Crisis Response:
Different Aspects
Dr. Jacob A. Frenkel
STRICTLY PRIVATE AND CONFIDENTIAL
Chairman, JPMorgan Chase International
Chairman, Group of Thirty (G30)
Former Governor, Bank of Israel
Panel Discussion II
The Seventeenth Dubrovnik Economic Conference
Croatian National Bank
Dubrovnik, June 29-July 2. 2011
J.P.Morgan Chase
Global Imbalances
• Imbalances in International Payments
• Imbalances in Macro Policies
• Imbalances in the Euro-System
6/20/2011
2
International Payments Imbalances
• Current Accounts Imbalances
• Who Holds US Treasuries?
• International Reserves
• Savings Imbalances
6/20/2011
3
Current Account of Balance of Payments
(U.S. dollars, bill.)
$630
US$ billions, 2011
600
$462
Of Which:
China
Japan
300
$372
$134
0
-$37
-$79
-300
-$494
-600
United States
Latin America and
the Caribbean
European Union
Middle East, N.
Africa, & Russia
Asia
Source: IMF, last update Apr 03 2011, WEO (2011 Forecast)
6/20/2011
4
J.P.Morgan Chase
Current Account of Balance of Payments
(U.S. dollars, bill.)
700
Asia,
2011:
$630B
Asia & Oil Exporters Save
500
M iddle East,
N. Africa, &
R u ssia,
2011:
$462B
300
100
EU, 2011:
-$ 3 7B
-100
Europe Balances
-300
US Spends
-500
-700
-900
2000
IMF Forecasts
European Union
United States
Middle East, N. Africa, & Russia
Asia
2001
2002
2003
2004
US, 2 011:
-$ 4 94B
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, last update Apr 03 2011, WEO (2010 & 2011 Forecast)
6/20/2011
5
J.P.Morgan Chase
Global Treasury Holdings
(% of total foreign holdings)
26%
0.25
20%
0.2
0.15
0.1
7%
5%
0.05
5%
3%
3%
Caribbean
Russia
0
China
Japan
United Kingdom
OPEC
Brazil
Source: US Treasury, Last Observation: March 2011
6/20/2011
6
J.P.Morgan Chase
Accumulation of Foreign Exchange
Reserves (Bill. Usd)
($B)
3,500
3,000
3,250
Stock,
May 2011
$3,045
3,000
2,750
($B)
2,750
2,500
Flow,
2005 - 2011
$2,421
2,250
2,500
2,250
2,000
2,000
1,750
1,750
1,500
1,500
1,250
1,250
$1,062
1,000
1,000
750
750
$468
500
$399
500
250
250
0
0
China
Japan
Russia
Taiwan
$364
$305
$241
China
Korea
Japan
Russia
$156
$105
Taiwan
Korea
Source: Nat'l Statistical Institutes, Foreign-Exchange Reserves ex. Gold, Last Observation: May 2011; China (3/11)
6/20/2011
7
J.P.Morgan Chase
Gross National Savings as a % of GDP,
2010
(% of GDP)
52
50
40
34
30
24
20
20
12
10
0
China*
India
Japan
Euro Area
United States
*For China, 2009 national savings rate; for all others, 2010.
Source: US Treasury, Last Observation: March 2011
6/20/2011
8
J.P.Morgan Chase
Imbalances in Macro Policies
• Global Interest Rate Cuts
• Nominal and Real Interest Rates
• Central Bank’s Balance Sheets
• Fiscal Deficits and Public Debt
6/20/2011
9
Coordinated Global Rate Cuts
6
(%)
5
4
3
EUR,
1 .25%
C anada,
1 .0%
2
1
UK 0.5%
US
0 .25%
0
United Kingdom
Japan
Eurozone
Canada
Japan
0 .1%
United States
-1
2005
2006
2007
2008
2009
2010
2011
Source: Bloomberg Market Data, Last observation: 20 Jun, 2011
6/20/2011
10
J.P.Morgan Chase
Global Policy Rates: Developed Markets
15
(%, 12mo moving avg.)
12.5
10
7.5
Nominal
5
2.5
Real
0
-2.5
Real avg. Policy Rate
Nominal avg. Policy Rate
-5
1975
1980
1985
1990
1995
2000
2005
2010
Source: JPMorgan Chase, National Statistical Institutest, Last Observation: Nominal - April 2011; Real - March 2011
6/20/2011
11
J.P.Morgan Chase
Global Policy Rates: Main Rate & Real
Rates
7
(%)
6
(%)
6
5
Bank Rate
5
4
4
3
3
Bank Rate
2
2
1
0
1
-1
0
-2
-3
Real Rate
Real Policy Rate (Headline CPI-deflated)
-4
Federal Reserve Target Fed Funds Rate
-2
-5
2000
2002
2004
2006
2008
Real Rate
-1
2000
2010
ECB Refinancing Rate
Real Policy Rate (Headline CPI-deflated)
2002
2004
2006
2008
2010
Source: ECB, Fed; Last Observation: Main Policy Rate - 20 Jun, 2011; Real Rate - May 2011 (Fed), May 2011 (ECB)
6/20/2011
12
J.P.Morgan Chase
Global Policy Rates: Main Rate & Real
Rates
8
(%)
3
7
(%)
Real Policy Rate (Headline CPI-deflated)
BoJ Overnight Call Rate
Bank Rate
6
2
5
Real Rate
4
3
1
2
1
Real Rate
0
0
Bank Rate
-1
-2
-1
-3
BoE Base Rate
-4
Real Policy Rate (Headline CPI-deflated)
-2
-5
2000
2002
2004
2006
2008
2000
2010
2002
2004
2006
2008
2010
Source: BoE, BoJ; Last Observation: Main Policy Rate - 20 Jun, 2011; Real Rate - May 2011 (BoE), May 2011 (BoJ)
6/20/2011
13
J.P.Morgan Chase
Total Assets of Key Central Banks
(indexed levels)
400
(indexed, end of June 2007 = 100)
350
300
250
Current assets
Billions of $
Total
Of Which:
Fed
BoE
ECB
F ed: 326
5,934
2,832
387
2,715
BoE: 300
200
EC B: 157
150
100
50
Jun-07
BoE
Dec-07
ECB
Jun-08
Federal Reserve
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Source: NSI's, Last Observation: Fed, BoE (Jun 15, 2011); ECB (Jun 10, 2011)
6/20/2011
14
J.P.Morgan Chase
Federal Reserve Balance Sheet Assets:
Total Assets & Security Holdings
3,000
(Bill Usd)
2,750
2,500
2,250
Assets:
$ 2 ,832 bill.
Total Assets
Treasury Securities Held
Federal Agency Securities
Mortgage Backed Securities
2,000
Treasury
Securities:
$ 1 ,576 bill.
1,750
1,500
1,250
1,000
750
MBS: $ 915
bill.
500
Agencies:
$ 1 18 bill.
250
0
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Source: Federal Reserve, Last Observation: 15 Jun, 2011
6/20/2011
15
J.P.Morgan Chase
Fiscal Positions: General Government
Balance
2
(Percent of GDP)
0
-2
Euro Area,
2 0 11:
-4 .4%
-4
-6
Japan,
2 0 11:
-1 0 .0%
-8
-10
US, 2 011:
-1 0 .8%
-12
IMF Forecasts
United States
Euro Area
Japan
-14
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)
6/20/2011
16
J.P.Morgan Chase
Fiscal Positions: Net Debt
140
(Percent of GDP)
120
Japan,
2 0 11:
1 2 7.8%
100
US, 2 011:
7 2 .4%
80
Euro Area,
2 0 11:
6 6 .9%
60
40
20
2000
IMF Forecasts
Euro Area
2001
2002
United States
Japan
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)
6/20/2011
17
J.P.Morgan Chase
Imbalances in the Euro-System
• Unemployment & Productivity
• Budget Deficits and Public Debt
• Savings and Payments Imbalances
• Spreads, CDS, and Banks
• “Bad Zones” and the Crisis
6/20/2011
18
Unemployment Rate (%): Selected Euro
Area Countries
22
Sp ain:
20.7%
(% of Labor Force)
20
Germany
Spain
Greece
Portugal
Ireland
G reece:
16.2%
18
16
14
Ireland:
14.8%
12
10
Portugal:
12.6%
8
6
G ermany:
7.0%
4
2
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Eurostat, Last Observation: Ireland, Germany (5/11); Spain (4/11); Greece (3/11)
6/20/2011
19
J.P.Morgan Chase
Relative Unit Labor Costs,
Manufacturing Sector
140
(index, Q1 2001 = 100)
Stage 2
EMU
Italy:
133
Euro
adoption
130
Spain:
123
120
Euro
Area:
121
Greece:
112
110
100
Germany
Greece
Italy
Spain
Euro Area
Germany:
98
90
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: OECD December 2010, Last observation: Q4/2010
6/20/2011
20
J.P.Morgan Chase
Relative Unit Labor Costs,
Manufacturing Sector
150
(index, Q1 2001 = 100)
Ita ly:
133
140
Sp ain:
123
130
Eu ro
Area:
121
120
110
G reece:
112
100
Euro
adoption
90
G ermany:
98
80
Stage 2
EMU
70
US:
59
60
Germany
Greece
Italy
Spain
United States
Euro Area
50
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: OECD December 2010, Last observation: Q4/2010
6/20/2011
21
J.P.Morgan Chase
Fiscal Position: General Government Balance
– Select Euro Area Economies
4
(Percent of GDP)
G ermany, 2011:
-2.3%
Portugal,
2011:
-5.6%
Sp ain,
2011:
-6.2%
-6
G reece,
2011:
-7.4%
-16
Ireland,
2011:
-10.8%
-26
IMF Forecast
Germany
2001
2003
Greece
Ireland
Spain
Portugal
-36
2000
2002
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)
6/20/2011
22
J.P.Morgan Chase
Fiscal Positions: Net Debt – Select Euro
Area Economies
(Percent of GDP)
G reece,
2011:
152.3%
160
140
120
Ireland, 2011:
95.2%
100
Portugal,
2011:
86.3%
80
60
Sp ain,
2011:
52.6%
40
G ermany,
2011:
54.7%
20
0
2000
IMF Forecast
Ireland
2001
2002
Germany
Spain
2003
2004
Greece
Portugal
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)
6/20/2011
23
J.P.Morgan Chase
Change in Gross National Saving Rate:
Select European Counties (2000 – 2010)
4
(Difference, in % between 2000 & 2010 in Saving Rate)
2.4
2
0
-2
-2.9
-4
-4.6
-6
-5.7
-8
-8.5
-10
-9.1
-8.6
-12
-13.1
-14
Germany
UK
Italy
Spain
France
Ireland
Greece
Portugal
Source: Eurostat, Last Update: March 11, 2011
6/20/2011
24
J.P.Morgan Chase
Change in Gross National Saving Rate:
Select European Counties (2000 – 2010)
0
Change
between
2000-2007
5.8
(Difference, in % between 2007 & 2010 in Saving Rate)
-2
4
-4
-3.4
-3.5
-4.1
-3.5
-3.5
Portugal
6
(Difference, in % between 2000 & 2007 in Saving Rate)
Greece
8
-4.1
2
0.6
-6
0
-0.5
-8
-7.8
-2
Change
between
2007-2010
-10
-11.1
Ireland
France
-12
Spain
-5.1
Germany
-5
Portugal
Ireland
France
Spain
Italy
UK
Germany
-6
Greece
-4
Italy
-1.6
UK
-1.3
-2
Source: Eurostat, Last Update: March 11, 2011
6/20/2011
25
J.P.Morgan Chase
Euro Area Current Account
Balance (% of GDP)
8
(Percent of GDP)
G ermany,
2011: 5.1%
6
4
2
0
-2
-4
-6
G IPS, 2011:
-5.2%
-8
-10
IMF Forecast
Germany
Ireland, Spain, Greece, & Portugal
-12
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)
6/20/2011
26
J.P.Morgan Chase
Greece, Portugal, Ireland and Spain:
Gross Financing Needs
Government Financing Needs, 2010 - 2013
2010
2011
2012
2013
2010 - 2013
Financing Needs
bill. Eur
bill. Eur
bill. Eur
bill. Eur
bill. Eur
Greece
Deficit
Maturing Debt
22.0
0.4
16.8
38.9
14.3
31.7
10.8
27.8
162.7
Portugal
Deficit
Maturing Debt
12.6
0.5
9.7
27.1
9.6
9.1
10.3
9.7
88.7
Ireland
Deficit
Maturing Debt
49.6
0.0
16.8
10.8
14.2
5.6
12.2
6.1
115.3
Spain
Deficit
Maturing Debt
98.2
8.9
67.6
130.2
63.2
70.3
57.7
68.8
564.7
Source: IMF, Bloomberg Market Data, last update: BBG - Jun 19 2011/ WEO - October 2010 database
6/20/2011
27
J.P.Morgan Chase
10yr Government Bond Yield Spread
1,400
(spread over German Bunds, bps)
G reece:
1438bp
1,200
1,000
Ireland:
849bp
800
600
Portugal:
819bp
400
200
Sp ain: 262bp
Greece
Spain
Portugal
Ireland
0
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Source: Bloomberg Market Data, Last Observation: Jun 20, 2011
6/20/2011
28
J.P.Morgan Chase
European Sovereign CDS Premia
2,300
2,200
2,100
2,000
1,900
1,800
1,700
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
(spread in basis points)
Jun-08
Greece 5yr CDS
Germany 5yr CDS
Spain 5yr CDS
Ireland 5yr CDS
Portugal 5yr CDS
Greece:
2 1 49bp
Portugal:
8 1 0bp
Ireland:
7 9 6bp
Spain:
2 8 7bp
Germany:
4 0 bp
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Source: Bloomberg Market Data, CMAN, last observation: June 17, 2011
6/20/2011
29
J.P.Morgan Chase
European Sovereign and Corporate CDS
Spreads
230
(CDS, spread in basis points)
210
Sovereign:
221bp
190
170
Financial:
165bp
150
130
Corporate:
111bp
110
90
70
iTraxx Western Europe SovX (sovereign), generic 5y
50
iTraxx Europe HG Corporate, generic 5y
iTraxx Europe Senior Financial, generic 5y
30
Oct-2009
Jan-2010
Apr-2010
Jul-2010
Oct-2010
Jan-2011
Apr-2011
Jul-2011
Source: Markiit iTraxx data, Last Observation: Jun 17, 2011
6/20/2011
30
J.P.Morgan Chase
Bank Holdings of Domestic Government
Securities (% of total bank assets)
8.0
(% share of bank assets)
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Euro Area:
4 .9 %
3.5
3.0
2.5
2.0
1.5
US: 1 .7%
1.0
0.5
United States, Commercial Banks
Euro Area, MFIs
0.0
1999
2001
2003
2005
2007
2009
Source: Federal Reserve (Flow of Funds), ECB (end-of-quarter value), Last observation: Q2/2010 (US), Q3/2010 (Euro Area)
6/20/2011
31
J.P.Morgan Chase
Gross Government Debt and Budget
Deficit (% of GDP 2010)
Gross General Government Debt (% of GDP), 2011
170
Greece
150
130
"Bad" - Zone"
110
Italy
Belgium
90
Portugal
Ireland
France
70
Austria
Euro Area
50
Germany
Spain
Netherlands
30
10
0
-2
-4
-6
-8
-10
-12
General Government Balance (% of GDP), 2011
Source: IMF, last update Apr 03 2011, WEO (2010 Forecast)
6/20/2011
32
J.P.Morgan Chase
Gross Government Debt and Budget
Deficit (% of GDP 2010)
Gross General Government Debt (% of GDP), 2011
170
Greece
150
130
Japan
"Bad" - Zone"
110
Italy
Belgium
90
Portugal
Ireland
France
UK
70
Austria
Euro Area
50
Germany
US
Spain
Netherlands
30
10
0
-2
-4
-6
-8
-10
-12
General Government Balance (% of GDP), 2011
Source: IMF, last update Jun 17 2011, WEO (2010 Forecast)
6/20/2011
33
J.P.Morgan Chase
Current Account Balance and Budget
Deficit (% of GDP 2010)
10
Current Account Balance (% of GDP), 2011
Netherlands
8
6
Germany
4
Austria
2
Belgium
0
Ireland
Euro Area
-2
France
-4
Italy
Spain
-6
Greece
-8
Portugal
-10
"Bad" - Zone"
-12
-1
-3
-5
-7
-9
General Government Balance (% of GDP), 2011
Source: IMF, last update Apr 03 2011, WEO (2010 Forecast)
6/20/2011
34
J.P.Morgan Chase
Current Account Balance and Budget
Deficit (% of GDP 2010)
10
Current Account Balance (% of GDP), 2011
Netherlands
8
6
Sweden
GermanyAustria
4
2
Japan
Belgium
0
Bulgaria
-2
Czech
-4
Ireland
Euro Area
UK
France
US
Italy
Spain
-6
Greece
-8
Portugal
-10
"Bad" - Zone"
-12
2
0
-2
-4
-6
-8
-10
-12
General Government Balance (% of GDP), 2011
Source: IMF, last update Jun 17 2011, WEO (2010 Forecast)
6/20/2011
35
J.P.Morgan Chase
Gross National Saving Rate and Budget
Deficit (% of GDP 2010)
Gross National Saving Rate (% of GDP), 2011
30
Austria
25
Slovak Republic
Belgium
Germany
20
Euro Area
Italy
15
France
Spain
Portugal
10
Ireland
Greece
5
"Bad" - Zone"
0
-1
-3
-5
-7
-9
-11
-13
General Government Balance (% of GDP), 2011
Source: IMF, last update Apr 03 2011, WEO (2010 Forecast); Eurostat (2010 forecast, EA13)
6/20/2011
36
J.P.Morgan Chase
Gross National Saving Rate and Budget
Deficit (% of GDP 2010)
Gross National Saving Rate (% of GDP), 2011
30
Austria
Sweden
25
Slovak Republic
Belgium
Germany
Japan
Czech
20
Euro Area
Italy
15
France
Spain
UK
US
Ireland
Portugal
10
Greece
5
"Bad" - Zone"
Bulgaria
0
2
0
-2
-4
-6
-8
-10
-12
General Government Balance (% of GDP), 2011
Source: IMF, last update Jun 17 2011, WEO (2010 Forecast); Eurostat (2010 forecast, EA13)
6/20/2011
37
J.P.Morgan Chase