10 May 2012

1. Marijke Zewuster Emerging Markets Group Economics Country Risk and the European debt crisis 10 May 2012

2. Contents 1. The European debt crisis, a brief update 2. Sovereign defaults it happened before 3. Country risk analysis at ABN AMRO 4. The Greek case

3. Contents 1. The European debt crisis, a brief update 2. Sovereign defaults it happened before 3. Country risk analysis at ABN AMRO 4. The Greek case

4. Sarkozy: ‘euro crisis is over’ (27 March 2012) 4 Source: Libered

5. Sovereign bond market stress returning… 10-Y government bond yield, % ECB loans 5 Source: Thomson Reuters Datastream

6. …reflecting a fundamental lack of demand % of total 6 Source: Bank of Spain

7. Large Eurozone bank exposures to periphery Eurozone big bank exposure to sovereign debt (% tier 1 capital) 7 Source: EBA, ABN AMRO Group Economics

8. Worries about banks returning Eurozone bank CDS index ECB loans 8 Source: Thomson Reuters Datastream

9. Recessions make austerity difficult Whole-economy PMI (below 50 equals contraction) 9 Source: Markit

10. Europe’s safety net is still not big enough EUR bn 10 Source: ABN AMRO Group Economics

11. The new fiscal fundamentalism in Europe % GDP 11 Source: EC, ABN AMRO Group Economics

12. Some good news (just for a change) Greek wages in industry down 10% over the last year; German wages up 3.8% Exports, % yoy, 3-month average 12 Source: Eurostat, ABN AMRO Group Economics

13. Moderate global growth Source: ABN AMRO Group Economics 13

14. Contents 1. The European debt crisis, a brief update 2. Sovereign defaults it happened before 3. Country risk analysis at ABN AMRO 4. The Greece case

15. 15 Sovereign Defaults are nothing new • Selected defaults in the 19th Century France 1 Argentina 2 Greece 4 Brazil 1 Netherlands 1 Chile 2 Spain 8 Colombia 4 Portugal 6 Mexico 4 Russia 2 Venezuela 6 Source: Reinhart & Rogoff: This time is different

16. 16 Sovereign Defaults are nothing new • and in the 20th Century Germany 2 Argentina 5 Greece 1 Brazil 7 Poland 3 Chile 7 Russia 3 Mexico 3 Turkey 5 Venezuela 4 Source: Reinhart & Rogoff: This time is different

17. 17 Past sovereign debt crisis • The Latin American Baring Crisis of 1890’s • The Latin American debt crisis of the 1980’s • The Asian crisis mid 90’s • The Rouble crisis of 1998

18. Loss rates in recent defaults date value loss rates range USD bn range (%) Russia 99/00 39 45-70 Ukraine 98/00 8 18-60 Pakistan 1999 1 30 Ecuador 2000 7 60 Argentina 01/05 202 58-67 Uruguay 2003 5 26-36 18 Source: IMF WP/05/137

19. Contents 1. The European debt crisis, a brief update 2. Sovereign defaults it happened before 3. Country risk analysis at ABN AMRO 4. The Greek case

20. Why do banks carry out own analysis and not rely on the rating agencies? Take own responsibility - understand the risks Build body of knowledge that can be widely used Basel II/III – savings on regulatory capital 20

21. 21 Different types of risks? • Sovereign risk • Country risk • Political risk • Transfer and convertibility (T&C) risk

22. 22 Sovereign Risk/Country Risk • Sovereign risk • Probability that the government of a country will refuse to comply with the terms of a loan agreement during economically difficult or politically volatiletimes. • Country risk • Probability of lossdue to economic and/or political instability in the buyer's/borrowerscountry, resulting in an inability to pay for imports/loans. Country risk includes sovereign risk. (from BusinessDictionary.com)

23. 23 Country Risk Analysis • Country risk analysis is based on monitoring of economic and political conditions and uses both quantitative and qualitative methods.

24. 24 Indicators of Country Risk:Economic Structure, development and policy • GDP per capita • Total GDP • Saving rate • Corruption • Contract enforcement • Property rights • Financial System • Real GDP Growth • Inflation • Government debt/GDP • Government balance/GDP • Interest payment/revenue

25. 25 Indicators of Country Risk:External Position • Foreign Debt/Export ratio • Current Account/GDP • Foreign Reserves/imports • Short-debt/exports • Trade diversification • Exchange rate system • Currency valuation

26. 26 Indicators of Country Risk: Political stability • Institutional permanence • Representativeness • Internal political consensus • External political consensus • External security threats • Civil unrest • Terrorism

27. 27 Critical level of some indicators • Government Debt > 100% of GDP • Foreign Debt/export ratio > 2 • International reserves < 2 months of imports • Current account > 5% of GDP • Inflation > 10% p.a

28. The rating agencies, what do their ratings mean? 28

29. The rating agencies, what do their ratings mean? 29

30. Lowest risk…AAA/Aaa rated by all rating agencies 30

31. Ratings some other Eurozone countries Moody’s S&P Fitch Austria Aaa AA+ AAA Belgium Aa3 AA AA France Aaa AA+ AAA Greece C CCC B- Italy A3 BBB+ A- Portugal Ba3 BB BB+ Spain A3 BBB+ A 31 Source: IMF WP/05/137

32. Triple A or Triple B ? 32 Source: Thomson Financial, EIU

33. Developed or Emerging?5y CDS spreads 33 Source: Bloomberg

34. Don’t forget politics Austerity could become too much for the public in the periphery… …and bail-outs could become too much for the public in the core

35. Contents 1. The European debt crisis, a brief update 2. Sovereign defaults it happened before 3. Country risk analysis at ABN AMRO 4. The Greek case

36. The Greek case, problem is not solved yet Greek government debt, % GDP 36 Source: ABN AMRO GE, IMF

37. 37 The Greek negotiations Five groups representing • Greek Government • International financial sector • Strong eurozone countries • Weaker eurozone countries • IMF • 15 minutes discussion in teams on: • Amount of debt forgiveness asked from private sector • Terms and conditions of a bail out package 5 minutes presentation per group presenting the results and the main arguments

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