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Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)
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Global Macro Report on the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain)

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This global macro report on the PIIGS countries written by Alexandre Kateb Director of COMPETENCE FINANCE looks at the financial vulnerabilities that have accumulated over the years in these economies …

This global macro report on the PIIGS countries written by Alexandre Kateb Director of COMPETENCE FINANCE looks at the financial vulnerabilities that have accumulated over the years in these economies and discusses the prospects for the fiscal situation, government debt, sovereign ratings and private sector deleveraging over the period 2010- 2013. A premium version of this report is accessible to subscribers of our Global Macro research service

Published in: Economy & Finance, Technology
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  • 1. A look at the macro-financial vulnerabilities in the PIIGS Alexandre Kateb Director of COMPETENCE FINANCE alexandre.kateb@competencefinance.com June 2010
  • 2. Summary : the macro-financial vulnerabilities facing the PIIGS countries warrant a long and painful structural adjustment process that will have severe consequences on GDP growth and government balance ●The sharp cyclical downturns currently observed in the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) are linked to the structural imbalances that have built up in these economies over the last expansion cycle ● These imbalances are related to the easiness with which households and corporates accessed to local and cross-border credit following the adoption of the euro as a single currency in 1999. This is particularly true in the case of Greece, Spain and Ireland. Households and corporate firms in these countries have taken advantage of this credit easiness to boost their spending and investment to unsustainable levels ●The deleveraging process that has started in these countries, and more broadly in the whole Euro Area with harsh austerity programs is likely to weigh severely on growth in the coming years, putting at risk the probability of success of these programs ● Our simulation shows that the fiscal and budgetary situation will stay deteriorated in the PIIGS countries at least until 2012-2013, especially in Greece, Ireland and Spain even if the austery programs are fully implemented. In case of failure, a restructuring of the Greek public debt seems unavoidable. ●In addition, we expect a further downgrading of the Spanish sovereign rating to AA- or A+ over the coming months given the recessive impact of the austerity plan and the adverse effect on growth of the develeraging process at work in the private sector ● However, the impact on the euro will be subdued as much of the adjustment has already occured. Hence, we expect the euro to reach a floor at 1.15 – 1.10 against the US dollar in Q3 10 and to stay at this level through mid 2011 © COMPETENCE FINANCE http://www.cfinanceconsulting.com 2
  • 3. A loss of competitiveness : in nominal terms, the cost of labour has grown much faster in the PIIGS than in other Euro Area countries. In real terms, the loss of competitiveness is limited to Ireland and Italy but that matters less for the international competitiveness of firms Nominal Labour cost per unit of production (base year 2000) Real labour cost per unit of production (base year 2000) 140 115 135 110 130 125 105 120 115 100 110 95 105 100 90 95 90 85 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 Euro Area Ireland Greece Euro area Ireland Greece Spain Italy Portugal Spain Italy Portugal Source : COMPETENCE FINANCE, EUROSTAT Source : COMPETENCE FINANCE, EUROSTAT © COMPETENCE FINANCE http://www.cfinanceconsulting.com 3
  • 4. Structural imbalances : growth in some of the PIIGS (Spain, Ireland) has relied mostly on the construction and services sectors, boosted by a strong increase in the labour force (through immigration and a rise in female labour participation) Share of the la construction dans le PIB (en %) Poids de construction sector in GDP (in %) Employment indexl'emploi year 2000)en 2000) Progression de (base (base 100 14 130 12 125 120 10 115 8 110 6 105 4 100 2 95 0 90 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 Zone euro Irlande Grèce Zone euro Irlande Grèce Espagne Italie Portugal Espagne Italie Portugal Source : COMPETENCE FINANCE, EUROSTAT © COMPETENCE FINANCE http://www.cfinanceconsulting.com 4
  • 5. Net external investment position : as a result of the credit bubble building up in Spain, Greece and Portugal over the last decade, these countries have become strongly reliant on foreign capital with loans representing the bulk of this capital. This is especially true in Greece. Total net external investment position (in % GDP) 20% 0% -20% -40% -60% -80% -100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 Euro area Ireland Greece Spain Italy Portugal Source : COMPETENCE FINANCE, EUROSTAT For more detailed data (e.g. Breakdown by sector and type of investment) and forecasts for the adjustment process (2010-2014) please contact us © COMPETENCE FINANCE http://www.cfinanceconsulting.com 5
  • 6. Household debt deleveraging : Irish, Portuguese and Spanish households have increased significantly their liabilities over the last decade at levels strongly surpassing their European peers. As a result the deleveraging process and the reconstitution of savings will weigh on private consumption in the coming years Loans to households (% GDP) 120 100 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Euro area Ireland Greece Spain Italy Portugal Source : COMPETENCE FINANCE, EUROSTAT © COMPETENCE FINANCE http://www.cfinanceconsulting.com 6
  • 7. Deleveraging in the corporate sector : Corporate debt has strongly increased over the last decade in Spain, Portugal and Ireland. The deleveraging process that will take place in the corporate sector will strongly reduce the contribution of investment to growth (in fact a negative contribution is expected in Spain) Loans to nonfinancial corporates (% GDP) 180 160 140 120 100 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Euro area Ireland Greece Spain Italy Portugal Source : COMPETENCE FINANCE, EUROSTAT © COMPETENCE FINANCE http://www.cfinanceconsulting.com 7
  • 8. A worsening fiscal situation : as a result of the financial crisis and economic recession, the governement budget in the PIIGS countries has suffered from a « cisors effect » : a fall down in income and a massive increase in expenditure Ireland : central administration budget (% GDP) Greece : central administration budget (% GDP) 45 45 40 40 35 35 30 30 25 25 20 20 15 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Income Expenditure Income Expenditure Source : EUROSTAT Spain : central administration budget (% PIB) 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 © COMPETENCE FINANCE Income Expenditure http://www.cfinanceconsulting.com 8
  • 9. A worsening fiscal situation : as a result of the financial crisis and economic recession, the governement budget in the PIIGS countries has suffered from a « cisors effect » : a fall down in income and a massive increase in expenditure Italy : central administration budget (% GDP) Portugal : central administration budget (% GDP) 35 45 40 30 35 25 30 25 20 20 15 15 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Income Expenditure Income Expenditure Source : EUROSTAT The « cisors effect » is less important for Italy but the fiscal situation was already in a bad shape before the financial crisis © COMPETENCE FINANCE http://www.cfinanceconsulting.com 9
  • 10. The « best case » scenario : even in a best case scenario (with successful implementation of the announced austerity measures), the fiscal situation will remain badly dammaged in Ireland, Greece and Spain (the probability of a « worst case » scenario being high for the latter two countries) Publicpublique (en % PIB) Dette debt (% GDP) Best case scenario Budgetpublic (en %GDP) Déficit deficit (% PIB) 160 4 140 2 0 120 2007 2008 2009 2010 p 2011 p 2012 p -2 100 -4 80 -6 60 -8 40 -10 -12 20 -14 0 2008 2009 2010 p 2011 p 2012 p -16 Irlande Grèce Espagne Italie Portugal Irlande Grèce Espagne Italie Portugal Simulation by COMPETENCE FINANCE (for the two other scenarios and their probability distribution for each country please contact us) We expect a further downgrading of the Irish and Spanish sovereign ratings in the coming months with credit spreads widening on public and corporate debt © COMPETENCE FINANCE http://www.cfinanceconsulting.com 10
  • 11. Exposure to Credit Default Swaps (CDS) : the volume of CDS contracts hedging investors against the PIIGS sovereign risk has increased by 40% over one year to a gross total of USD 500 billion and a net exposure of USD 60 billion. This is an indication of the increase in the perceived risk on the PIIGS Net volume of Sovereign CDS contracts (in USD bn) Gross volume of sovereign CDS contracts (in USD bn) 70 600 60 500 50 400 40 300 30 200 20 100 10 0 0 Portugal Italy Ireland Greece Spain All PIIGS Portugal Italy Ireland Greece Spain All PIIGS Week ending Week ending Week ending Week ending 22/05/2009 21/05/2010 22/05/2009 21/05/2010 Source : COMPETENCE FINANCE, DTCC Data on CDS exposure on the PIIGS banking and corporate sectors is available upon request © COMPETENCE FINANCE http://www.cfinanceconsulting.com 11
  • 12. Banking exposure : the French banks are the most exposed to the PIIGS risk followed by German and British banks. The exposure of the French banks is especially high to Italy and Spain, the latter country being the most vulnerable to a corporate and banking credit crisis unfolding from the real estate sector Consolidated exposure of European banks to the PIIGS (in USD bn) 1200 1032.8 1000 851.1 800 634.6 600 511.4 400 238 241 219.6 189.7 187.5 183.4 188.6 200 119.7 114.1 76.9 68.7 60.4 75.1 30.8 44.7 47.4 45 24.3 12.4 15.1 11.9 0 Italy Spain Ireland Portugal Greece All european banks French banks German banks British banks Dutch banks Source : COMPETENCE FINANCE, BIS More detailed data for the large banks direct and indirect exposure to the PIIGS is available upon request © COMPETENCE FINANCE http://www.cfinanceconsulting.com 12
  • 13. Disclaimer Any reproduction even partial of the information and analysis contained in this document is strictly prohibited without an explicit autorization requested from COMPETENCE FINANCE. We decline any responsability regarding the use that may be made by third parties of the data and information provided in this document. This information is general and does not constitute a recommandation for investment in any financial instrument whatsoever. Please consult our Internet site : http://eng.cfinanceconsulting.com © COMPETENCE FINANCE 2010. All rights reserved. © COMPETENCE FINANCE http://www.cfinanceconsulting.com 13

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