

23

Governments facing huge fiscal challenges.Estimated

financing

needs

of the euro area countries in 2012.

Source

: ECB, financial

Stability


General

government

deficitMaturing

sovereign

debt

in % of nominal GDP

24

Governments facing huge fiscal challenges.Impact on the economy

: the seven

lean

years.

Lesser economic growthlower expenditures government

decreased purchasing power households

lesser corporate investments

higher saving ratio households and corporates

Economy supported byextremely low interest rates (ST and LT)

euro not soo expensive

declining spreads on bonds

better performance economy US and China

MFM Alumni partner:

The perilous Belgian budget

Bart Van Craeynest, Chief

Economist Petercam

26/2517‐01‐2012 | Vlerick Alumni Financial Debate |26

26/2526


40

60

80

100

120

140

160

180

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Public debt Doing

nothing

Primary

balance (incl

ageing

costs) Towards

primary

surplus of 4%

Source: Input gezondheidszorg

dec

2011 ‐

layout

AWI.xls –

sheet

overheidsschuldAs a % of GDP

Doing nothing is not an option

Public debt


‐8

‐6

‐4

‐2

0

2

4

6

8

1979 1983 1987 1991 1995 1999 2003 2007

Cyclically

adjusted

primary

balance (as a % of GDP)

Fiscal stimulus

Serious efforts required

Reversal in fiscal policy required


Single, no children, AW Married, 2 children, AW + 67% AW

0 10 20 30 40 50 60

MexicoNew Zealand

KoreaAustraliaIcelandIrelandJapan

SwitzerlandUS

CanadaUK

LuxemburgPolandOECD

PortugalNorwayTurkey

SlovakiaNetherlands

SpainDenmarkGreece

Czech

RepublicFinlandSweden

ItaliyAustriaFrance

GermanyHungaryBelgium

0 5 10 15 20 25 30 35 40 45 50Mexico

New ZealandKoreaIreland

LuxemburgAustraliaIceland

SwitzerlandUS

JapanCanada

UKPolandSlovakiaOECD

NetherlandsPortugalNorway

Czech RepulicSpain

DenmarkFinlandTurkeySwedenAustriaGreece

ItalyGermanyFrance

HungaryBelgium

No room for higher taxes on labour

Tax on labour(income tax + social security, OECD)


Primary spending

35

40

45

50

55

60

1970 1975 1980 1985 1990 1995 2000 2005

As a % of GDP

Looking for spending cuts

Required fiscal effort

2012: weaker 2011 + weaker

economic growth

1%

(3.7 bn)

By 2020: debt reduction + ageing

costs

4.4%

(16.3 bn)

By 2030: debt reduction + ageing

costs

8.5%

(31.5 bn)


0

10000

20000

30000

40000

50000

60000

70000

80000

Federalgovernment

Regional government

Localgovernment

Social security Health care

Primary spending

Looking for spending cuts

Spending

MFM Alumni partner:

PIIGS countries


ING BELGIUM 33

THEME IV: Fears of EMU exit have hit peripheral countries

ING BELGIUM 34

The difficult combination

•

Peripheral countries have both a competitiveness problem and a fiscal problem

•

Deflationary policy cannot be the solution to both problems

ING BELGIUM 35

European capital market is fracturing again

0

1

2

3

4

5

6

7

8

-15 -10 -5 0 5 10

Average CA balance in % GDP 1997-2006

Ave

rage

dom

estic

dem

and

grow

th 1

997-

2006

ES

PT

GR

IR

FN

NLFR

BEITAT

DE-10

-8

-6

-4

-2

0

2

4

6

-15 -10 -5 0 5 10

CA balance in % GDP 2011D

omes

tic d

eman

d gr

owth

201

1

GR

ES

PT

IT

FR

IR

FNAT

BE DENL

Era of reallocation of savingswithin the whole of the EMU Era of renewed home country bias

Today the risk of credit crunch is the highest in countries with a lack of savings

ING BELGIUM 36

ECB’s monetary policy not equal for everyone

2008 2009 2010 20113.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

Greece

Spain

Germany

Interest rate on short term loans to non-financial companies

ING BELGIUM 37

What would happen in a break-up scenario?

ING BELGIUM 38

GDP impact of a break-up of the Eurozone

85

90

95

100

105

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Germany AUT, FIN, BENELUX Southern -Europe (GIPS)

Real GDP (2011 = 100)

After 5 years Belgian GDP would be 11.5% lower than in the

base case. Unemployment would be 3.5% higher.

ING BELGIUM 39

Debt dynamics would hardly improve

40

506070

8090

100

110120130

140

2000 2002 2004 2006 2008 2010 2012 2014 2016

Italy Germany Base case Breakup

(% of GDP)

After 5 years, Belgian debt/GDP ratio would be 17.5% higher than

in the base case.

MFM Alumni partner:

Role of the European Union

Frank Lierman, Chief Economist Dexia Bank

41

Towards a real European economic / fiscal union?A pact for the euro.

Basic principleseconomic governance

prioritisation of specfic actions

each country engaged to make concrete steps yearly

completing internal market

Goalsincrease of competitiveness

stimulation of employment

sustainable public finance

increase of financial stability

42

Towards a real European economic / fiscal union?Six-pack.

Goal : strenghtening economic governance and improved fiscal sustainabilitysurveillance mechanism for prevention and correction of macroeconomic imbalance (European semester)

government debt criterion (60% of GDP)

expenditure benchmark (no longer finance growth out of revenue windfalls)

new quasi-automatic financial sanctions if budget deficit exceeds 3% of GDP

new minimum requirements for rules and procedures governing national budgetary frameworks

adoption national fiscal rules introducing balanced budgets in structural terms (annual structural deficit shall not exceed 0,5% of nominal GDP)

43

Towards a real European economic / fiscal union?Which future for the euro area ?

Header and footer options

Monetary Union

Fiscal / Economic Union

Governments have to clean up their deficits

Governments have to stimulate the growtheducation

innovation

employment

44

Towards a real European economic / fiscal union?Alternatives.

Header and footer options

Split up of the euro area

Smaller euro area (‘ light ‘ version)exit problem countries; euro area ≈ German euro area

exit strong countries; euro area ≈ Weak European monetary union

floating of weak and or strong currencies against euro

New Bretton Woods system with more or less fixed rates between USD, EUR and YUAN or YEN

MFM Alumni partner:

Role of the ECB

Bart Van Craeynest, Chief Economist Petercam


46/2546


ECB

Objectives

"The primary objective of the ESCB shall be to maintain price stability".

And: "without prejudice to the objective of price stability, the

ESCB shall support the general economic policies in the Community with a

view to contributing to the achievement of the objectives of the

Community as laid down in Article 2." (Treaty article 105.1)

The

objectives

of

the

Union

(Article

2

of

the

Treaty

on

European

Union)

are

a

high

level

of

employment

and

sustainable

and

non‐inflationary growth.

Further tasks

Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area. Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary for fulfilling the tasks, either from national

authorities or directly from economic agents.

Financial

stability

&

supervision:

the

Eurosystem

contributes

to

the

smooth

conduct

of

policies

pursued

by

the

authorities

in

charge related to the prudential supervision of credit institutions and the stability of the financial system. International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and fora both within

the EU and internationally in respect of tasks entrusted to the Eurosystem.

47/2547


G940

99 00 01 02 03 04 05 06 07 08 09 10 11 127.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

UNEMPLOYMENT RATE

ECB meets its primary objective

Inflation under control

‐1

0

1

2

3

4

5

Jan‐99 Jan‐01 Jan‐03 Jan‐05 Jan‐07 Jan‐09 Jan‐11

CPI

Core

Source : Input vlerick debat 17 Jan 2012.xls

‐

Sheet balance sheet 1

Unreasonably high unemployment


Source: Slides US Layout AWI.xls–

sheet EMU Spreads

12/01/2012

0

5

10

15

20

25

30

35

40

Aug‐09 Nov‐09 Feb‐10 May‐10 Aug‐10 Nov‐10 Feb‐11 May‐11 Aug‐11 Nov‐11

Belgium

ItalySpain

Portugal

Ireland

Greece

Germany

Eurocrisis: financial stability at risk

Eurozone bond yields


ECB bond purchasesLooking to Frankfurt

Mandate: financial stability in the

eurozone

Unlimited means

RisksInflationMoral hazard

Alternative???

Source: Eco strat August2011.xls – Sheet ECB

0

5000

10000

15000

20000

25000

Dec‐10 Mar‐11 Jun‐11 Sep‐11 Dec‐11

Eurocrisis: waiting for the ECB


0

500000

1000000

1500000

2000000

2500000

3000000

Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11

ECB

0

500000

1000000

1500000

2000000

2500000

3000000

Oct‐05 Oct‐06 Oct‐07 Oct‐08 Oct‐09 Oct‐10 Oct‐11

Fed

Source : Eco strat April2011 ‐

sheets world inflation ‐

Core Inflation ‐

Inflation Asia.xls ‐ Sheet balance sheet Source : Eco strat April2011 ‐

sheets world inflation ‐

Core Inflation ‐

Inflation Asia.xls ‐

Sheet balance sheet

Mln USDMln USD Mln EURMln EUR

Massive monetary expansion

Central bank balance sheet

+ 200%

+ 90%


Bart Van Craeynest

[email protected].:

+32 (0)2 229 62 32

Petercam N.V.Sint Goedeleplein 19

1000 BrusselTel.: +32 (0)2 229 63 11

Fax : +32 (0)2 229 65 98

Brussels –

Frankfurt – London ‐

Luxemburg ‐

Madrid ‐

Geneva

MFM Alumni partner:

The IMF , the USA & the importance of emerging economies


ING BELGIUM 54

THEME VII: Slowdown or recession in the US and emerging world?

ING BELGIUM 55

Signs of improvement in the US

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201280

85

90

95

100

105

110 250

300

350

400

450

500

550

600

650

700

Unemployment claims(inverted scale)

US small business optimism

ING BELGIUM 56

Debt households, companies and government

100

150

200

250

300

350

1980 1990 2000 2010

Source: BIS

(Weighted average debt in % GDP)

ING BELGIUM 57

Increase in total debt (2000-2010)

0

20

40

60

80

100

120

140G

E

CA

SW AT NL JP FI IT BE

Avg GR

US FR ES

UK PT

ING BELGIUM 58

Emerging markets lead the way…

90

100

110

120

130

140

150

160

170

08 09 10 11 12 13

Index

90

100

110

120

130

140

150

160

170

China

India

B razil

P o land

US

Russia

Euro zo ne

Fo recasts1Q08=100

Emerging

world

output surges

ahead

of developed

ING BELGIUM 59

Chinese economy

is softening

2005 2006 2007 2008 2009 2010 2011 20125

10

15

20

25

30

35

40

90

95

100

105

110

115

120

125

130

135

140

145Chinese Business Confidence

Chinese M1 growth

3m lead

MFM Alumni partner:

Favourite asset class for 2012

Edwin De Boeck, Chief

Economist KBC

Equity …and improving growth prospects

Stabilisation

of OECD leading

indicators… …supports equities

3-monthly change

in % 3-monthly change

in %

Equity Attractive valuation…

Expected earnings growth Forward PE ratios well below long-term average

Equity Globalisation

of regional equity markets

Expected earnings growth converges to Developed Markets

Valuation discount has largely disappeared

Government bonds Extremely expensive as safe haven…

Real 10 year benchmark yields are negative… … but high risk premia

may offer opportunities

Corporate bonds …but corporate spreads are offering value

Non-financial corporates… …offer attractive spread

EMU, Spread to

benchmark, in basis points

Commodities over their peak

Oil price rises again on Iran worries

(January 2007=100 in USD)

Commodity prices

MFM Alumni partner:

Thank

youMFM Alumni, Your Financial Network

MFM Alumni partner:

ReceptionMFM Alumni, Your Financial Network

vlerick event chief economists 17 01-2012

Economy & Finance

financial stability review

crisis government finances

emu crisis spilling

banking sector intra

general government

european commission

core countries

base case