Country Risk
and the European debt crisis
Marijke Zewuster
Emerging Markets
Group Economics
10 May 2012
Contents
1. The European debt crisis, a brief update
2. Sovereign defaults it happened before
3. Country risk analysis at ABN AMRO
4. The Greek case
Contents
1. The European debt crisis, a brief update
2. Sovereign defaults it happened before
3. Country risk analysis at ABN AMRO
4. The Greek case
Sarkozy: ‘euro crisis is over’ (27 March 2012)
Source: Libered
4
Sovereign bond market stress returning…
10-Y government bond yield, %
ECB loans
8
7
6
5
4
Jun-11
Sep-11
Dec-11
IT
Source: Thomson Reuters Datastream
Mar-12
ES
5
…reflecting a fundamental lack of demand
% of total
55
50
45
40
35
30
25
99
02
05
08
11
foreign holdings of Spanish gov. bonds
Source: Bank of Spain
6
Large Eurozone bank exposures to periphery
Eurozone big bank exposure to sovereign debt (% tier 1 capital)
100
80
60
40
20
0
GR
incl. IR and PT
end December 2010
Source: EBA, ABN AMRO Group Economics
incl. SP
incl. IT
end September 2011
7
Worries about banks returning
Eurozone bank CDS index
ECB loans
400
350
300
250
200
150
100
Jun-11
Sep-11
Source: Thomson Reuters Datastream
Dec-11
Mar-12
8
Recessions make austerity difficult
Whole-economy PMI (below 50 equals contraction)
52
50
48
46
44
42
40
GE
Source: Markit
AU
NL
EZ
ES
IT
GR
9
Europe’s safety net is still not big enough
EUR bn
1000
800
600
400
200
0
Remaining
ESM/EFSF
(current)
Source: ABN AMRO Group Economics
Remaining
ESM/EFSF (new)
Bail-out IT & ES
10
The new fiscal fundamentalism in Europe
% GDP
10
8
6
4
2
0
GR
IE
ES PT
IT
FR
EZ
BE NL
DE AU
FI
Budget cuts 2011-2013
Source: EC, ABN AMRO Group Economics
11
Some good news (just for a change)
Greek wages in
industry down
10% over the last
year; German
wages up 3.8%
Exports, % yoy, 3-month average
20
15
10
5
0
Greece
Portugal
Germany
Spain
export growth in February
Source: Eurostat, ABN AMRO Group Economics
12
Moderate global growth
Economic outlook
Global GDP
US
Eurozone
China
2010
5.2
3.0
1.8
10.4
2011
3.8
1.7
1.5
9.2
2012
3.4
2.3
-0.5
8.2
2013
3.9
2.4
1.0
8.0
World trade
15.5
5.9
4.5
6.5
Global CPI
Eurozone
US
China
3.6
1.6
1.6
3.3
4.6
2.7
3.1
5.4
3.7
2.3
2.2
4.2
3.6
1.3
1.8
5.0
19-Apr
0.74
0.47
1.70
1.97
3M
0.70
0.40
2.20
2.30
2012
0.90
0.30
2.40
2.50
2013
1.1
0.3
2.9
3.3
1.31
1.35
1.30
1.25
Rates and FX (end of period)
3-M Euribor rate
3-M Libor rate
German 10-Y yield
US 10-Y yield
EUR/USD
Source: ABN AMRO Group Economics
13
Contents
1. The European debt crisis, a brief update
2. Sovereign defaults it happened before
3. Country risk analysis at ABN AMRO
4. The Greece case
Sovereign Defaults are nothing new
Selected defaults in the 19th Century
France
1
Argentina
2
Greece
4
Brazil
1
Netherlands
1
Chile
2
Spain
8
Colombia
4
Portugal
6
Mexico
4
Russia
2
Venezuela
6
15
Source: Reinhart & Rogoff: This time is different
Sovereign Defaults are nothing new
and in the 20th Century
Germany
2
Argentina
5
Greece
1
Brazil
7
Poland
3
Chile
7
Russia
3
Mexico
3
Turkey
5
Venezuela
4
16
Source: Reinhart & Rogoff: This time is different
Past sovereign debt crisis
The Latin American Baring Crisis of 1890’s
The Latin American debt crisis of the 1980’s
The Asian crisis mid 90’s
The Rouble crisis of 1998
17
Loss rates in recent defaults
date
value
loss rates
range
USD bn
range (%)
Russia
99/00
39
45-70
Ukraine
98/00
8
18-60
Pakistan
1999
1
30
Ecuador
2000
7
60
Argentina
01/05
202
58-67
Uruguay
2003
5
26-36
18
Source: IMF WP/05/137
Contents
1. The European debt crisis, a brief update
2. Sovereign defaults it happened before
3. Country risk analysis at ABN AMRO
4. The Greek case
Why do banks carry out own analysis and not rely on
the rating agencies?
Take own responsibility - understand the risks
Build body of knowledge that can be widely used
Basel II/III – savings on regulatory capital
20
Different types of risks?
Sovereign risk
Country risk
Political risk
Transfer and convertibility (T&C) risk
21
Sovereign Risk/Country Risk
Sovereign risk
Probability that the government of a country will refuse to comply with the terms of
a loan agreement during economically difficult or politically volatile times.
Country risk
Probability of loss due to economic and/or political instability in the
buyer's/borrowers country, resulting in an inability to pay for imports/loans.
Country risk includes sovereign risk.
(from BusinessDictionary.com)
22
Country Risk Analysis
Country risk analysis is based on monitoring of
economic and political conditions and uses both
quantitative and qualitative methods.
23
Indicators of Country Risk:
Economic Structure, development and policy
GDP per capita
Total GDP
Saving rate
Corruption
Contract enforcement
Property rights
Financial System
Real GDP Growth
Inflation
Government debt/GDP
Government balance/GDP
Interest payment/revenue
24
Indicators of Country Risk:
External Position
Foreign Debt/Export ratio
Current Account/GDP
Foreign Reserves/imports
Short-debt/exports
Trade diversification
Exchange rate system
Currency valuation
25
Indicators of Country Risk:
Political stability
Institutional permanence
Representativeness
Internal political consensus
External political consensus
External security threats
Civil unrest
Terrorism
26
Critical level of some indicators
Government Debt > 100% of GDP
Foreign Debt/export ratio > 2
International reserves < 2 months of imports
Current account > 5% of GDP
Inflation > 10% p.a
27
The rating agencies, what do their ratings mean?
Moody's
Brief S&P description:
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Extremely strong payment capacity
"Investment-grade"
S&P
&Fitch:
Very strong payment capacity
Payment capacity strong but somewhat susceptible to adverse conditions
Payment capacity adequate but may be weakened by adverse conditions
28
The rating agencies, what do their ratings mean?
Moody's
Brief S&P description:
BB+
BB
BBB+
B
BCCC+
CCC
CCCCC
C
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C
Somewhat vulnerable,
payment capacity possibly inadequate in adverse conditions
"Speculative-grade"
S&P
&Fitch:
Vulnerable,
payment capacity or willingness likely impaired in adverse conditions
Payment capacity unlikely in adverse conditions
Obligation highly vulnerable to non-payment
Bankruptcy petition filed but payments are continued
29
Lowest risk…
AAA/Aaa rated by all rating agencies
AAA/Aaa
Eurozone
Europe
Others
Finland
Denmark
Australia
Germany
Norway
Canada
Luxembourg
Sweden
Singapore
Netherlands
UK
Switzerland
30
Ratings some other Eurozone countries
Moody’s
S&P
Fitch
Austria
Aaa
AA+
AAA
Belgium
Aa3
AA
AA
France
Aaa
AA+
AAA
Greece
C
CCC
B-
Italy
A3
BBB+
A-
Portugal
Ba3
BB
BB+
Spain
A3
BBB+
A
Source: IMF WP/05/137
31
Triple A or Triple B ?
Country A
Country B
2009
2012
2009
2012
Real GDP growth
-4.9
0.6
-0.3
3.5
Inflation
2.2
2.6
4.9
5.5
Unemployment
7.7
8.7
8
6.2
-11.4
-6.0
-3.4
-2.5
Government debt (%GDP)
68
90
62
54
Current account (% GDP)
-1.7
-1.8
-1.5
-2.3
Foreign debt/export
10.4
1.4
Nominal GDP, usd bn
2200
1600
Budget balance (%GDP)
Source: Thomson Financial, EIU
32
Developed or Emerging?
5y CDS spreads
1200
1000
800
600
400
200
0
Jan-07
Jan-08
Jan-09
Greece
33
Source: Bloomberg
Jan-10
Brazil
Jan-11
Don’t forget politics
Austerity could become too much for the
public in the periphery…
…and bail-outs could become too much for
the public in the core
Contents
1. The European debt crisis, a brief update
2. Sovereign defaults it happened before
3. Country risk analysis at ABN AMRO
4. The Greek case
The Greek case, problem is not solved yet
Greek government debt, % GDP
220
220
200
200
180
180
160
160
140
140
120
120
100
100
10
11
Post PSI
Source: ABN AMRO GE, IMF
12
13
14
15
Pre PSI
16
17
18
19
20
Post PSI (half austerity)
36
The Greek negotiations
Five groups representing
1. Greek Government
2. International financial sector
3. Strong eurozone countries
4. Weaker eurozone countries
5. IMF
15 minutes discussion in teams on:
•
Amount of debt forgiveness asked from private sector
•
Terms and conditions of a bail out package
5 minutes presentation per group presenting the results and the main arguments
37
Important information
The views and opinions expressed in this document may be subject to change at any given time.
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This material is provided to you for information purposes only and should not be construed as an advice
nor as an invitation or offer to buy or sell securities or other financial instruments. Before
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other risks and any possible restrictions that you and your investments activities may encounter under
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are advised to discuss such an investment with your relationship manager or personal advisor and check
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amendments to this material.
38