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EIU Webinar_European Debt Crisis_Nov 23 2010


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As a result of the financial crisis and global recession public debt burdens have risen to critical levels in a number of Western European countries. Emergency loans from the EU and IMF have eased funding pressures, but have only bought the region time; painful fiscal adjustment and an improvement in competitiveness is required if the region is to enjoy a sustainable recovery.

Eastern Europe, while rebounding through exports and industrial output, will underperform its emerging-market peers in 2010. Business and consumer sentiment in the region is fragile, and its currency and bond markets are vulnerable to contagion from problems in the euro zone or a rise in risk aversion more broadly.

This presentation takes a look at the economic outlook for both Western and Eastern Europe.

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EIU Webinar_European Debt Crisis_Nov 23 2010

  1. 1. The European debt crisis: Will confidence be restored? An EIU webinar analyzing the risk outlook for Europe John Bowler Director, Country Risk Service Matteo Napolitano Senior Editor / Economist November 23, 2010
  2. 2. About the Economist Intelligence Unit (EIU) <ul><li>Research arm of The Economist Group for business executives </li></ul><ul><li>650 analysts and industry specialists worldwide covering </li></ul><ul><ul><li>Analysis and forecasting for over 200 countries and territories </li></ul></ul><ul><ul><li>Risk assessment </li></ul></ul><ul><ul><li>Industry data and trends: automotive, consumer goods, energy, financial services, healthcare, technology </li></ul></ul><ul><ul><li>Market sizing </li></ul></ul><ul><ul><li>Custom client research </li></ul></ul><ul><ul><li>Visit to register for free macroeconomic information on 187 countries </li></ul></ul>
  3. 3. Today’s Presenters John Bowler Director, Country Risk Service Matteo Napolitano Senior Editor, Economist
  4. 4. Weak public finances Italy Greece Ireland Portugal Spain UK 2010 data. Source: EIU, Country Data . - 30%
  5. 5. Market perception of eurozone sovereign risk 2010 data. Source: Haver Analytics.
  6. 6. Euro zone: Private-sector debt Bank claims on private sector, € bn. Source: IMF, International Financial Statistics . 211% of GDP 112% 111% 92% 234% 192% 150% 110%
  7. 7. Periphery has lost competitiveness Average real wage index, 1999 Q1=100. Source: Economist Intelligence Unit, CountryData .
  8. 8. Greece: Fiscal adjustment on track but is it sufficient? <ul><li>January-September 2010 versus 2009 </li></ul><ul><ul><li>Revenue + 3.3% </li></ul></ul><ul><ul><li>Spending – 10.0% </li></ul></ul><ul><ul><ul><li>Primary spending – 11.6% </li></ul></ul></ul><ul><ul><ul><li>Interest charges + 8.0% </li></ul></ul></ul><ul><ul><li>Budget deficit € 16.3bn (€ 23.6bn in 2009) </li></ul></ul><ul><ul><li>Public debt (end June) € 316bn (135% of GDP) </li></ul></ul><ul><li>Fiscal tightening </li></ul><ul><ul><li>Economic contraction, undermining debt sustainability </li></ul></ul><ul><ul><li>Austerity fatigue, social unrest </li></ul></ul><ul><li>Market access still closed for government and banks </li></ul><ul><li>In Greece’s interest to default earlier rather than later ? </li></ul><ul><li>B rated for sovereign risk </li></ul>
  9. 9. Ireland: the cost of a property and banking bust <ul><li>Anglo-Irish bail-out </li></ul><ul><ul><li>Fiscal deficit in 2010 33% of GDP </li></ul></ul><ul><ul><li>Risk of further losses </li></ul></ul><ul><li>Public debt/GDP 24% in 2007, 98% in 2010 </li></ul><ul><li>Run on banks </li></ul><ul><ul><li>Half of banks’ non-deposit funding (€83bn) from ECB </li></ul></ul><ul><li>EU/IMF loan </li></ul><ul><ul><li>More spending cuts </li></ul></ul><ul><ul><li>Raise corporate tax from 12.5% ? </li></ul></ul><ul><ul><li>Recapitalise/restructure banks </li></ul></ul><ul><li>Can Ireland grow fast again ? </li></ul><ul><ul><li>Average GDP growth 5.5% in 2001-07 </li></ul></ul><ul><li>Downgraded to BB in October </li></ul>Real GDP growth, %. Source: EIU, Country Data .
  10. 10. <ul><li>2010 fiscal deficit 7.5% of GDP </li></ul><ul><li>Public debt 82% of GDP </li></ul><ul><li>Political agreement to cut 2011 deficit by 3% of GDP </li></ul><ul><li>Banks dependent on ECB liquidity </li></ul><ul><li>Borrowing costs unsustainable </li></ul><ul><ul><li>EU/IMF funding ? </li></ul></ul><ul><li>Lack of competitiveness, low growth, low savings </li></ul><ul><li>Downgraded to BB in October </li></ul>Portugal: finally a greater sense of urgency Current-account (% of GDP). Source: EIU, Country Data .
  11. 11. Saving the eurozone <ul><li>Funding pressures eased by </li></ul><ul><ul><li>€ 750bn EU-IMF financing </li></ul></ul><ul><ul><li>How costly will it be to draw on €440bn EFSF? </li></ul></ul><ul><ul><li>ECB bond purchases (around €65bn to date) </li></ul></ul><ul><li>Restoring solvency </li></ul><ul><ul><li>Economic growth </li></ul></ul><ul><ul><ul><li>Competitiveness </li></ul></ul></ul><ul><ul><li>Fiscal consolidation </li></ul></ul><ul><ul><li>Fiscal transfers </li></ul></ul><ul><ul><li>Default </li></ul></ul><ul><li>Tougher fiscal surveillance </li></ul><ul><li>New debt resolution mechanism </li></ul><ul><ul><li>Burden sharing for new creditors </li></ul></ul>
  12. 12. Is leaving the eurozone the solution? <ul><li>Boost to competitiveness </li></ul><ul><ul><li>Would this materially change growth prospects ? </li></ul></ul><ul><ul><li>Not a substitute for reform </li></ul></ul><ul><li>How to manage an orderly devaluation ? </li></ul><ul><ul><li>Printing of banknotes </li></ul></ul><ul><ul><li>Redenomination of banks’ euro liabilities </li></ul></ul><ul><ul><ul><li>Depositors suffer losses </li></ul></ul></ul><ul><ul><li>Problem of insolvency exacerbated </li></ul></ul><ul><li>Not a rational choice but one which could be made in extremis </li></ul>
  13. 13. East-central Europe: An uneven recovery… Seasonally adjusted GDP, rebased to Q1 2006=100 Source: Eurostat/Haver Analytics.
  14. 14. … that is stronger in countries with milder imbalances… Source: Eurostat/Haver Analytics.
  15. 15. … but which may now have peaked Source: Eurostat/Haver Analytics.
  16. 16. Currencies rally, but less than other emerging markets Currencies versus US$, Index Jan 4 2010= 100, Source: Haver Analytics
  17. 17. Sounder public finances than in eurozone periphery… Poland Greece Ireland Portugal Spain Czech Republic 2010 data. Source: EIU, Country Data . - 30% Romania Latvia Hungary Slovakia
  18. 18. … and sounder private finances as well Bank claims on private sector, % of GDP . Source: IMF, International Financial Statistics .
  19. 19. Few ratings upgrades to date Sovereign risk score and rating (latest rating in brackets) Source: EIU, Country Risk Service . Upgraded to BBB in September 2010 Downgraded to B in April 2009
  20. 20. Poland: good growth, but no urgency on fiscal policy <ul><li>Economy kept growing throughout the global crisis </li></ul><ul><ul><li>Large domestic market </li></ul></ul><ul><ul><li>Avoidance of excesses previously; strong financial supervision </li></ul></ul><ul><li>But fiscal deficit got out of hand in 2008-09 </li></ul><ul><ul><li>Little consolidation planned in 2010-11… </li></ul></ul><ul><ul><li>… and no sense of urgency afterwards </li></ul></ul><ul><li>Public debt likely to break through legal ceilings, forcing action </li></ul><ul><li>However, markets could punish Polish assets, particularly if global mood turns against emerging markets </li></ul>
  21. 21. Czech Republic/Slovakia: export dependency <ul><li>Economies tracked slump and recovery in global trade </li></ul><ul><ul><li>FDI-driven economies </li></ul></ul><ul><ul><li>Tied into German supply chain, allowing them to tap into more dynamic markets </li></ul></ul><ul><ul><li>Small domestic markets will continue to be a weakness </li></ul></ul><ul><ul><li>Avoided excesses previously; strong financial supervision </li></ul></ul><ul><li>Both are front-loading fiscal adjustment </li></ul><ul><ul><li>Less insulated than Poland, therefore less complacent? </li></ul></ul><ul><ul><li>But coalition politics could force a watering down </li></ul></ul>
  22. 22. Hungary/Romania/Latvia: domestic imbalances still to be worked through <ul><li>Hungary </li></ul><ul><ul><li>Domestic economy is still weak; households exposed to currency risk </li></ul></ul><ul><ul><li>Government is strong, but uncertainties over policy direction </li></ul></ul><ul><ul><li>May yet need to strike a deal with the IMF if investor mood sours </li></ul></ul><ul><li>Romania </li></ul><ul><ul><li>Fiscal austerity to hold back recovery </li></ul></ul><ul><ul><li>Political instability is hampering policy execution </li></ul></ul><ul><ul><li>Social unrest could escalate </li></ul></ul><ul><li>Latvia </li></ul><ul><ul><li>Suffered an enormous contraction, has begun timid recovery </li></ul></ul><ul><ul><li>Still at risk of political instability </li></ul></ul><ul><ul><li>Will need further wage adjustment to become competitive again </li></ul></ul>
  23. 23. What about the euro accession process? <ul><li>There is scepticism on both sides of the divide </li></ul><ul><ul><li>Enthusiasm in candidate countries has waned </li></ul></ul><ul><ul><li>The future of the euro area still hangs in the balance </li></ul></ul><ul><ul><li>Until new governance rules are in place, no appetite for expansion </li></ul></ul><ul><ul><li>The crisis showed the value of a floating currency </li></ul></ul><ul><ul><li>Larger countries could adopt a Sweden-type stance </li></ul></ul><ul><li>Only Latvia has a firm accession target date (2014) </li></ul><ul><ul><li>Encouraged by Estonia’s accession, scheduled for January 2011 </li></ul></ul><ul><ul><li>Low political weight; little change to euro zone’s structure </li></ul></ul><ul><ul><li>Euro accession would entrench currency board </li></ul></ul><ul><li>There is a serious risk that Estonia will be the last country to enter the euro area in this decade </li></ul>
  24. 24. Questions and Answers
  25. 25. Economist Intelligence Unit analysts have been featured in the media for their analysis of the European debt crisis. You can keep up on our latest thinking around this subject and other international economic and political affairs on 187 countries for free by registering at Register at to keep up on global economic events for free V
  26. 26. Thank you. Contact for more information: Holly Donahue Marketing Manager Economist Intelligence Unit [email_address] +1 212 541 0596