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

Money does not perform. People do.

June 2008 - Amsterdam

Anton Brender

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

22

Up to now, Emerging countries have been rather resilient and have supported world growth

Source: Thomson Datastream

Import growth (% year on year, in dollars)

00 01 02 03 04 05 06 07 08-30

-20

0

20

40

60

OPEC

China Russia

BrazilChina

Russia

Korea

Brazil

GDP growth (% year on year)

0

2

4

6

8

10

12

14

04 05 06 07 08

33

This partly explains why some commodity prices – oil in particular – have continued to rise


WheatSoybeans

50

100

150

200

250

300

Jan Apr Jul Oct Jan Apr Jul2007 2008

CornRice (not included in the index)

Commodity Index(Goldman Sachs, January 2007 = 100)

Jan Apr Jul Oct Jan Apr Jul50

100

150

200

250

2007 2008

Energy

AgriculturePrecious metalsIndustrial metals

Livestock

44

OPEC has played a role in pushing oil prices higher…

-3

-2

-1

0

1

2

3

4

01 02 03 04 05 06 07 08

Production

World production

Non OPEC

Other

OPEC?

2008**from January to May 2008 (annual rate)

OPEC “iso-income” curves

10

15

20

25

30

35

50 70 90 110 130 150

OPEC oil basket price($ per barrel)

OPE

C pe

trole

um e

xpor

ts(m

illion

bar

rels

per d

ay)

$680 billion

2007

Sources: IEA, Dexia-AM

World petroleum production and consumption(million barrels per day, annual change)

-3

-2

-1

0

1

2

3

4

01 02 03 04 05 06 07 08

Consumption

World consumption

OECD

Non OECD

$950 billion

55

… but speculation also played its part

Spread spot price – 18-month forward price ($)

95 97 99 01 03 05 07-10

0

10

20

-30

0

50

100

120

WTI oil price ($) [R.H.S.]

Oil price and expectations

95 97 99 01 03 05 070

100

200

300

400

Long positions

Short positions

Non commercial positions(thousands of contracts)

Sources: CFTC, Thomson Datastream

Net speculative positionsand oil price

Oct Dec Feb Apr Jun-80

-60

-40

-20

0

20

40

60

-10

0

10

20

30

4045

2007 2008Net speculative positions(long minus short positions, thousands ofcontracts, change over 3 months)

WTI oil price(% change over 3 months) [R.H.S.]

Euro/dollar exchange rateand oil price

Jun Aug Oct Dec Feb Apr Jun2007 2008

60

80

100

120

140

1.30

1.40

1.50

1.60

1.70

Oil price ($)

Oil price (€)(indexed on the dollar oil price in June 2007)

Euro/dollar exchange rate [R.H.S.]

66

A continuing steep rise in oil prices could end up choking world growth

OPEC and Russia trade balance

($ billions, annual rate)

0

400

800

1200

00 02 04 06 08

WTI oil price rises at $150

WTI oil price falls back to $100

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…

$105

40

80

120

140

2006 2007 2008

Oil prices(WTI, $ per barrel)

$66 $72

0

200

400

600

94 98 02 06

Imports

Exports

OPEC

Russia

Imports

Exports

Trade balance*($ billions, annual rate)

0

400

800

1 200

1 400

94 98 02 06

(*) Assuming an oil price at $100 per barrel.

Sources: Thomson Datastream, Dexia-AM

77

The more so since the financial system has turned much less “borrower friendly”...

Bank lending standards (net percentage of banks tightening their standards)

C&I loans (medium and large firms)

Commercial real estate

Loans to firms Loans to individuals

Euro areaUnited States

Firms

House purchase Consumer credit

-20

0

20

40

60

80

03 05 07

Residential mortgages

Credit cards

Other consumer loans

-40

0

40

80

100

96 00 04 08-40

0

40

80

100

90 94 98 02 06

Sources: Thomson Datastream, ECB, Federal Reserve

88

… even if equity capital constraints do not seem to be binding

IMF estimated total losses ($ billions, as of March 2008)

Estimated losses on unsecuritized U.S. loans

225

Estimated mark-to-market loss on related securities

720

Total losses 945

0

100

200

250

UnitedStates Europe

of whichEuro area

0

100

200

Q2 Q3 Q4 Q1 Q2

2007 2008

Banks Brokers0

40

80

120United States

Sources: IMF, Bloomberg

Losses

Capital raised

Reported credit losses versus capital raised($ billions, as of May 22)

World

0

200

400

99

Despite some improvement, liquidity on the interbank market is not back to normal…

Sources: Thomson Datastream, Bloomberg, Federal Reserve

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.

3-month interbank rate minus OIS rate

(basis points)

Libor $

Euribor €

0

40

80

120

Jun Sep Dec Mar Jun2007 2008

120

Jun Sep Dec Mar Jun

Libor $

Euribor €0

40

80

2007 2008

1-month interbank rate minus OIS rate

(basis points)

TED spread(3 months Eurodollar rate

minus Tbill rate, basis points)

0

100

200

300

Jan Apr Jul Oct Jan Apr

2007 2008

1010

… and while credit spreads have recently narrowed appreciably, they still remain wider than a year ago

Municipal bonds(ML 10-year, basis points)

2007 2008

-120

-80

-40

0

40

80

120

Jun Sep Dec Mar Jun

Euro – Crossover Itraxx (5-year, basis points)

2007 2008

250

450

650

750

Jun Sep Dec Mar Jun

Euro – Investment grade Itraxx (5-year, basis points)

2007 2008

0

100

200

Jun Sep Dec Mar Jun

Commercial CMBX AAA(NA 3, basis points)

2007 2008

Subprime ABX AAA(07-01, basis points)

US - high yield (Merrill Lynch, 5-year, basis points)

2007 2008

150

350

550

750

Jun Sep Dec Mar Jun

US - Leveraged loans(LCDX NA 5-year, basis points)

2007 2008

0

200

400

500

Jun Sep Dec Mar Jun0

100

200

300

Jun Sep Dec Mar Jun2007 2008

0

400

800

1200

Jun Sep Dec Mar Jun

Sources: Thomson Datastream, JP Morgan, MarkIt

1111

Economic and financial outlook

Contents

United States: in recession… ?

Euro area: weathering the storm?

Annex

1212

Up to now, pessimists have been wrong: the US economy has not yet contracted

Contribution to GDP growth(% year on year)

Residential investment [R.H.S.]

GDP ex residential investment

-5

-1

3

7

11

55 62 69 76 83 90 97 04-2

-1

0

1

2

Unemployment rate(%)

89 93 97 01 053.5

5.5

7.58.0

Employment (year on year change, thousands)

-60

-40

0

40

80

90 94 98 02 06-300

-200

0

200

400Ex construction & finance[R.H.S.]

Construction & finance

GDP growth(% year on year)

Goldman Sachs

IMF-1

0

2

4

6

99 01 03 05 07

(% quarter on quarter, annual rate)

2008

-2

-1

0

1

2

Q1 Q2 Q3 Q4

Goldman Sachs

IMF*

(*) Quarterly profile is our best “guess”.

Sources: IMF, Goldman Sachs, Thomson Datastream, Dexia-AM

Likely

?

Likely

1313

Despite high gasoline prices and weakening consumption…

Motor vehicle sales

12

14

16

18

2021

04 05 06 07 08

(Millions, annual rate)

Jan 04 - July 07 average

Core retail sales

(% over 3 months, annual rate)

93 97 01 05-2

0

4

8

12

Consumption

03 04 05 06 07 08-1

0

1

3

5

7

-150

-100

-50

0

50

100

150

200

Consumption(% / 3 months, annual rate)

Gasoline prices(% / 3 months, annual rate) [R.H.S.]

Gasoline prices and consumption

Consumer confidence

03 04 05 06 07 0850

70

90

110

-150

-100

-50

0

50

100

150

200

Consumer confidence - expectations

Gasoline prices(% / 3 months, annual rate) [R.H.S.]


1414

… growth has not tumbled, thanks to support from the rest of the world

-15

-10

0

10

20

90 94 98 02 06-1

1

3

5

7

External demand [R.H.S.]

Exports

-30

-20

0

20

40

98 00 02 04 06 08

Canada(21%)

LatAm (17%)

Euro area(15%)

Other developed Europe (6%)

-30-20

0

20

40

60

98 00 02 04 06 08

Japan(5%)

Asia ex Japan

(19%)

Middle East (3%)

US exports by destination*(% year on year)

(*) The % in bracket is the share in US exports

Exports(% year on year)

90 94 98 02 06-15

-10

0

10

20

-15

-10

-5

0

5

10

15

Real effective exchange rate [R.H.S.]

Exports


90 94 98 02 06-10

0

10

15

-2

0

2

4

6

ImportsDomestic demand [R.H.S.]

(% year on year)

Imports Trade balance

90 94 98 02 06-1.5

-0.5

0

0.5

1.5 (contribution to real GDP growth, % year on year) +1%

-1.0

1.0

1515

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.

2001

-2

2

Fiscal stimulation in two episodes(% month on month)

Real disposable income

-3

-1

0

1

32008

Real disposable income

-4

-2

0

4

8

Q2 2008 +2.6Q3 2008 +0.4Q4 2008 -3.0

How consumption might be affected

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.

1-month lag 2-month lag

0.0+5.6-5.4

Impact on consumption(% quarter on quarter, annual rate)


Consumption

1616

… while state and local governments’ revenue shortfalls should not significantly affect their spending, at least in 2008

Using $35 billionsof rainy day funds

0.3 0.2 -0.2

Contribution of state and local governments’ expenditures to GDP growth

2007 2008 2009

Real state & local expenditures* 2.2 -0.3 -0.3

GDP weight (in %) 12 12 12

(% year on year)

(*) Rate of growth of expenditures maintaining the same net borrowing requirement as in 2007 (-1.1% of GDP).

0.0 0.0Without using rainy day funds

0.3

Contributions to GDP

During the last few years, as revenues and economic conditions have rebounded, States have built up rainy day funds.

0

20

40

60

80

79 86 93 00 07

States’ rainy day funds($ billions)

Sources: Thomson Datastream, National Association of State Budget Officers

State and local governments

-4

-2

0

2

6

63 73 83 93 03-0.8

-0.4

0

0.4

0.8

1.210

Expenditures and the business cycle

State and local governments’expenditures share in GDP (%, year on year change) [R.H.S.]

Real GDP (% year on year)

4

8

1717

Still, there is no sign of bottoming in the housing sector…

Sources: Thomson Datastream, S&P, Bloomberg

Existing home prices

National

-30

-20

-10

10

20

30

88 92 96 00 04 08

0

S&P/CS(% year on year)

OFHEO(% year on year)

S&P/CS(% quarter on quarter, annual rate)

Futures

Home sales (thousands, annual rate)

Houses for sale to houses sold(months supply) [R.H.S]

Existing

85 89 93 97 01 052500

4500

6500

3

5

7

9

1112

New

Home sales

95 97 99 01 03 05 07500

700

900

1100

13001400

3

5

7

9

1112

By metropolitan area(% change over 3 months, annual rate)

-50

-40

-30

-20

-10

0

10

Sept. 07

Mar. 08

1818

… partly because the financial turmoil prevented mortgage rates from falling with Treasury rates

Sources: Thomson Datastream, Bloomberg

Home sales and mortgage rates

Home sales(thousands, monthly rate)

Mortgage rates (-2M, change over 4M) [R.H.S.]

Home sales (change over 3 months)

-250

-200

-100

0

100

200

250

03 04 05 06 07 08-0.8

-0.4

0.0

0.4

0.8

CDS and mortgage spreads(basis points)

Banks CDS (US libor sample)

0

80

160

200

06 07 08

Freddie Mac CDS

Freddie Mac CDS

-10

30

70

110

06 07 0890

170

250

290

30-year mortgage rate minus 10-year Treasury [R.H.S.]

Mortgage rates(as given by Bankrate, %)

3

4

5

6

7

8

06 07 08

30-year jumbo rate

30-year fixed rate

US 10-year treasury rate

1919

The Fed and the Administration are trying to make credit available to borrowers

Financing of home mortgages(billions of dollars,

change over 1 quarter at annual rate)

ABS issuers-400

0

400

800

94 96 98 00 02 04 06 08

Fed’s balance sheet and off-balance sheet selected items

(billions of dollars)

0

200

400

450

2007 2008

Term Securities Lending facility (TSLF)

Primary Dealer Credit Facility (PDCF) and discount

Term auction facility (TAF)

Repurchase agreements

The Fed is helping financial institutions

to carry their debt load…

Treasury securitiesheld outright

Reserve Bank credit

TAF[R.H.S.]

Repurchase agreements [R.H.S.]

500

600

700

800

900

2007 20080

100

200

300

400

Other loans [R.H.S.]

… without increasing global liquidity

Sources: Thomson Datastream, Federal Reserve

Commercial banks and Saving & Loans

GSE backed pools

2020

However the risk of a deep and long lasting correction in home prices has significantly increased

-11% per year

-1% per year

United States

4.6

4.9

5.2

5.5

5.8

6.1

83 89 95 01 07 13

24%

Reference level*

Home prices

OFHEO home prices(log level)

4.5

5.0

5.5

6.0

6.5

7.0

83 89 95 01 07 13

ReferenceLevel*

29 quarters

53%

30Q

25%-16%

California

Home prices

(*) The reference level is derived, state by state, by regressing local home prices on the national disposable income per household.

Home prices

Reference level*

New York State

3.5

4.5

5.5

6.5

7.0

75 83 91 99 07

OFHEO prices and home transactions

Real OFHEO(% year on year)

Home sales (per year and hundreds of households) [R.H.S.]

-8

-4

0

4

8

12

76 86 96 062.5

3.5

4.5

5.5

6.5

7.5

Sources: Thomson Datastream, OFHEO, Dexia-AM

2121

In the coming years, negative wealth effects could be a serious headwind for the economy

Mortgage equity withdrawal(% of disposable income)

-10

2

4

6

89

93 97 01 05

Cash out

Home equity borrowingTurnover related

MEW

Household wealth(% of annual disposable income)

60 70 80 90 0050

150

250

350

450

Tangible wealth

Financial wealth


A 10% fall in home prices diminishes consumption by 1.2% after two years

0

40

80

100

91 95 99 03 07

Repayment of non-mortgage debt

Home improvements

Acquisition of assets

Personal consumption

Utilization of MEW(%)

60

20

2222

Even if the credit squeeze recedes quickly, growth should stay below potential both this year and next


3.5

4.5

5.5

6.5

95 99 03 07


0

2

4

6

95 99 03 07

Source: Dexia-AM

GDP growth in the United States

Q/Qannual rate (%)

2005 2006 2007 2008

Consumption

Investment

- Residential

- Equipment

- Structures

Inventory changes($ billions)

Government

External balance ($ billions)

- Exports

- Imports

GDP

3.2 3.1 2.9 1.7

7.3 2.8 -2.5 -4.5

6.6 -4.6 -17.0 -22.3

9.6 5.9 1.3 2.1

0.5 8.4 12.9 -0.1

33.3 40.3 4.6 7.7

0.7 1.8 2.0 2.2

-618 -624 -556 -448

1203 1304 1410 1507

1821 1929 1965 1956

Q3 07

3.1 2.9 2.2 1.7

Q2 07

1.4

3.0

-11.8

4.7

26.2

5.8

4.1

-574

1380

1953

3.8

2.8

0.1

-20.5

6.2

16.4

30.6

3.8

-533

1441

1974

4.9

2009

1.6

0.2

1.4

2.3

-8.8

16.2

1.6

-365

1623

1988

2.1

Q4 07

2.3

-3.2

-25.2

3.1

12.4

-18.3

1.9

-503

1464

1967

0.6

Q1 08

1.0

-6.8

-25.5

-0.9

1.1

-14.4

2.0

-480

1474

1954

0.9

2323

But the combination of ever-increasing gasoline prices and a protracted credit crunch...

98 02 06-2

0

2

4

6

8

10

Real wagesPCE deflator

Nominal wages

Wages (% year on year)

Gasoline prices and inflation perception

03 05 074

5

6

7

130

200

300

400

Retail gasoline (cents per gallon) [R.H.S.]

Inflation in 12 months (%)

Auto loans delinquency rates(% of loans)

1.0

2.0

3.0

3.5

90 95 00 05

Direct loans

Indirect loans (through dealers)

Mortgage delinquency rates(% of loans)

8

12

16

18

98 02 061.5

2.5

3.5Subprime

Prime [R.H.S.]

98 02 061

3

5Total

Consumer prices(% year on year)

Core

Sources: Thomson Datastream, ABA

Consumer confidence (Conference board, expectations)

69 75 81 87 93 99 0540

70

100

130

2424

… would lead to a “L-shaped” slowdown

Reasonably optimistic Protracted slowdown

Housing starts(thousands units, annual rate)

700

1500

2300

93 97 01 05 09

Structures(% year on year)

-30

-20

0

20

95 99 03 07


3

5

7

8

95 99 03 07

Consumption(% year on year)

0

2

4

6

95 99 03 07

OFHEO home prices(% year on year)

-15

-5

0

5

15

01 03 05 07 09


0

2

4

6

95 99 03 07

V-SHAPED

Source: Dexia-AM

L-SHAPED

2525

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!

2626

Economic and financial outlook

Contents

Euro area: weathering the storm?

United States: in recession… ?

Annex

2727

Monthly surveys point to a clear slowdown in activity in the coming months

Eurozone PMI and GDP

GDP (% year on year)

PMI [R.H.S.]

0

2

4

5

99 01 03 05 0747

52

57

62

Services

40

50

60

70

99 01 03 05 07

Manufacturing

France Germany Italy Spain

PMI indices

40

50

60

70

99 01 03 05 07

Sources: Thomson Datastream, Reuters

2828

As in the United States, European households are facing strong inflation

United States

(% year on year)

99 01 03 05 07-1

0

2

4

6

7CPI-food

Contribution to the Euro CPI-food

-1

0

1

2

3

99 01 03 05 07

Bread & cereals

Meat Milk, cheese & eggs

Fruits

(% year on year)

Retail gasoline pricesUnited States(in dollars)

2007 200890

130

170

(Jan. 2007 = 100)

Wholesale gasoline pricesUnited States(in euros)

GermanyFrance

Italy

2007 200880

120

160

180

(Jan. 2007 = 100)

Sources: Thomson Datastream, Eurostat

Shares in the total CPI

Shares in the Euro CPI-food

0

10

20

30

Bread &

cerea

lsMea

t

Fish & se

afood

Milk ch

eese

& eggs

Oil & fa

tsFrui

ts

Vegeta

bles

Sugar,

Honey

…Othe

r

0

5

10

15

Food Motor fuel

United StatesEuro

%

%

GermanyFrance

Italy

Euro area

2929

But except in Spain and Ireland, employment growth has kept its momentum…

-2

0

2

4

67

99 01 03 05 07

Germany

Spain

Employment by country (% year on year)

0

2

4

6

8

99 01 03 05 07

Spain

Ireland

-2

-1

0

1

2

3

4

99 01 03 05 07

Germany

France

Netherlands

Belgium

Employment in the Euro area and the United States

(% year on year)

99 01 03 05 07-2

-1

0

1

2

3

United States


Euro area

3030

… and a progressive improvement in German consumption is to be expected

Employment and wages (2003=100)

Employment

Germany

France

03 05 0799

101

103

105 Real wages per employee

Germany

France

Euro area

03 05 0794

98

102

106

108


Real disposable income(% year on year)

France

Germany93 99 05

-2

0

2

4

5

Real consumption and income in Germany

(% year on year)

-2

-1

0

1

2

3

4

5

93 96 99 02 05 08

Disposable income

Consumption

3131

Moreover, equipment investment in many Euro countries – in Germany in particular – seems to keep on growing

Germany

Spain

Credit to non financial corporations by country (% year on year)

04 05 06 07 08-5

0

10

20

30

35

04 05 06 07 08-10

-5

0

5

10

15

20

Germany

France

NetherlandsBelgium

Italy

Equipment investment in the Euro area and the United States

(% year on year, nominal)

-15

-5

0

5

15

99 01 03 05 07

USA

10

-10


04 05 06 07 0810

20

30

40

Ireland

Spain

Euro area

3232

The sources of Euro domestic demand growth should hence progressively become more balanced…


Domestic demand growth(% year on year)

Euro area

-4

-2

0

2

4

6

8

96 98 00 02 04 06 08

SpainGermanyFrance

Italy

2007

0

2

4

5

Germany Spain Euro area

2008

Domestic demand growth (%, annual average rate)

Germany 26%

France 22%Italy 18%

Spain 13%

Others 21%

Shares in Eurodomestic demand

Contributions to euro area domestic demand growth

(% year on year)

-1.0

-0.5

0.0

0.5

1.0

1.5

96 98 00 02 04 06 08

3333

… while, despite the appreciation of the euro, exports should not totally falter

+3% since January 08

Extra Euro area exports

United States 12%

United Kingdom15%

Other developedEurope 13%

Other advanced 6%CEE & CIS 25%

Developing Asia 12%

Western Hemisphere 4%

Middle East 6%Africa 5%

Other 2%By country of destination (%)

Germany40%

France 15%Italy 14%

Spain 5%

Netherlands11%

Belgium 8%

Austria 4% Finland 3%

By exporting country (%)

Recent exchange rate movements

Euro / $

J FMAM J J ASOND J FMAM J J1.2

1.4

1.6

1.7

2007 2008

Real effective exchange rate (ULC based, 2007 = 100)

GermanyFrance

Italy

SpainNetherlandsBelgium

2007 200885

95

105

110

United States

United Kingdom

100

90Pound

Yen

Zloty

Czech Koruna

J FMAM J J A SOND J FMAM85

125

2007 2008

115

100


Euro effective exchange rate(indexed on the euro $ in 01/07)

3434

If the US avoids a protracted slowdown, Euro growth could stay close to potential

GDP growth in the Euro area

- Construction

- Equipment

(% Q/Qannual rate)

Consumption

Investment

- Other

Changein inventories(contribution, % GDP) Government

External balance(contribution, % GDP)

- Exports

- Imports

GDP

Q107 Q207 Q307 2004 2005 2006 2007 2008

0.2 2.6 2.1

5.3 -0.1 4.4

1.9 -1.5 0.9

4.1 0.9 2.6

-0.8 1.0 -0.6

3.3 3.6 8.4

5.3 1.3 10.2

2.7 1.3 2.9

1.5 1.6 1.8

2.0 3.1 5.3

2.0 2.0 4.6

2.8 4.2 6.5

-0.5 2.5 2.9

0.2 0.0 0.2

1.4 1.4 2.0

0.1 -0.3 0.2

6.7 4.9 8.1

6.5 5.7 7.8

1.9 1.7 2.9

1.5 1.3

4.1 3.3

1.7 1.9

6.0 4.7

4.4 2.4

0.0 0.1

2.2 1.6

0.4 -0.1

6.0 4.3

5.1 4.6

2.5 1.8

2009

1.6

2.8

0.9

4.5

1.6

-0.4

2.0

0.4

4.8

4.2

1.9

Q407

-0.3

3.4

-0.5

-0.4

-0.6

2.3

-1.2

1.5


0

2

4

5

95 99 03 07


6

8

10

11

95 99 03 07

Source: Dexia-AM

3535

Still risk factors have accumulated, with fiscal policy having only a limited capacity to respond

Bank lending survey

Factors affecting demand for loans to Euro area enterprises

-60

-40

-20

0

20

40

03 04 05 06 07 08

Fixed investment

Inventories

M&A

Debt restructuring

Budgetary leeway*

Public debt(% of GDP, 2008)

Publ

ic de

ficit

(% o

f GDP

, 200

8)

-4-3-2

0

2

4

6

0 20 40 60 80 100 120

IR

FR

FN

NLSP

SL AU

IT

BG

PT

GE

LX

GR

SP IR GE

SL

Euro AU

FN BG IT LX FR PT

NL

GR

Change in cyclically adjusted primary balances

Stimulation

Restriction

-1.5

-1.0

-0.5

0.0

0.5

1.0(%, 2008)

-80

-60

-40

-20

0

20

40

03 04 05 06 07 08

Euro area

Germany

Demand for loans to enterprises

Governments’ spread vs German 10-year Bund

(basis points)

J F M A M J J A S O N D J F M A M0

20

40

60

80

Italy

Belgium

Greece

FranceSpain

(*) Bubble size proportional to weight in euro area GDP

2007 2008

Sources: Thomson Datastream, European Commission, Dexia-AM

3636

The ECB has tried its best to keep the interbank market liquid but has not changed its policy rate

Policy rate and monetary pillar

Repo rate (%) [R.H.S.]

99 01 03 05 072

6

2

3

4

5

10

14

Frontloading the distribution of liquidity

100

150

200

250

300

Jan Mar May Jul Sep Nov Jan Mar May Jul

Reserves Reservesrequirement

(€ billions)

2007 2008

Lengthening the average maturity of operations

-200

0

200

400

600

Jan Mar May Jul Sep Nov Jan Mar May Jul

Main refinancing operations

Longer-term refi. operations

Fine-tuning operations

Total net refinancing operations

2007 2008

(€ billions)

Consumer prices(% year on year)

Oil=$125

Oil=$150

Core CPI

Headline CPI

0

2

4

5

97 99 01 03 05 07 09

Cumulated deviation from the ECB inflation target

(index, 1999=100)

99

101

103

104

99 03 07

100

102

Sources: Thomson Datastream, ECB, Dexia-AM

Credit to the private sector(% year on year)

M3(% year on year)

3737

Up to now, the euro / dollar exchange rate has remained driven by expectations on monetary policies

O D F A J A O D F A J1.23

1.30

1.40

1.501.53

-1.4

-1

0

0.7

2006 2007

Sept. 08 short term rate differential (%, Euro-US) [R.H.S.]

$ against the euro

2006 2007

Expected Sept. 08Euro short term rates (%)

3.0

4.0

5.0

5.5

Oct Jan Apr Jul Oct

Memo: December 2007

Expected Sept. 08 US short term rates (%)


Exchange rates and short term interest rates differentials

2

3

4

5

6

Oct Jan Apr Jul Oct Jan Apr

2006 2007 2008

Expected June 09US ST rates (%)

Expected June 09 Euro short term rates (%)

1.23

1.38

1.53

1.68

Oct Jan Apr Jul Oct Jan Apr-1.4

-0.8

-0.2

0.4

1.0

1.6

2006 2007 2008

1.23

1.38

1.53

1.68

Oct Jan Apr Jul Oct Jan Apr-1.4

-0.8

-0.2

0.4

1.0

1.6

2006 2007 2008

June 09 short term rate differential (%, Euro-US) [R.H.S.]

$ against the euro

3838

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.

3939

Economic and financial Outlook

Contents

Annex

Euro area: how resilient?

United States: walking on a tight rope…

4040

COMMERCIAL BANKS DELINQUENCY AND CHARGE-OFF RATES(% of loans)

Real estate delinquency rates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

87 92 97 02 07

Total

Residential

Commercial

Delinquency rates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

87 92 97 02 07

TotalC&I loansReal EstateConsumer loans

Charge-off rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

85 90 95 00 05

TotalC&I loansReal EstateConsumer loans

Consumer loans delinquency rates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

87 92 97 02 07

Total

Credit cards

Other

Real estate charge-off rates

- 0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

85 90 95 00 05

TotalResidentialCommercial

Consumer loans charge-off rates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

85 90 95 00 05

TotalCredit cardsOther

Delinquency rates for US commercial banks


4141

Adjustable mortgage delinquency rates and projected ARM resets

Prime - adjustable rate

0

1

2

3

4

9899000102030405060708

30d 60d > 90d

Subprime - adjustable rate

0

2

4

6

8

10

12

9899000102030405060708

MORTGAGE DELINQUENCY RATES(% of loans)

Prime residential loans - seriously delinquent

0.4

0.9

1.4

1.9

2.4

2.9

3.4

3.9

4.4

98 99 00 01 02 03 04 05 06 07 08

PrimeFixed rateAdjustable rate

Prime residential loans - foreclosure started

0.0

0.4

0.8

1.2

98 99 00 01 02 03 04 05 06 07 08

PrimeFixed rateAdjustable rate

Subprime residential loans - seriously delinquent

0

5

10

15

20

25

98 99 00 01 02 03 04 05 06 07 08

SubprimeFixed rateAdjustable rate

Subprime residential loans - foreclosure started

0.0

1.0

2.0

3.0

4.0

5.0

6.0

98 99 00 01 02 03 04 05 06 07 08

SubprimeFixed rateAdjustable rate

Mortgage delinquency rates in the United States


4242

Selected indicators for Spain

Credit institutions’ balance sheet(year on year change, euro billions)

Ratio of doubtful loans(% of total loans)

0.0

0.4

0.8

1.2

1.6

00 02 04 06 08

Default rate curve by vintage

Housing prices (% year on year)

-5

0

5

10

15

20

97 00 03 06

Spain France

United States

Credit to the private sector (% year on year)

Liabilities

-50

0

50

100

150

200

250

00 02 04 06 08

Domestic deposits

RoW deposits

Securities other than shares

0

10

20

30

40

50

97 00 03 06 09

Households

Construction and real estate activities

Other business

-100

0

100

200

300

400

500

00 02 04 06 08

Loans

Securities other than shares

Total assets

Assets

Sources: Thomson Datastream, Central bank of Spain, Dexia-AM

Money does not perform. People do.

June 2008 - Amsterdam

Anton Brender

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

Documents

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