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The economic and financial outlook in the wake of the credit turmoil

The economic and financial outlook in the wake of the credit turmoil. Anton Brender. June 2008 - Amsterdam. GDP growth (% year on year). Import growth (% year on year, in dollars). 14. 60. Brazil. China. 12. China. Russia. 40. 10. Russia. 8. 20. 6. 0. Korea. 4. OPEC. 2.

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The economic and financial outlook in the wake of the credit turmoil

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  1. The economic and financial outlook in the wake of the credit turmoil Anton Brender June 2008 - Amsterdam

  2. GDP growth (% year on year) Import growth (% year on year, in dollars) 14 60 Brazil China 12 China Russia 40 10 Russia 8 20 6 0 Korea 4 OPEC 2 -20 Brazil 0 -30 00 01 02 03 04 05 06 07 08 04 05 06 07 08 Up to now, Emerging countries have been rather resilient and have supported world growth Source: Thomson Datastream

  3. Commodity Index (Goldman Sachs, January 2007 = 100) 250 300 250 200 200 150 150 100 100 50 50 Jan Apr Jul Oct Jan Apr Jul Jan Apr Jul Oct Jan Apr Jul 2007 2008 2007 2008 Energy Wheat Industrial metals Soybeans Precious metals Corn Agriculture Rice (not included in the index) Livestock This partly explains why some commodity prices – oil in particular – have continued to rise Source: Thomson Datastream

  4. World petroleum production and consumption (million barrels per day, annual change) 4 World consumption 3 Non OECD OPEC “iso-income” curves 2 35 1 Consumption 0 30 -1 *from January to May 2008 (annual rate) 2007 2008* OECD -2 25 OPEC petroleum exports (million barrels per day) -3 01 02 03 04 05 06 07 08 20 $950 billion 4 15 World production 3 $680 billion 2 10 Other 1 50 70 90 110 130 150 Production Non OPEC 0 OPEC oil basket price ($ per barrel) OPEC -1 -2 -3 01 02 03 04 05 06 07 08 OPEC has played a role in pushing oil prices higher… ? Sources: IEA, Dexia-AM

  5. Oil price and expectations 120 20 WTI oil price ($) [R.H.S.] 100 Euro/dollar exchange rate and oil price Net speculative positions and oil price 10 50 1.70 140 60 45 40 0 40 0 Spread spot price – 18-month forward price ($) 1.60 120 30 20 -30 -10 0 95 97 99 01 03 05 07 20 1.50 100 -20 Non commercial positions (thousands of contracts) 10 -40 1.40 80 0 400 -60 Long positions 1.30 -80 -10 60 300 Jun Aug Oct Dec Feb Apr Jun Oct Dec Feb Apr Jun 2007 2008 2007 2008 200 Net speculative positions (long minus short positions, thousands of contracts, change over 3 months) Oil price ($) Short positions Oil price (€) (indexed on the dollar oil price in June 2007) 100 WTI oil price (% change over 3 months) [R.H.S.] Euro/dollar exchange rate [R.H.S.] 0 95 97 99 01 03 05 07 … but speculation also played its part Sources: CFTC, Thomson Datastream

  6. Trade balance* ($ billions, annual rate) OPEC and Russia trade balance ($ billions, annual rate) OPEC 1200 1 400 WTI oil price rises at $150 1 200 Oil prices (WTI, $ per barrel) Exports 800 800 140 WTI oil price falls back to $100 400 400 Imports 120 $105 0 94 98 02 06 80 $72 Russia 0 $66 00 02 04 06 08 600 40 2006 2007 2008 400 Exports 200 Imports (*) Assuming an oil price at $100 per barrel. 0 94 98 02 06 A continuing steep rise in oil prices could end up choking world growth If oil price increases to $150 per barrel and stay there, growth can continue only if non oil exporting countries accept and manage to reduce their surpluses or increase their deficits by more than $400 billion… Sources: Thomson Datastream, Dexia-AM

  7. The more so since the financial system has turned much less “borrower friendly”... Bank lending standards (net percentage of banks tightening their standards) United States Euro area Loans to firms Loans to individuals 100 100 80 Commercial real estate 80 80 60 C&I loans (medium and large firms) Residential mortgages Firms 40 40 40 Other consumer loans 20 0 0 0 House purchase Credit cards Consumer credit -20 -40 -40 96 00 04 08 90 94 98 02 06 03 05 07 Sources: Thomson Datastream, ECB, Federal Reserve

  8. Reported credit losses versus capital raised ($ billions, as of May 22) 400 250 200 IMF estimated total losses ($ billions, as of March 2008) 200 100 Estimated losses on unsecuritized U.S. loans 225 0 0 of which Euro area United States Europe World Estimated mark-to-market loss on related securities 720 120 200 United States Total losses 945 80 Losses 100 40 Capital raised 0 0 Banks Brokers Q2 Q3 Q4 Q1 Q2 2007 2008 … even if equity capital constraints do not seem to be binding Sources: IMF, Bloomberg

  9. TED spread (3 months Eurodollar rate minus Tbill rate, basis points) 3-month interbank rate minus OIS rate (basis points) 1-month interbank rate minus OIS rate (basis points) 120 300 120 Libor $ Libor $ 80 200 80 100 40 40 Euribor € Euribor € 0 0 0 Jan Apr Jul Oct Jan Apr Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun 2007 2007 2007 2008 2008 2008 Despite some improvement, liquidity on the interbank market is not back to normal… Starting beginning of August, central banks provided ample liquidity to ease tensions on the money markets. But market rates continued to spike upwards despite recent central banks’ initiatives. Sources: Thomson Datastream, Bloomberg, Federal Reserve

  10. … and while credit spreads have recently narrowed appreciably, they still remain wider than a year ago Subprime ABX AAA (07-01, basis points) Commercial CMBX AAA (NA 3, basis points) US - high yield (Merrill Lynch, 5-year, basis points) US - Leveraged loans (LCDX NA 5-year, basis points) 750 500 1200 300 400 550 200 800 200 350 400 100 150 0 0 0 Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun 2007 2008 2007 2008 2007 2007 2008 2008 Municipal bonds (ML 10-year, basis points) Euro – Crossover Itraxx (5-year, basis points) Euro – Investment grade Itraxx (5-year, basis points) 750 120 200 80 650 40 0 100 450 -40 -80 250 -120 0 Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun Jun Sep Dec Mar Jun 2007 2008 2007 2007 2008 2008 Sources: Thomson Datastream, JP Morgan, MarkIt

  11. Economic and financial outlook Contents United States: in recession… ? Euro area: weathering the storm? Annex

  12. Unemployment rate (%) GDP growth (% year on year) 8.0 6 Contribution to GDP growth (% year on year) 7.5 Likely 4 11 2 GDP ex residential investment 5.5 2 7 1 Goldman Sachs 0 3.5 IMF -1 89 93 97 01 05 Employment (year on year change, thousands) 99 01 03 05 07 3 0 (% quarter on quarter, annual rate) 400 80 Exconstruction & finance [R.H.S.] 2 -1 -1 Goldman Sachs 200 40 Likely 1 Residential investment [R.H.S.] ? -5 -2 0 0 55 62 69 76 83 90 97 04 0 Construction & finance -200 -40 -1 -300 IMF* -60 90 94 98 02 06 -2 Q1 Q2 Q3 Q4 2008 (*) Quarterly profile is our best “guess”. Up to now, pessimists have been wrong: the US economy has not yet contracted Sources: IMF, Goldman Sachs, Thomson Datastream, Dexia-AM

  13. Gasoline prices and consumption Motor vehicle sales 21 20 Consumer confidence Consumption Jan 04 - July 07 average 18 7 110 200 200 16 150 150 5 14 100 100 (Millions, annual rate) 90 12 50 50 04 05 06 07 08 3 0 0 Core retail sales 70 -50 -50 12 1 (% over 3 months, annual rate) -100 -100 0 8 50 -150 -150 -1 03 04 05 06 07 08 03 04 05 06 07 08 4 Consumption (% / 3 months, annual rate) Consumer confidence - expectations 0 Gasoline prices (% / 3 months, annual rate) [R.H.S.] Gasoline prices (% / 3 months, annual rate) [R.H.S.] -2 93 97 01 05 Despite high gasoline prices and weakening consumption… Source: Thomson Datastream

  14. Exports (% year on year) US exports by destination* (% year on year) 40 20 7 20 15 Other developed Europe(6%) LatAm(17%) Exports Exports 10 20 5 10 10 5 0 3 0 Canada (21%) 0 0 -5 Euro area (15%) -20 1 Real effective exchange rate[R.H.S.] External demand [R.H.S.] -10 -30 -10 -10 98 00 02 04 06 08 -15 -15 -15 -1 60 90 94 98 02 06 90 94 98 02 06 Middle East(3%) Imports Trade balance 40 1.5 Asia ex Japan (19%) 15 6 (contribution to real GDP growth, % year on year) +1% 20 1.0 10 4 0.5 0 Japan (5%) 0 2 -20 0 -30 Domestic demand[R.H.S.] -0.5 Imports 98 00 02 04 06 08 0 -1.0 (% year on year) (*) The % in bracket is the share in US exports -1.5 -10 -2 90 94 98 02 06 90 94 98 02 06 … growth has not tumbled, thanks to support from the rest of the world Source: Thomson Datastream

  15. Fiscal stimulation in two episodes (% month on month) How consumption might be affected 2001 2008 3 8 (% quarter on quarter, annual rate) Real disposable income Consumption Impact on consumption 2 1-month lag 2-month lag 1 4 0.0 Q2 2008 +2.6 0 Q3 2008 +0.4 +5.6 Real disposable income -5.4 Q4 2008 -3.0 0 -1 -2 -2 Assuming only a third of the rebates is spent this time,consumption should be boosted by 0.3% for the year as a whole… with a strong rebound in Q3 if spending takes place with a 2-month lag. -4 -3 In the coming quarters, front loaded fiscal stimulation should provide some additional temporary support… In 2001, tax rebates amounted to 0.6% of disposable income ($44 billion). Three quarters of the rebates were spent (i.e. consumption was boosted by roughly 0.5%). In 2008 rebates will amount to more than 1% of disposable income. A third has been sent electronically in May. Sources: Thomson Datastream, Dexia-AM

  16. State and local governments Contribution of state and local governments’ expenditures to GDP growth Expenditures and the business cycle States’ rainy day funds ($ billions) 1.2 80 10 8 0.8 (% year on year) 2007 2008 2009 60 6 2.2 -0.3 -0.3 Real state & local expenditures* 0.4 4 40 GDP weight (in %) 12 12 12 2 0 Contributions to GDP 0 20 Without using rainy day funds 0.3 0.0 0.0 -0.4 -2 0 -4 Using $35 billions of rainy day funds -0.8 0.3 0.2 -0.2 79 86 93 00 07 63 73 83 93 03 During the last few years, as revenues and economic conditions have rebounded, States have built up rainy day funds. Real GDP (% year on year) State and local governments’ expenditures share in GDP (%, year on year change) [R.H.S.] (*) Rate of growth of expenditures maintaining the same net borrowing requirement as in 2007 (-1.1% of GDP). … while state and local governments’ revenue shortfalls should not significantly affect their spending, at least in 2008 Sources: Thomson Datastream, National Association of State Budget Officers

  17. Home sales 12 6500 Existing 11 Existing home prices 9 National 4500 By metropolitan area (% change over 3 months, annual rate) 7 30 10 5 S&P/CS (% year on year) 20 0 3 2500 85 89 93 97 01 05 1400 12 -10 10 New Sept. 07 1300 11 OFHEO (% year on year) 0 -20 1100 9 -10 -30 Futures Mar. 08 900 7 S&P/CS (% quarter on quarter, annual rate) -20 -40 700 5 -30 -50 500 88 92 96 00 04 08 3 95 97 99 01 03 05 07 Home sales (thousands, annual rate) Houses for sale to houses sold (months supply) [R.H.S] Still, there is no sign of bottoming in the housing sector… Sources: Thomson Datastream, S&P, Bloomberg

  18. CDS and mortgage spreads (basis points) Home sales and mortgage rates 200 160 Home sales (change over 3 months) Mortgage rates (as given by Bankrate, %) Banks CDS (US libor sample) 8 250 80 0.8 Mortgage rates (-2M, change over 4M) [R.H.S.] Freddie Mac CDS 30-year jumbo rate 200 7 0.4 0 100 06 07 08 6 290 0 110 30-year fixed rate 0.0 30-year mortgage rate minus 10-year Treasury [R.H.S.] 5 250 -100 70 -0.4 4 Freddie Mac CDS Home sales (thousands, monthly rate) US 10-year treasury rate 170 -200 30 3 -250 -0.8 06 07 08 03 04 05 06 07 08 -10 90 06 07 08 … partly because the financial turmoil prevented mortgage rates from falling with Treasury rates Sources: Thomson Datastream, Bloomberg

  19. Fed’s balance sheet and off-balance sheet selected items (billions of dollars) 450 Financing of home mortgages (billions of dollars, change over 1 quarter at annual rate) 400 Term Securities Lending facility(TSLF) The Fed is helping financial institutions to carry their debt load… Primary Dealer Credit Facility (PDCF) and discount 800 200 GSE backed pools Term auction facility (TAF) Repurchase agreements 400 0 2007 2008 900 400 0 Reserve Bank credit Commercial banks and Saving & Loans 800 300 ABS issuers … without increasing global liquidity Treasury securities held outright -400 94 96 98 00 02 04 06 08 700 200 Repurchase agreements[R.H.S.] TAF [R.H.S.] 600 100 Other loans[R.H.S.] 500 0 2007 2008 The Fed and the Administration are trying to make credit available to borrowers Sources: Thomson Datastream, Federal Reserve

  20. OFHEO home prices (log level) 7.0 7.0 California New York State Reference Level* 6.5 6.5 53% Home prices 6.0 5.5 Home prices OFHEO prices and home transactions Reference level* 5.5 25% -16% 4.5 12 7.5 5.0 Real OFHEO (% year on year) 30Q 29 quarters 8 4.5 3.5 6.5 83 89 95 01 07 13 75 83 91 99 07 United States 4 5.5 6.1 Home prices -1% per year 0 4.5 24% 5.8 (*) The reference level is derived, state by state, by regressing local home prices on the national disposable income per household. -4 3.5 5.5 Home sales(per year and hundreds of households) [R.H.S.] -11% per year -8 2.5 5.2 76 86 96 06 Reference level* 4.9 4.6 83 89 95 01 07 13 However the risk of a deep and long lasting correction in home prices has significantly increased Sources: Thomson Datastream, OFHEO, Dexia-AM

  21. Household wealth (% of annual disposable income) Mortgage equity withdrawal (% of disposable income) Utilization of MEW (%) 100 9 450 Repayment of non-mortgage debt 8 Financial wealth 80 Home improvements 350 6 60 4 250 Acquisition of assets 40 Tangible wealth 2 150 20 Personal consumption 0 0 -1 50 60 70 80 90 00 91 95 99 03 07 93 97 01 05 Cash out Turnover related A 10% fall in home prices diminishes consumption by 1.2% after two years Home equity borrowing MEW In the coming years, negative wealth effects could be a serious headwind for the economy Sources: Thomson Datastream, Federal Reserve

  22. GDP growth (% year on year) GDP growth in the United States 6 Q/Q annual rate (%) 2005 2006 2007 2008 2009 Q1 08 Q2 07 Q3 07 Q4 07 4 Consumption 1.4 2.8 2.3 1.0 3.2 3.1 2.9 1.7 1.6 2 Investment 3.0 0.1 -3.2 -6.8 7.3 2.8 -2.5 -4.5 0.2 - Residential -25.5 6.6 -4.6 -17.0 -22.3 1.4 -11.8 -20.5 -25.2 0 95 99 03 07 - Equipment -0.9 9.6 5.9 1.3 2.1 2.3 4.7 6.2 3.1 Unemployment rate (%) - Structures 1.1 0.5 8.4 12.9 -0.1 -8.8 26.2 16.4 12.4 6.5 Inventory changes ($ billions) 5.8 30.6 -18.3 -14.4 33.3 40.3 4.6 7.7 16.2 Government 2.0 0.7 1.8 2.0 2.2 1.6 4.1 3.8 1.9 5.5 External balance ($ billions) -574 -533 -503 -480 -618 -624 -556 -448 -365 4.5 - Exports 1474 1203 1304 1410 1507 1623 1380 1441 1464 - Imports 1954 1821 1929 1965 1956 1988 1953 1974 1967 3.5 GDP 0.9 3.1 2.9 2.2 1.7 2.1 3.8 4.9 0.6 95 99 03 07 Even if the credit squeeze recedes quickly, growth should stay below potential both this year and next Source: Dexia-AM

  23. Consumer prices (% year on year) Gasoline prices and inflation perception Auto loans delinquency rates (% of loans) 3.5 5 7 400 Total Retail gasoline (cents per gallon) [R.H.S.] Indirect loans (through dealers) 3.0 6 300 3 2.0 5 200 Core Inflation in 12 months (%) Direct loans 1.0 1 4 130 03 05 07 98 02 06 90 95 00 05 Wages (% year on year) Consumer confidence (Conference board, expectations) Mortgage delinquency rates (% of loans) 10 130 18 3.5 Nominal wages Subprime 8 16 Prime[R.H.S.] 6 100 4 2.5 12 70 2 PCE deflator 0 Real wages -2 40 8 1.5 69 75 81 87 93 99 05 98 02 06 98 02 06 But the combination of ever-increasing gasoline prices and a protracted credit crunch... Sources: Thomson Datastream, ABA

  24. Housing starts (thousands units, annual rate) OFHEO home prices (% year on year) Structures (% year on year) 20 2300 15 5 0 0 1500 -5 -20 -30 -15 700 01 03 05 07 09 95 99 03 07 93 97 01 05 09 Consumption (% year on year) GDP growth (% year on year) Unemployment rate (%) 6 6 8 7 4 4 V-SHAPED 5 2 2 L-SHAPED 0 3 0 95 99 03 07 95 99 03 07 95 99 03 07 Protracted slowdown Reasonably optimistic … would lead to a “L-shaped” slowdown Source: Dexia-AM

  25. To sum up • After lowering its policy rate by 225 basis points since January, the Fed will stay accommodative for many months and will continue to try to alleviate credit markets’ strains. • Long term interest rates should stay below 4% as long as the housing market does not give clear signs of stabilization. • If the economic and financial outlook deteriorates significantly, the Fed will act aggressively again and the Congress will vote a new stimulus package to try to avoid a protracted stagnation of the economy. Long term rates would then fall close to 3%. • Against such a backdrop, the stock market perspectives for end of 2008 remain uncertain: 1500 for the SP500 in our reasonably optimistic scenario, but 1250 in a “L-shaped” one!

  26. Economic and financial outlook Contents United States: in recession… ? Euro area: weathering the storm? Annex

  27. PMI indices Eurozone PMI and GDP Manufacturing Services 70 5 70 62 4 60 60 57 2 50 50 52 47 40 0 40 99 01 03 05 07 99 01 03 05 07 99 01 03 05 07 GDP (% year on year) PMI [R.H.S.] France Germany Italy Spain Monthly surveys point to a clear slowdown in activity in the coming months Sources: Thomson Datastream, Reuters

  28. Wholesale gasoline prices CPI-food Shares in the total CPI 7 15 180 United States Euro area United States (in euros) 6 Euro 160 10 Germany United States France 4 % 5 120 2 Italy 0 0 (Jan. 2007 = 100) Food Motor fuel (% year on year) -1 80 Shares in the Euro CPI-food 2007 2008 99 01 03 05 07 30 Retail gasoline prices Contribution to the Euro CPI-food 3 170 20 United States (in dollars) Milk, cheese & eggs Meat % 2 Bread & cereals 10 Germany 130 1 Fruits 0 France Other Meat Fruits Oil & fats Vegetables Sugar, Honey… Italy 0 Bread & cereals Fish & seafood Milk cheese & eggs (Jan. 2007 = 100) (% year on year) 90 -1 2007 2008 01 03 05 07 99 As in the United States, European households are facing strong inflation Sources: Thomson Datastream, Eurostat

  29. Employment by country (% year on year) 7 Employment in the Euro area and the United States (% year on year) 6 Spain 4 3 2 4 Euro area France 2 0 3 Germany 2 Belgium -2 1 99 01 03 05 07 1 0 8 0 Germany -1 Netherlands 6 Spain -2 -1 United States 99 01 03 05 07 4 -2 99 01 03 05 07 2 Ireland 0 99 01 03 05 07 But except in Spain and Ireland, employment growth has kept its momentum… Source: Thomson Datastream

  30. Employment and wages (2003=100) Real wages per employee Employment 105 108 France Real consumption and income in Germany (% year on year) 106 France 103 102 5 Euro area 4 101 98 Germany 3 Disposable income Germany 2 99 94 03 05 07 03 05 07 1 Real disposable income (% year on year) 0 5 France -1 4 Consumption -2 93 96 99 02 05 08 2 0 Germany -2 93 99 05 … and a progressive improvement in German consumption is to be expected Sources: Thomson Datastream, Dexia-AM

  31. Credit to non financial corporations by country (% year on year) Equipment investment in the Euro area and the United States (% year on year, nominal) 35 Spain 30 20 15 Germany Euro area 20 10 Netherlands 10 Belgium 15 Italy France 0 5 10 -5 04 05 06 07 08 0 5 USA 40 0 Germany -5 Ireland -5 30 -10 -10 04 05 06 07 08 Spain -15 20 99 01 03 05 07 10 04 05 06 07 08 Moreover, equipment investment in many Euro countries – in Germany in particular – seems to keep on growing Source: Thomson Datastream

  32. Domestic demand growth (%, annual average rate) Contributions to euro area domestic demand growth (% year on year) 5 Domestic demand growth (% year on year) 2007 4 8 1.5 2008 2 6 1.0 4 0.5 0 2 Germany Spain Euro area 0.0 Shares in Euro domestic demand 0 -0.5 -2 Others 21% Germany 26% -4 -1.0 96 98 00 02 04 06 08 96 98 00 02 04 06 08 Spain 13% Euro area France 22% Italy 18% Germany Italy Spain France The sources of Euro domestic demand growth should hence progressively become more balanced… Sources: Thomson Datastream, Dexia-AM

  33. Extra Euro area exports By country of destination (%) Recent exchange rate movements Other 2% Africa 5% United States 12% Middle East 6% 1.7 Real effective exchange rate (ULC based, 2007 = 100) Western Hemisphere 4% Euro / $ United Kingdom 15% 1.6 110 Developing Asia 12% +3% since January 08 Italy 1.4 Belgium Other developed Europe 13% 105 Netherlands Euro effective exchange rate (indexed on the euro $ in 01/07) Spain France CEE & CIS 25% Other advanced 6% 100 1.2 Germany J F M A M J J A S O N D J F M A M J J 2007 2008 By exporting country (%) 95 125 United Kingdom Finland 3% Pound Austria 4% 90 115 Belgium 8% United States Yen Germany 40% 85 Netherlands 11% 100 2007 2008 Czech Koruna Spain 5% Zloty 85 J F M A M J J A S O N D J F M A M 2007 2008 Italy 14% France 15% … while, despite the appreciation of the euro, exports should not totally falter Source: Thomson Datastream

  34. GDP growth (% year on year) GDP growth in the Euro area 5 (% Q/Q annual rate) Q107 Q207 Q307 2004 2005 2006 2007 2008 Q407 2009 4 Consumption 0.2 2.6 2.1 1.5 1.6 1.8 1.5 1.3 -0.3 1.6 Investment 5.3 -0.1 4.4 2.0 3.1 5.3 4.1 3.3 3.4 2.8 2 - Construction 2.0 2.0 4.6 1.7 1.9 0.9 2.8 4.2 6.5 6.0 4.7 - Equipment 4.5 0 95 99 03 07 -0.5 2.5 2.9 4.4 2.4 - Other 1.6 Unemployment rate (%) Change in inventories (contribution, % GDP) 1.9 -1.5 0.9 0.2 0.0 0.2 0.0 0.1 -0.5 -0.4 11 4.1 0.9 2.6 Government 1.4 1.4 2.0 2.2 1.6 -0.4 2.0 10 External balance (contribution, % GDP) -0.8 1.0 -0.6 0.1 -0.3 0.2 0.4 -0.1 -0.6 0.4 - Exports 3.3 3.6 8.4 6.7 4.9 8.1 6.0 4.3 2.3 4.8 8 5.3 1.3 10.2 6.5 5.7 7.8 5.1 4.6 - Imports -1.2 4.2 6 GDP 2.7 1.3 2.9 1.9 1.7 2.9 2.5 1.8 1.5 1.9 95 99 03 07 If the US avoids a protracted slowdown, Euro growth could stay close to potential Source: Dexia-AM

  35. Change in cyclically adjusted primary balances Bank lending survey Factors affecting demand for loans to Euro area enterprises 1.0 (%, 2008) Restriction 0.5 40 Governments’ spread vs German 10-year Bund (basis points) Debt restructuring 0.0 20 Inventories -0.5 0 80 Stimulation -1.0 -20 Greece M&A -1.5 60 -40 IT IR PT SL LX FR SP FN NL GE AU BG GR Fixed investment Euro -60 Italy 03 04 05 06 07 08 40 Budgetary leeway* Demand for loans to enterprises 6 Belgium 20 40 FN 4 Spain 20 LX France 2 0 0 Public deficit (% of GDP, 2008) NL J F M A M J J A S O N D J F M A M SP GE 0 -20 Euro area 2007 2008 SL BG AU GR -40 -2 PT IR Germany IT -3 -60 FR (*) Bubble size proportional to weight in euro area GDP -4 -80 0 20 40 60 80 100 120 03 04 05 06 07 08 Public debt (% of GDP, 2008) Still risk factors have accumulated, with fiscal policy having only a limited capacity to respond Sources: Thomson Datastream, European Commission, Dexia-AM

  36. Policy rate and monetary pillar Frontloading the distribution of liquidity 5 14 300 Credit to the private sector (% year on year) (€ billions) 250 4 10 Reserves Reserves requirement 200 3 6 150 Repo rate (%) [R.H.S.] M3 (% year on year) 2 100 2 Jan Mar May Jul Sep Nov Jan Mar May Jul 99 01 03 05 07 2007 2008 Consumer prices (% year on year) Cumulated deviation from the ECB inflation target (index, 1999=100) Lengthening the average maturity of operations 5 600 104 Oil=$150 4 103 400 Headline CPI Total net refinancing operations 102 101 200 Oil=$125 2 Main refinancing operations 100 Longer-term refi. operations 0 99 Core CPI 99 03 07 (€ billions) Fine-tuning operations -200 0 Jan Mar May Jul Sep Nov Jan Mar May Jul 97 99 01 03 05 07 09 2007 2008 The ECB has tried its best to keep the interbank market liquid but has not changed its policy rate Sources: Thomson Datastream, ECB, Dexia-AM

  37. Memo: December 2007 5.5 Exchange rates and short term interest rates differentials Expected Sept. 08 US short term rates (%) 5.0 1.68 1.68 6 1.6 1.6 June 09 short term rate differential (%, Euro-US) [R.H.S.] Expected June 09 US ST rates (%) 4.0 1.0 1.0 5 Expected Sept. 08 Euro short term rates(%) 1.53 1.53 3.0 0.4 0.4 Oct Jan Apr Jul Oct 4 2006 2007 $ against the euro 1.53 0.7 Expected June 09 Euro short term rates(%) -0.2 -0.2 Sept. 08 short term rate differential (%, Euro-US) [R.H.S.] 1.38 1.38 1.50 3 -0.8 -0.8 0 1.40 2 1.23 1.23 -1.4 -1.4 Oct Jan Apr Jul Oct Jan Apr Oct Oct Jan Jan Apr Apr Jul Jul Oct Oct Jan Jan Apr Apr 1.30 2006 2006 2007 2007 2008 2008 2006 2007 2008 -1 $ against the euro 1.23 -1.4 O D F A J A O D F A J 2007 2006 Up to now, the euro / dollar exchange rate has remained driven by expectations on monetary policies Sources: Thomson Datastream, Dexia-AM

  38. To sum up • With high inflation and an economy staying close to potential, the ECB is likely to stay pat this year. • Long term 10-year interest rates should stay around 4% until the end of 2008. • If financial distress increases, the ECB might contribute to global stabilization by adjusting its policy rates. • As in the US, the stock market perspectives for end of 2008 remain uncertain: the MSCI EMU should be close to 250 if growth tracks our reasonably optimistic scenario, but at 190 with a deeper slowdown.

  39. Economic and financial Outlook Contents United States: walking on a tight rope… Euro area: how resilient? Annex

  40. Delinquency rates for US commercial banks Sources: Thomson Datastream, Federal Reserve

  41. Mortgage delinquency rates in the United States Adjustable mortgage delinquency rates and projected ARM resets Subprime - adjustable rate Prime - adjustable rate 4 12 10 3 8 2 6 4 1 2 0 0 98 99 00 01 02 03 04 05 06 07 08 98 99 00 01 02 03 04 05 06 07 08 > 90d 60d 30d Source: Thomson Datastream

  42. Selected indicators for Spain Credit institutions’ balance sheet (year on year change, euro billions) Housing prices (% year on year) Ratio of doubtful loans (% of total loans) 20 500 1.6 Assets Spain France 400 15 1.2 Total assets 300 10 0.8 200 Loans 5 0.4 100 United States 0 0.0 0 00 02 04 06 08 Securities other than shares -5 -100 Default rate curve by vintage 97 00 03 06 00 02 04 06 08 Credit to the private sector (% year on year) 250 50 Liabilities Construction and real estate activities 200 40 Domestic deposits 150 30 Securities other than shares 100 20 50 10 Households 0 RoW deposits Other business -50 0 00 02 04 06 08 97 00 03 06 09 Sources: Thomson Datastream, Central bank of Spain, Dexia-AM

  43. The economic and financial outlook in the wake of the credit turmoil Anton Brender June 2008 - Amsterdam

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