Decision Time for the Euro zone

1. Decision Time for the Euro zone Jan von Gerich 12/6/2012 Markets

2. Also longer German bond yields following in the footsteps of Japan

3. The Euro zone will survive, but notable bumps still ahead A Greek Euro-exit threatening to push the Euro-zone into a deeper recession The recent development of leading indicators worrying Spain will need external help with its bank Bonds to remain well supported in the near future With short rates zero or negative in many cases, longer bonds still with pick-up Stay within the core countries for now More determination needed to build a longer-term future for the euro Euro-zone governments need to pave the way for a tighter monetary union In the end, the ECB will do what is needed to save the euro Pressure to let inflation accelerate Risk of an uncontrolled chain of events not zero, although still small

4. The recent falls in Euro-zone confidence numbers worrying Source: Reuters EcoWin

5. Weak loan demand point to a weakening economy in the near term

6. The biggest drag from fiscal consolidation this year Note: European Commission Spring 2012 Economic Forecasts

7. US banking system looking much healthier compared to Europe 7

8. Many banks very reliant on ECB funding

9. Also progress seen, but still a long road ahead Restoring competitiveness will take years • Ireland in external balance already, while also Spain come a long way 9

10. A Greek exit threatening to escalate the debt crisis once again 10

11. Bank run in Spain much more difficult to handle than one in Greece Source: the ECB 11

12. Deposit outflows so far been relatively limited Source: the ECB 12

13. LTRO support already behind for Spanish and Italian government bonds Source: the ECB 13

14. Central bank system financed the capital flight from Spain

15. In Spain the housing market remains a big source of uncertainty 15

16. Spanish construction sector a drag for the economy for a long time 16

17. The gap between public expenditure and income still great 17

18. Weak structural growth a problem for Italy 18

19. Economic growth an important variable in debt sustainability 19

20. The weakening Italian economy to receive added attention again

21. Italy learned to live with a high debt

22. Flattening Spanish and Italian curves implying increasing near-term worries

23. The number of core countries fallen

24. Belgian and Irish bonds provided the best YTD return this year Source: iBoxx bond indices, Reuters EcoWin 24

25. Euro-zone not with huge problems on an aggregate basis Source: European Commission Spring 2012 Economic Forecasts

26. The recent weakening in the euro only in line with the development of interest rate differentials

27. How can the debt crisis end? The ECB/EFSF buys bonds as needed, increased IMF/EFSF/ESM resources try to provide a sufficient backstop Euro zone countries continue austerity measures and structural reforms Economic growth weak for a long time Gradually closer co-operation between the members An individual member may decide to leave the Euro zone Economic growth (and structural measures) given higher priority More time to implement austerity measures Moving towards euro bonds, banking and a political union The ECB a permanent lender of last resort for governments Higher inflation part of the solution Managed debt restructuring on a wide scale Very challenging to implement without breaking the Euro zone Break-up of the Euro zone Individual currencies make a comeback Several Euro zone countries default on their debt or re-denominate in a new currency Financial crisis II The real safe havens in non-EUR investments

28. Notable risk of higher inflation ahead not being priced Sources: Reuters, Nordea

29. The Euro zone will survive, but notable bumps still ahead A Greek Euro-exit threatening to push the Euro-zone into a deeper recession The recent development of leading indicators worrying Spain will need external help with its bank Bonds to remain well supported in the near future With short rates zero or negative in many cases, longer bonds still with pick-up Stay within the core countries for now More determination needed to build a longer-term future for the euro Euro-zone governments need to pave the way for a tighter monetary union In the end, the ECB will do what is needed to save the euro Pressure to let inflation accelerate Risk of an uncontrolled chain of events not zero, although still small

30. No quick solutions to debt problems in store…

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