Outlook (Us&Euro)

2. 2008 – A New World The 2008 Trade Family Long Bonds Curve Steepeners Short Inflation Linked Recession Spread Widening Lehman Brothers Failure High Volatility Illiquidity Short Credit Short Volatility The Market The Ideal Trades Carry Trade Reversals Short High Yield Currency

3. 2008 – A New World Interest rates have reached historical lows… Government bonds become very expensive… … and was one of the best asset classes in 2008 … relative to equity market Source: Dexia AM, Bloomberg, JP Morgan

4. 2008 – A New World … due to the aggressive cut by central bank and the decline of inflation expectations Unusual coordinated cuts by central banks High volatility increases appetite for government bonds Inflation expectations have become close to 0% Source: Dexia AM, Bloomberg

5. 2008 – A New World The deleveraging cycle has barely begun… The deviation between Debt/GDP and its trend illustrates the leveraging cycles Source: Dexia AM, Bloomberg Payment Difficulties for Borrowers Investor forced to sale Asset Prices decrease GDP and Profits decrease Deleveraging Cycle

6. 2008 – A New World … and leads to the worst recession since the second world war A probability above 25% gives a clear signal of recession Source: Dexia AM, Bloomberg

9. The Risk of Deflation After reaching high levels in 2008, inflation may turn negative in 2009 Domestic demand slumps… Desperate House Prices … It is the risk of Liquidity Trap… And money multiplier has decreased dramatically… Source: Dexia AM, Bloomberg

11. The Risk of Deflation The specter of debt-deflation can move interest rate to new lows The specter of deflation leads to a distortion between breakeven and real yield… Source: Dexia AM, Bloomberg 2.50 0.10 2.40 US Current 2.50 0.00 2.50 US Target EMU Target EMU Current 2.20 1.60 Real 10Y Yield 2.70 3.10 Nominal 10Y Yield 0.50 1.50 Breakeven 10Y Yield

12. After the Recession, the Reflation … Governments and Central Banks will have to use all possible stimulus to avoid deflation Encouraging Domestic Demand Helping the Housing Market The savings ratio must remain at a low level and fiscal package must encourage consumption Source: Dexia AM, Bloomberg Mortgage rates must remain significantly low to stabilize the housing market + 200%

13. After the Recession, the Reflation … Governments and Central Banks will have to use all possible stimuli to avoid deflation Avoiding the Liquidity Trap Money Market must continue the normalization process Unfreezing the Credit Market Bailout Plans The Fed expands its balance sheet rapidly by buying mortgage-backed securities and treasury securities If the quantitative easing is a success, the multiplier must increase. However, the Fed will have to drain the excess reserves… Source: Dexia AM, Bloomberg Not Disclosed Not Disclosed 14/10/2008 USD 700 US TARP 1 Y 31/12/2009 25/11/2008 USD 200 US TALF 30/06/2012 30/06/2009 21/11/2008 No Limit US TLGP 90 days 30/04/2009 27/10/2008 No Limit US CPFF 3 Y 04/09/2009 13/10/2008 GBP 250 UK 3 Y 31/12/2009 17/10/2008 EUR 400 Germany 5 Y 31/12/2009 16/10/2008 EUR 320 France Term of Guarantee Initial Date of Eligibility Initial Date of Eligibility Size (in BLNs) Country

14. After the Recession, the Reflation … Impact on US bond market US government bonds are historically expensive … … and inflation linked bonds become more and more bargain Source: Dexia AM, Bloomberg 2.50 0.10 2.40 US Current 3.30 1.00 2.30 US Target Real 10Y Yield Nominal 10Y Yield Breakeven 10Y Yield

15. After the Recession, the Reflation … Impact on Euro bond market ECB can continue the easing cycle … but the potential is now limited The actual level is now far from long term value estimated by CPI Source: Dexia AM, Bloomberg 3.10 1.50 1.60 EMU Current 3.30 1.80 1.50 EMU Target Real 10Y Yield Nominal 10Y Yield Breakeven 10Y Yield

16. After the Recession, the Reflation … When the recession will be over… On average during a recession, equity market lost 6 % while it gained 7% the year after On average during a recession, government yield decreased 100 bps while it increased 40 bps the year after Recession is a cyclical event Source: Dexia AM, Bloomberg, NBER

17. After the Recession, the Reflation … Hedge against reflation risk via Inflation Linked Bonds Market expects negative inflation for 5 years in US … … or in Europe Inflation Linked Bonds are attractive in comparison with nominal bonds in US … … and a durable inflation below 2% in Europe Source: Dexia AM, Bloomberg

18. After the Recession, the Reflation … Hedge against reflation risk via Intra Emu-Spreads Italy +120 bps Belgium +80 bps Greece +200 bps Germany 3.15% Italy 4.40% Greece 5.30% Source: Dexia AM, Bloomberg

19. After the Recession, the Reflation … Hedge against reflation risk via Intra Emu-Spreads Number of auctions in 2008 & 2009 2009 Forecast Issuance (€ bn) The forecasted government bond issuance exceeds €700bn i.e. a 25% increase Source: Dexia AM, Bloomberg, JP Morgan