The Investment Expert - Stockholm 22/10/2013. Brunello Rosa - RGE (c) - Mapping the Political and Economic Environment for Investment 1

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1 The Investment Expert - Stockholm 22/1/213 Today s Discussion: 1. The role of central banks in influencing economic recovery Credible and incredible Forward Guidance 2. EZ economy: is it really the end of the crisis? Debt sustainability: The dark side of whatever it takes By Brunello Rosa, Director of Macro Strategy Stockholm, 22 October The outlook for the US economy Desperately seeking escape velocity 4. Chinese Growth Forecasting and trading the slowing Chinese economic growth Roubini Global Economics Copyright 213 No reproducing or redistribution without written consent. Roubini Global Economics roubini.com americas@roubini.com Tel: europe@roubini.com / asia@roubini.com Tel: +44 () Central banks balance sheets have risen massively Today s Discussion: 1. The role of central banks in influencing economic recovery Credible and incredible Forward Guidance 2. EZ economy: is it really the end of the crisis? Debt sustainability: The dark side of whatever it takes 3. The outlook for the US economy Desperately seeking escape velocity 4. Chinese Growth Forecasting and trading the slowing Chinese economic growth % of GDP CB Total Assets as % of GDP Swiss China Japan Euro Area UK US Historical BOE Total Assets (% of GDP) Mar-6 Sep-7 Mar-9 Sep-1 Mar-12 Source: Bank of England Environment for Investment 1

2 The Investment Expert - Stockholm 22/1/213 A timeline of unconventional Central Banks interventions Impact of Fed s decision on long-term bond yields % stat Fed s expected policy normalization path, and the 1y yield The ECB The Belated White Knight IP/EC Sentiment/HICP EC Sentiment/ECB/2y swap % % EZ Industrial Production y/y change (%, LHS) EZ HICP inflation y/y change (%, RHS) EC Sentiment Indicator (Index/1-8, RHS) Source: The Eurozone Malaise: From Economic Causes to Market Implications by Brunello Rosa, RGE, 13 May 213 Environment for Investment 2

3 The Investment Expert - Stockholm 22/1/213 SNB s Floor: but towards a ceiling in housing market? Credible or Incredible Forward Guidance? % % % Grey line: 2 May, 213 Blue line: 19 August, 213 Green lines: central bank s preferred policy path The tentative stabilization in EZ: growth or stagnation? Today s Discussion: 1. The role of central banks in influencing economic recovery Credible and incredible Forward Guidance % 2. EZ economy: is it really the end of the crisis? Debt sustainability: The dark side of whatever it takes 3. The outlook for the US economy Desperately seeking escape velocity 4. Chinese Growth Forecasting and trading the slowing Chinese economic growth Source: Haver Analytics, RGE Environment for Investment 3

4 The Investment Expert - Stockholm 22/1/213 GDP Growth since the peak Recessions: historical comparison in the core The core EZ is almost there the periphery, not really Germany France Real GDP (Q1-28=1, SA) Real GDP (Q1-28=1, SA) Q2-28 Q3-29 Q4-21 Q1-212 Q2-213 Germany France Austria Netherlands Q2-28 Q3-29 Q4-21 Q1-212 Q2-213 Italy Spain Portugal Greece Ireland Q1-28=1 Q2-21=1 Q1-1992=1 Q1-1982= Quarters from real GDP Peak before recession Q1-28=1 Q2-21=1 Q1-1992=1 Q1-198= Quarters from real GDP Peak before recession Source: Haver Analytics, RGE Source: Haver Analytics, RGE and the periphery How bad can that be? Italy Portugal Germany Italy 12 1 Q Q1-28= Q3-27= Q1-21 Q Q Q4-27=1 Q2-22= Quarters from Peak Quarters from Peak Years from Start of Recession Years from Start of Recession 6 Source: Haver Analytics, RGE Source: Great Depressions of the Twentieth Century, Federal Reserve Bank of Minneapolis, 27; Haver Analytics, RGE; Environment for Investment 4

5 The Investment Expert - Stockholm 22/1/213 German and Italian industrial production Indexes (ex-construction; base: 1999 = 1) Serious implications for debt sustainability The dark side of whatever it takes Source: Italy Scenarios: Make it, Break it, or Muddle Through? By Brunello Rosa, RGE, 27 March 213 The rise in public debt since the crisis and in debt-servicing costs Gross Public Debt/GDP Ratio (%) Gross Public Debt/Revenues (times) Interest Expenditure/Total Revenues (%) Interest Expenditure/Total Expenditure (%) Greece Italy Portugal Ireland Spain Aveerage France- Germany Average Program Countries Italy Spain Aveerage France- Germany Italy Average Program Countries Spain Aveerage France- Germany Italy Average Program Countries Spain Aveerage France- Germany Environment for Investment 5

6 The Investment Expert - Stockholm 22/1/213 First countries in line other program countries Greece Debt/GDP scenarios % 18 RGE 1.5% PS RGE 16 RGE 2.3% RGE 1% 14 IMF Past Portugal Deficit and Debt projections % % Debt -1 restructuring, PCCL or 2nd financial assitance IMF Budget balance forecast RGE Budget balance forecast IMF Government debt forecast (LHS) Ireland 14 1 % % % IMF Budget balance forecast RGE Budget balance forecast IMF Government debt forecast (LHS) RGE Government debt forecast RGE Downside Budget balance forecast (LHS) The Cyprus Non-Template Debt swap of government bonds maturing in coming years, in order to "bail in" holders and avoid capital flight. Banks holding the bonds who participated got the same coupons, but maturities were pushed to 5 or 1 years. Ratings agencies characterized this as a "distressed" exchange, and downgraded to SD. Tbill maturities coming up are problematic -- roll over or bail in? The elephants in the China store Active Liability Management Exercises Italy: Evolution of Debt and Nominal GDP Spain: Evolution of Deficit, GDP and Debt Guarantees: Insurance is another possibility that would not result in residual debt. Billion Public Debt 4% 2% % -2% -4% 12% 115% 11% 15% 1% Collateral: Secured bonds, senior to other bonds (US tobacco bonds EU lottery revenues) Sequestration of Revenue Streams Liability Management: Maturity extensions through debt swaps, possibly including deferral, capitalization, or PIK of interest due Nominal GDP -6% -8% -1% 95% 9% 85% Loans (following an ECCL program): The IMF or ESM would lend long-term at low rates (compared to bond yields) ESM and ECB could also conduct secondary market purchases % Deficit (LHS) Nominal GDP (LHS) Debt Dynamics (RHS) 8% OSI (when multilateral or bilateral lending large part of overall debt burden): Lending gets extended and reduced in real terms through a combination of measures PSI (external debt and/or local law debt) Default, voluntary, or forced exchanges Environment for Investment 6

7 The Investment Expert - Stockholm 22/1/213 ECB Policy Options Political actions: incremental muddle through 1. More Explicit Forward Guidance 2. Further Reduction in the Main Refinancing Rate 3. More LTROs 4. Credit Easing Options 5. Negative Deposit Rate 6. Actions to Prevent the Euro from Appreciating Further 1. Germany s overall approach to remain gradual and cautious Adverse effects of reforms are acknowledged, but seen as necessary Fiscal consolidation and reforms are believed to bring long term benefits Germany will provide support, if the periphery moves in the right direction 2. Relative stability through back door fiscal and monetary integration No explicit debt mutualisation and risk sharing possible for now Partial reforms likely to calm financial markets, but bring more political risks 3. Little risk from Germany s political front Compromise on SRM postponed, as politicians want to avoid opposition s criticism Grand coalition would pursue more integration, but be stricter on banking rules Source: Belated White Knight: ECB Policy Options for the EZ Recession and Credit Crunch by Nouriel Roubini and Brunello Rosa, RGE, 24 May 213 Source: Germany Trip Report: Little Risk From Berlin, by Nouriel Roubini, Christian Odendahl and Brunello Rosa, RGE, 15 August 213 US growth: elements to be cautious persist Today s Discussion: 1. The role of central banks in influencing economic recovery Credible and incredible Forward Guidance 2. EZ economy: is it really the end of the crisis? Debt sustainability: The dark side of whatever it takes 3. The outlook for the US economy Desperately seeking escape velocity 4. Chinese Growth Forecasting and trading the slowing Chinese economic growth Consumer spending remains weak Capex subdued on low final demand Environment for Investment 7

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9 Keynote Address: Mapping the political and economic environment for investment Brunello Rosa Director, Western Europe, G1 Rates and Currencies Roubini Global Economics

10 The Investment Expert - Stockholm 22/1/213 But positive signs exist driven by good progress on household deleveraging Real Estate assets value slow to recover but housing starts are rising and will do so Fall in US household debt, from the peak Yearly change in credit and liabilities and loose monetary policy QE-adjusted Taylor rule: first hike in H2 15 U.S. real growth to pick up in 214 Today s Discussion: 1. The role of central banks in influencing economic recovery Credible and incredible Forward Guidance 2. EZ economy: is it really the end of the crisis? Debt sustainability: The dark side of whatever it takes 3. The outlook for the US economy Desperately seeking escape velocity 4. Chinese Growth Forecasting and trading the slowing Chinese economic growth Environment for Investment 8

11 The Investment Expert - Stockholm 22/1/213 RGE projections: a good leading indicator China s debt: a closer look Chinese surprises predicted by RGE and this could be used as a trading strategy China s True Sovereign Debt Burden (RMB, mn) The rise in China s total debt (% GDP) Impact of Chinese investment slowdown on EMs roubini.com americas@roubini.com Tel: europe@roubini.com / asia@roubini.com Tel: +44 () Environment for Investment 9

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