The euro-zone crisis seen from Norway Senior Economist Knut A. Magnussen 1 The Domino Theory 10y government bond, percent 35 30 7/4/10: Gr10y hits 7% 2/5/10: 110'' package 25 7/2/11: Pt10y hits 7% 3/5/11: 78'' package 2/11/10: Ir10y hits 7% 28/11/10: 85'' package 20 9/11/11: It10y hits 7% but only first time 15 10 5 0 Jan10 Apr10 Ir.
Jul10 Oct10 Pt. Jan11 It. AprJul11 11 Sp. Oct- Jan11 12 Greece Source: Thomson Datastream/DNB M arkets 2 Germany vs Southern Europe Germany aims at keeping the pressure for necessary economic reforms in Southern Europe Hence, the use of EFSF as main policy tool But, the EFSF is to small to handle Italy and/or Spain And, this strategy also rules out other solutions: Euro-bonds, ECB (as lender of last resort) Risk: The crisis may escalate and turn into a Italian default
Gross Public Debt Euro billion 4000 3500 3000 2500 2000 1500 1000 500 0 2005 2010 Greece Ireland Portugal 2015 Spain Italy Kilde: IM F Fiscal M onitor Sep-2011/DNB M arkets 3 Italy: Growth is needed to stabilize debt Italy: Gross Debt, Percent of GDP 4% annual change in nominal GDP 160 140
120 100 80 60 40 20 0 2000 2005 PB 4%, IR 4% 2010 2015 2020 PB 2% IR 6% 2025 2030 PB 2%, IR 8% Source: IM F Fiscal M onitor/ Thomson Datastream/DNB M arkets 4 The Baltic solution is impressive Major turnaround in the Baltic region Shows that internal devaluation is a possible option But, government debt has been very low in the Baltic region GDP
15 Per cent, y/y General government debt 70 10 60 5 50 0 40 -5 30 -10 20 Per cent of GDP 10 -15 0 -20
1998 2000 2002 2004 2006 2008 2010 2012 Latvia Estonia Lithuania Source: Thomson Datastream/DNB M arkets 1996 1998 2000 2002 2004 2006 2008 2010 Latvia Lithuania Estonia Maastricht Source: Thomson Datastream/DNB M arkets 5 The solution: A much more integrated Europe The imbalances between Germany and Italy/Spain are huge. Very hard for Spain and Italy to improve competitiveness (vs Germany) within the currency union. Hence, Germany has to spend more of its surplus domestically. Or, the southern countries will have to deflate and contract. A fiscal union is needed to restore imbalances. The eurobonds could be issued. Current account balance, Bn euro 300 200
100 0 -100 -200 -300 2000 2002 2004 2006 2008 2010 2012 Pt. Ir. It. Gr. Sp. Ge. EZ-4 Source: Thomson Datastream/DNB Markets K i lde:OE CD/ T homson Datastr eam/ DnB NOR Mar kets 6 EMU was never a optimal currency area Lack of common fiscal policy Lack of labour mobility Maastricht-criteria could have solved (parts of) this problem Now, far less costly to maintain the monetary union than to break
up. Hence, the union will most likely be saved What would have been an optimal currency area? A Nordic/Baltic krone union A Central European stronger euro A Southern European weaker euro 7 The Norwegian experience Norway experienced a major financial crisis in the early 1990s Solved by government takeover of the three largest banks The banks dealt with problem loans themselves The crisis was not costly to the taxpayer Quick writedowns and recapitalization limited the economic downturn Norway: Mainland GDP-growth 6 Per cent 5 4 3 2 1 0 -1 -2
1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: SSB/DNB M arkets 8 Thank you for the attention! 9 Disclaimer This note (the Note) must be seen as marketing material and not as an investment recommendation within the meaning of the Norwegian Securities Trading Act of 2007 paragraph 3-10 and the Norwegian Securities Trading Regulation 2007/06/29 no. 876. The Note has been prepared by DNB Markets, a division of DNB Bank ASA, a Norwegian bank organized under the laws of the Kingdom of Norway (the Bank), for information purposes only. The Note shall not be used for any unlawful or unauthorized purposes. The Bank, its affiliates, and any third-party providers, as well as their directors, officers, shareholders, employees or agents (individually, each a DNB Party; collectively, DNB Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Note. DNB Parties are not responsible for any errors or omissions, regardless of the cause, nor for the results obtained from the use of the Note, nor for the security or maintenance of any data input by the user. The Note is provided on an as is basis. DNB PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE NOTES FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE NOTE WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall DNB Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Note, even if advised of the
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