Mal DnB NOR Markets med bilde

Mal DnB NOR Markets med bilde

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

possibility of such damages. Any opinions expressed herein reflect the Banks judgment at the time the Note was prepared and DNB Parties assume no obligation to update the Note in any form or format. The Note should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. No DNB Party is acting as fiduciary or investment advisor in connection with the dissemination of the Note. While the Note is based on information obtained from public sources that the Bank believes to be reliable, no DNB Party has performed an audit of, nor accepts any duty of due diligence or independent verification of, any information it receives. Confidentiality rules and internal rules restrict the exchange of information between different parts of the Bank and this may prevent employees of DNB Markets who are preparing the Note from utilizing or being aware of information available in DNB Markets/the Bank which may be relevant to the recipients of the Note. The Note is not an offer to buy or sell any security or other financial instrument or to participate in any investment strategy. Distribution of material like the Note is in certain jurisdictions restricted by law. Persons in possession of the Note should seek further guidance regarding such restrictions before distributing the Note. The Note is for clients only, and not for publication, and has been prepared for information purposes only by DNB Markets - a division of DNB Bank ASA registered in Norway with registration number NO 984 851 006 (the Register of Business Enterprises) under supervision of the Financial Supervisory Authority of Norway (Finanstilsynet), Monetary Authority of Singapore, the Chilean Superintendent of Banks, and on a limited basis by the Financial Services Authority of UK. Information about DNB Markets can be found at Additional information for clients in Singapore The Note has been distributed by the Singapore branch of DNB Bank ASA. It is intended for general circulation and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser regarding the suitability of any product referred to in the Note, taking into account your specific financial objectives, financial situation or particular needs before making a commitment to purchase any such product. Recipients of the Note should note that, by virtue of their status as accredited investors or expert investors, the Singapore branch of DNB Bank ASA will be exempt from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the FAA), the Financial Advisers Regulations and associated regulations there under. In particular, it will be exempt from: - Section 27 of the FAA (which requires that there must be a reasonable basis for recommendations when making recommendations on investments). Please contact the Singapore branch of DNB Bank ASA at +65 6212 0753 in respect of any matters arising from, or in connection with, the Note. We, the DNB group, our associates, officers and/or employees may have interests in any products referred to in the Note by acting in various roles including as distributor, holder of principal positions, adviser or lender. We, the DNB group, our associates, officers and/or employees may receive fees, brokerage or commissions for acting in those capacities. In addition, we, the DNB group, our associates, officers and/or employees may buy or sell products as principal or agent and may effect transactions which are not consistent with the information set out in the Note. Additional Information, including for Recipients in the In the United States: This note (the Note) is a market letter, as the term is defined in NASD Rule 2211, and, thus, does not constitute a research report within the meaning of U.S. securities laws and regulations, including, without limitation, SEC Rule 15a-6, NASD Rule 2711 and Regulation AC. 10

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