The age of global crisis.by R.Ziemba

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The age of global crisis.by R.Ziemba

  1. 1. By Rachel Ziemba, Director of Emerging Europe and Global Macro© Roubini Global Economics Copyright 2011No reproducing or redistribution without written consent. Roubini Global Economicsroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800
  2. 2. Global Headwinds For the Black Sea Region • Global outlook has darkened especially in Europe, with recession risks high • Downside risks for Black Sea Region in near term, undermining long-term growth prospects. – Financing strains could put pressure on currencies and banks – Global weaknesses will exacerbate any domestic vulnerabilities, especially for Ukraine, Romania – But policy space remains constrained. • Policy Response – Use policy space available to improve balance sheets – Infrastructure and Institutions to support intra-regional trade – Improve Balance sheetsroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 2
  3. 3. Global Story: Private Debt Crisis to Public Burden U.S., U.K., Japan EZ PIIGS—Explosive Baseline/Shock Baseline/Adverse Debt Paths Debt Paths Note: Baseline is the IMF WEO Projection; Adverse Scenarios are RGE 1-standard Source: IMF and RGE Calculations deviation shocks to GDP growth and interest rates over the last decade—a relatively benign PIIGS scenario • Sovereign credit risk will stay sky high in the EZ PIIGS, keeping the world on the edge of crisis given the threat of disorderly default or EZ break-up • Heavy public debt burdens in the United States, United Kingdom and Japan will weigh on recovery, but should not threaten collapse; all can monetize public debt • This will draw attention also to the EM countries that have weaker balance sheetsroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 3
  4. 4. Global Story: Too Much Debt in Advanced Economies EZ/U.K. Warning Signals Flash Amber/Red, Less So in the United States US Japan UK Canada EZ Belgium France Germany Greece Ireland Italy Portugal Spain Government Gross Debt, 2011 100 229 83 84 87 97 88 80 152 114 120 91 64 Government Net Debt, 2011 72 128 75 35 67 82 78 55 n.a. 95 101 86 53 Primary Balance, 2011 -9 -8.6 -5.5 -4.1 -1.7 -0.5 -3.5 -0.3 -0.9 -7.5 0.2 -1.6 -4.6 Households Gross Debt 91 74 107 93 72 55 69 62 68 129 50 103 90 Households Net Debt -230 -231 -184 n.a. -129 -204 -131 -130 -56 -60 -178 -126 -74 Nonfinancial Corporates Gross Debt 76 138 128 n.a. 142 161 157 69 71 278 119 154 205 Nonfinancial Corporates Debt over Equity (percent) 105 176 89 72 106 43 76 105 218 113 135 145 152 Financial Institutions Gross Debt 97 188 735 n.a. 148 139 148 95 21 664 99 65 113 Bank Leverage 13 23 24 18 26 30 26 32 17 18 20 17 19 Bank Claims on Public Sector 8 76 7 20 n.a. 22 19 25 27 28 32 16 22 Total Economy Gross External Liabilities 144 64 696 91 174 417 254 181 194 1,598 153 293 215 Total Economy Net External Liabilities 19 -55 14 7 13 -43 11 -39 99 102 20 106 90 Government Debt Held Abroad 32 7 27 20 29 68 64 53 61 59 47 57 50 Bank Leverage (Tier 1) 9 21 20 18 n.a. 21 23 22 17 20 11 16 16 Source: IMF; RGE • Debt-led growth is a symptom of structural barriers to sustainable, balanced growth • [Excessive] Debt brings forward [too much] activity; will be followed by low growth • EZ/U.K. problems run deeper and wider than U.S., but all face severe challenges • There are no quick fixes; the only way forward is to commit to debt relief upfront, and structural and fiscal adjustment later, to reduce risk of depression / stagnation nowroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 4
  5. 5. Global Scenarios—No Way to escap adjustment CostsPresent to End of 2011 2012 Probability Policy Response 2013-15 Probability DMs fall into A weak, U-shaped recovery recession, likely in late 60% Adequate policy support continues, with volatile 2011 or early 2012. Triggers (QE and fiscal stimulus growth in DMs (amid include a financial crisis across DMs and possibly balance-sheet repair and following disorderly some EMs) staves off the possible EZ uncertainty) and ~55% default(s) in the EZ or policy failure of systemic EMs growing near potential. mistakes (lack of or institutions. Chinas broken investment- insufficient timely support). led growth model gives out. DMs are at stall Gradual rebalancing ensues. speed, while EMs aregrowing near potential. DMs face a risk offalling into recession in 2011. The growth environment is The policy response is A deep recession takes hold volatile, but DMs avoid inadequate (no QE or of DMs and possibly technical recession (though too-little, too-late QE; not growth recession) and lack of adequate fiscal globally, requiring an ~45% EMs keep growing around 40% aggressive, coordinated stimulus and possible potential. policy response. fiscal drag). roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 5
  6. 6. Global Growth: DM Recession, EM Slowdown Growth Inflation 2011 2012 2011 2012 U.S. 1.5 0.7 3.1 2.3 EZ 1.6 0.8 2.5 1.8 Japan -0.7 2.0 0.1 0.1 G7 1.3 1.0 2.6 1.9 Advanced Economies ₁ 1.3 1.1 2.6 1.9 Emerging and Frontier Markets 6.3 5.7 6.5 5.2 Asia/Pacific ₂ 5.9 6.1 4.8 3.5 Emerging Asia ₃ 7.5 7.0 5.9 4.2 Latin America ₅ 4.5 3.5 8.9 7.8 Emerging Europe ₆ 4.6 3.3 6.6 6.0 Middle East and Africa ₇ 3.4 3.0 6.2 6.1 BRIC 7.5 7.1 6.6 4.9 World 3.7 3.3 4.5 3.51. U.S., Canada, Japan, UK, Eurozone, Sweden, Norway, Australia, Switzerland2. Japan, Australia, China, India, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Vietnam, South Korea, Taiwan, Thailand3. Asia/Pacific ex-Japan and Australia4. Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam5. Brazil, Argentina, Mexico, Chile, Peru, Colombia, Venezuela6. Czech Republic, Hungary, Poland, Turkey, Russia7. Israel, Egypt, Saudi Arabia, United Arab Emirates, South Africa Based on IMF PPP Weights for 2011 and 2012 roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 6
  7. 7. Risks Are to the Downside • Policy responses moving too slow in Europe-> and economic indicators highlight rising risk of recession or at best stagnation. • A disorderly default could add to financing strains – The chance of a Greek exit in next 12 months is growing • US too will barely grow, as underlying debt issues have not been addressed. • EM too will be affected through trade and financing channels. • EMEA most exposed due to trade links and weaker balance sheets – still recovering from past credit/asset booms. • Some good news -Inflation has eased from early 2011, helped by good harvests and modest increases in oil supply.roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 7
  8. 8. EM Consumption Can’t Pick Up the Slack Yet Nominal Consumption, USD billion • DM balance-sheet repair will subtract from aggregate demand 12 000 • Negative wealth effects, forced deleveraging 10 000 , fiscal consolidation all 8 000 contribute to adverse feedback loops 6 000 4 000 • EM consumption cannot lift the world economy: 2 000 • Most of EM has substantial 0 consumption shares in GDP US Europe Japan Key EM levels and growth Private consumption, annualized, 2010 • China remains export- and investment-led, and is unable Note: “Europe” includes EZ and UK; “Key EM” includes BRICS plus to change this model fast Indonesia and Turkey Source: IMF, national statistical agencies, RGEroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 8
  9. 9. Emerging Europe Growth Slowing Down Growth OECD Leading Indicators Points to Stall/Recession 2011 2012 115 Hungary 1.8 1.1 110 Poland 3.9 2.7 105 Turkey 7.6 3.3 100 Romania 1.5 1.3 Russia 4.1 3.9 95 Eurozone 1.6 0.8 90 Germany 2.9 1.2 85 US 1.5 0.7 China 9.1 8.3 EM 6.32 5.7 Hungary Russia South Africa Poland Czech RepublicGrowth Falling or Staying Below Trend Inflation Moderating too, Giving More Policy Space for some roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 9
  10. 10. EM Europe: Balance Sheet Vulnerabilities • Tepid recovery has prevented more of an improvement in regional balance sheets. • Eurozone supported regional recovery, especially Czech R and other countries shifted to exports as primary growth driver. • New Trading partner - Countries are also trading more with China (especially commodities) • Many economies (Hungary, Romania, Ukraine Baltics) had to begin fiscal austerity, weakening domestic demand and overall growth. • Turkey has seen the size of its external deficit grow, credit growth soar, and now has less policy space than in 2008. • Romania, Bulgaria and others remain constrained by high levels of FX lending and debt service which adds to weak domestic demand and bank balance sheets.roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 10
  11. 11. Balance Sheet Repair Is Underway External Debt (%GDP) External Deficits Forced to ImproveHefty FX debt burden in Bulgaria, Romania Loan to Deposit Ratios Starting to Improve Domestic FX loans (latest) (% GDP) of which % FX credit in total Total pvt sector Corp. HH lending /2 Bulgaria 44.7 34.7 10.0 61.9 Georgia 20.2 … … 74.3 Romania 24.9 12.4 12.5 62.5Russia 9.1 8.3 0.7 20.3Turkey 14.9 … … 27.8 Ukraine 31.8 19.1 12.7 46.3 roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 11
  12. 12. How Much Policy Space • EMEA balance sheets still weaker than Asia/Latam. • FX mismatches increasing vulnerability to FX depreciation. • Much less maturity mismatches than in 2008. • Inflation is easing -> but limited space for CBs to cut • Wide fiscal deficits, limit space for stimulus • Multilateral institutions could provide support • CBs still have cushions but are starting to run out of reserves ammunition. • Other EM stimulus (china) will keep commodity demand from plungingroubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 12
  13. 13. Long-term positives • Chance of boosting yields through agriculture. Population growth will put pressure on agricultural commodities which will outperform. • Space for infrastructure, technology transfer • Convergence/catch up with advanced economies • Greater intra-regional trade • Improving macro/institutional frameworks.roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800 13
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