In this presentation SEB's experts highlight three possible scenarios for the coming 6-12 months regarding the European sovereign debt crises: 1) Quicker than expected relief; 2) Muddling through (main scenario); and 3) Heavy turbulence and default in some countries. 1) Quicker than expected relief (probability: 15%) Consolidation measures on track in Greece and Ireland. Portugal will recieve support. Spain manages without but international pressure forces them to implement further budgetary savings. A stronger than expected international business cycle eases the situation somewhat for both troubled and not so troubled countries in the euro zone. The market focus decreases eventually as investors are convinced that necessary reforms are on the right track. Key factors are a decisive German/EU/ECB/IMF strategy ahead, offensive ECB liquidity and bond-purchase program, political sobering up and crises awareness in the countries. 2) Muddling through (main scenario - prob: 70%) Large similarities with our last Nordic Outlook (November 2010) forecast. The crises is not solved in a near future and new elements are added. Portugal will need support and eventually also Spain. This means that more financial muscles are necessary for EFSF/EFSM and from the IMF, which we expect will be provided. The threat of default in especially Greece lives on but ECB/EU/IMF have possibilities to ease the situation and move the defining moment ahead in time which creates uncertanties but buys countries time to implement consolidation packages. A full European sovereign debt and banking crises can be avoided - we muddle through. 3) Heavy turbulence and default in some countries (prob: 15%) The present turbulence turns to the worse. The need for resources to save countries and banks increases dramatically as Portugal and Spain needs assistance and also other countries like Italy, Belgium and France lose market confidence. Consolidation packages create a negative spiral that can not be broken: government savings push countries towards recession which increases the need for additional savings etc. Several countries face protests and political authority is weakened. Even Germany has to pay a price: large commitments pushes interest rates up and raises doubts over how long Germany will support weak countries. In the report, there are sections on: - Macro and fiscal outlook for PIIGS - Three scenarios for the coming 6-12 months - Key macro data - Euro-zone crises: financial safety nets - Consolidation measures - Financing need 2011-2013 - Rising cost of servicing sovereign debt is not the main problem - Political agenda - Exposure of banking system - Renegotiation of debt: A comparison with Argentina (2001) and Russia (1998)

1. SEB Research
European sovereign debt crises
December 2010
Daniel Bergvall (daniel.bergvall@seb.se), Robert Bergqvist, Håkan Frisén,
Carl Hammer, Jussi Hiljanen, Olle Holmgren, Johan Javeus, Elisabet Kopelman & Tomas Lindström
SEB Economic Research
1

2. In this package…
Macro and fiscal outlook for PIIGS
Three scenarios for the coming 6-12 months
Key macro data
Euro-zone crises: financial safety nets
Consolidation measures
Financing need 2011-2013
Rising cost of servicing sovereign debt is not the main problem
Political agenda
Exposure of banking system
Renegotiation of debt: A comparison with Argentina (2001) and
Russia (1998)
2

3. Macro and fiscal outlook for PIIGS
3

4. Growth: Greece still in recession,
Spain returns to growth
Sharpest and most prolonged
drop in GDP so far in Ireland
Consolidation packages will
Percent y/y
dampen growth in the years
ahead – Greece has the
weakest outlook
Highest unemployment
increases in Spain and Ireland,
Greece will probably move
higher before peaking
Crises has moved NAIRU
higher
Wage pressure will be low
Percent
looking ahead
Getting GDP back to growth is
important to prevent debt ratio
from growing out of control
4

5. PIIGS household debt lower than
average
Household sector debt, % of GDP
150 150
140 Italy Switzerland US 140
130
Belgium
Austria
Norway
Spain
Denmark
130
Very low household debt in Italy
Germany Portugal
120 Finland UK 120 Spain in line with average
Greece Ireland
110 Sweden Netherlands 110
100 100 Bank sector problems more
90 90 connected to strong economic
80 80 downturn than high debt levels
70 70
60 60
50 50
40 40
Source: Eurostat
5

6. Small export sectors in PIIGS
Export, goods and services, % of GDP Small countries usually have
90
Japan Portugal Denmark
90 relatively larger export sectors
80 80
Greece
Spain
Canada
Finland
Switzerland
Austria => Greece and Portugal worse
70 France Germany Netherlands 70
Italy Norway Ireland off than implied by chart
60 UK Sweden Belgium 60
(smaller help from global
50 50
40 40
recovery)
30 30 Spain and Italy similar to France
20 20 and UK. However Spain is only
10 10 half the size of these countries
Source: OECD
6

7. Bank sector major Irish headache
Bank sectors in Italy and Greece relatively small, Spain close
to average
Bank sector problems in many cases not caused by extensive
balance sheets
Bank sector assets, % of GDP
700 SW 700 Bank sector foreign liabilities, % of GDP
IR
400 400
600 600
500 500 300 300
NL UK
SE UK
400 400
DK
AU IE DE FR ES 200 200
300 Mean LU PT
300 FI NL
SW
BE
200 BE 200 SE
DK
IT GR 100 FR 100
AU PT
ES NO DE
100 FI 100 GR IT
JP US
CA
0 0 0 0
Source: BIS
Source: The Riksbank
7

8. Competitiveness: Lost decade for
PIIGS
Higher wage and price increases
and lower productivity have
eroded the competitiveness for
all PIIGS compared to Germany
Some improvements can be
noted for Ireland
We expect Germany to allow
somewhat higher wage
increases ahead which will help
with rebalancing
Lowered wages for public sector
workers are part of all PIIGS
consolidation measures,
flexibility in private sector differs
between countries
8

9. Current account balance: Most PIIGS
countries heavily reliant on foreign capital
Large current account deficits in
Portugal, Spain and Greece
Percent of GDP
which makes deficits more
difficult to finance
Improving situation in most
PIIGS during 2009, especially
for Spain, but still far from
satisfactorily
Current account balance (2010), % of GDP
15 NO 15 International net investment
10 10
(difference between country's
SE
NL DE DK external financial assts and
5 5
JA
AT
FI BE liabilities) position almost -100%
IR
0 0 of GDP in Spain and Portugal,
FR UK
-5 IT US
ES
-5 85% in Greece, Ireland 66%.
-10 -10 Italy in a better position -22%
PT GR
-15 -15
9

10. Public finances: worst situation in
Greece, fastest increase for Ireland
Government debt
180
per cent of GDP Increase compared to pre-
160
Portugal
Italy
Spain
Ireland
Greece crises: Ireland (+90%), Greece
140
120
(+51%), Spain (+37%), Portugal
100
(30%)and Italy (16%)
80
60 The Irish development shows
40
20 that a low government debt can
0
not save you from quickly
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
getting in trouble
19
19
19
19
19
20
20
20
20
20
20
20
20
20
20
20
20
Source: OECD 20
General government budget (2010), % of GDP
10 NO 10
The larger difference between
interest rates and nominal GDP
0 0
SE
FI DE AT DK
BE IT NL
growth, the better primary
-10 PT FR JA GR
ES UK
US
-10 deficit/surplus (balance
-20 -20 excluding interest cost) is
needed for debt not to snowball.
-30 -30
IR
Additional savings will be
-40 -40
Source: OECD needed to stabilise debt
10

11. Comparing the countries…
Index ranking based on public deficit and debt, CA balance, bank
sector exposure and economic performance
Low risk score in Nordic Countries
Country risk score
1.5 1.5
NO
1.0 FI SE
1.0
DE
NL DK AT
0.5 BE 0.5
JP
0.0 IT 0.0
FR
-0.5 US PT
-0.5
UK ES
-1.0 IR -1.0
GR
-1.5 -1.5
Source: SEB
11

12. The road ahead
ECB
– With policy rates at historical lows, the use of the alternative toolbox
must be increased
– Increased intervention in government debt market to ease pressure and
show commitment. ECB (asset purchases of 1.5% of GDP) still has a
long way to go to match interventions by Fed (19%) and BoE (14%)
Euro zone stability and growth pact (SGP)
– The crises strengthens the position of Germany
– EMU is too important to fail, default by any member will be seen as a
failure crises will have to become much worse before EMU countries
(Germany) stop supporting weaker countries
– If necessary, European crisis fund (EFSF) will get more resources.
EMU/IMF support gives slow moving political process time to
consolidate public finances and avoid the short term funding need that
most often is the trigger to default
– In a longer term perspective regulations has to be changed. This should
include harder SGP rules, an heir to EFSF, national budget frameworks
and elements that will increase the markets’ role in evaluating the
healthiness of public finances like a write-down clause/postponement of
payment clause in government borrowing contracts
12

13. QE: Interventions by ECB much lower
than Fed and BOE
Central banks asset purchases as % of GDP
19%
($2600bn)
14%
(£200bn)
1.5%
(€130bn)
ECB BOE Fed
Source: ECB, BoE, Fed, SEB
13

14. Sovereign debt crises
- Three scenarios for the coming 6-12 months
14

15. Three possible scenarios in coming 6-
12 months
1. Quicker than expected relief (probability: 15%)
• Improved crises awareness in PIIGS, implemented
consolidation measures successful
• Global recovery eases pressure
• Market perception of PIIGS risk decreases
2. Muddling through (main scenario – prob: 70%)
• Crises not solved in near future
• Portugal and Spain needs assistance – more financial
resources from EMU/IMF necessary
3. Heavy turbulence and default in some countries (prob: 15%)
• Present turbulence turns to the worse
• Pressure extended to Italy, Belgium and France
• Consolidation packages creates a negative spiral
15

16. Quicker than expected relief (prob: 15%)
Improved crises awareness in PIIGS, implemented consolidation
measures successful both in terms of effect on deficit and debt and
returning market confidence
Global recovery improves situation and eases pressure on unemployment
and public finances
Market perception of PIIGS risk decreases, Portugal needs assistance,
Spain manages without support
Key factors: Decisive German/EU/ECB/IMF strategy ahead, offensive ECB
liquidity and bond-purchase program, political sobering up and crises
awareness in countries.
Summary: Real and financial effects
Risk spread Significant reduction but still markedly higher than pre-crises level
German gov't bonds Up 100 bp
Spread SWE/NOR to GER Up somewhat due to higher short-spread
EUR/USD Staying in high end of 1.20-1.40 range
EUR/SEK SEK to trade stronger than our bearish end 2011/2012 8.75/8.60 EUR/SEK forecasts
Equities Up 20%
GDP growth ~2.0% in Euro-zone 2011, 0.5 p.e. higher per year compared to NO Nov
16

17. Muddling through
(main scenario, prob: 70%)
Main scenario in NO Nov – crises is not solved in near term, new elements
are added but not to the extent that a slow recovery is stopped
Portugal and Spain needs assistance – more financial resources from
EMU/IMF necessary
Threat of default lives on but actions from ECB/IMF makes muddle through
possible creates turbulence but avoids implosion
Political protests in troubled countries but consolidation continues with
international support/pressure
A full scale European banking crises is avoided but stress remains
Summary: Real and financial effects
Varies depending on news-flow and dynamics of crises, falls somewhat
Riskspread in IRL and and GRE, increases in others including FRA
German gov't bonds Up 20-30 bp end-2011
Spread SWE/NOR to GER Increases but less than in relief-scenario
EUR/USD Targeting 1.25 mid-2011
EUR/SEK No large deviations from NO Nov path
Equities Up 10-15%
GDP growth 1.5% 2011 (NO Nov forecast)
17

18. Heavy turbulence and default in some
countries (prob: 15%)
Present turbulence turns to the worse – Zero growth in Euro-zone,
recession in several countries, Greece and possibly more countries defaults
Portugal and Spain needs assistance, pressure extended to Italy, Belgium
and France
Consolidation packages create a negative spiral, government savings
depress growth that further worsen government balances. Deficits, low
growth and low inflation make debt spiral out of control
Even Germany has to pay a price: large commitments pushes interests up –
when will Germany get tired of supporting weak countries?
Summary: Real and financial effects
Risk spread At crisis levels in countries troubled at present, sharply rising spreads
in Italy but also to some extent France
German gov't bonds Up 100 bp on contagion and large committments
Spread SWE/NOR to GER Falling
EUR/USD Heading towards 1.10
EUR/SEK Substantial risk trading above 9.50 on surging riskaversion
Equities Sharp fall
GDP growth Zero growth in Euro-zone, recession in several troubled countries
18

19. Currency implications should Spain seek
financial assistance
In our main scenario of muddling through, Spain will enter the EFSF
Such scenario is not compatible with a rising euro.
On the contrary as markets start to price this outcome the euro will
suffer and we now forecast EUR/USD back at 1.25 by mid-2011.
The US will according to our forecast show good growth momentum
during the coming quarters. Markets will likely favour USD over EUR as
the "growth gap" between the regions increases.
Near-term EUR/USD may continue higher on positive seasonality
pattern (December is the best euro-month of the year) and hence we
still forecast a slow grind higher in the coming weeks.
The very expansionary US fiscal policies however (the US is the only
G10 country to ease fiscal policy next year) will not pass unnoticed by
financial markets. If Europe presents a "good and credible" solution to
the underlying problems the risks then move back again towards the
US and the USD. Hence our long-term held view that EUR/USD will
continue to trade the 1.20/25-1.40/45 range as the "most ugly contest"
continues remains.
19

20. Key macro data
20

21. Basic facts about PIIGS and major
economies – one EMU, situation very diverse
2010-12-03 PIIGS Italy Spain Greece Ireland Portugal
€bn 3 135 1 521 1 054 233 160 168
GDP % of EMU 35% 17% 12% 2.6% 1.8% 1.9%
% of EU 27% 13% 9% 2.0% 1.4% 1.4%
Current account €bn -156 -49 -58 -26 -5 -17
balance % of GDP -5% -3% -6% -11% -3% -10%
Assets €bn 5 936 1 845 1 370 258 2 175 288
International % of GDP 189% 121% 130% 111% 1362% 172%
investment Liab. €bn 7 727 2 180 2 333 458 2 303 452
position % of GDP 246% 143% 221% 197% 1442% 270%
(2009) Net. €bn -1 791 -335 -963 -201 -128 -164
% of GDP -57% -22% -91% -86% -80% -98%
A+ AA BB+ AA A-
Sovereign rating S&P
stable negative negative negative negative
2010-12-03 EU27 EMU Germany France UK USA Japan
€bn 11 783 8 956 2 397 1 943 1 572 11 917 4 434
GDP % of EMU 132% 100% 27% 22% 18% 133% 50%
% of EU 100% 76% 20% 16% 13% 101% 38%
Current account €bn -50 120 -37 -20 -264 100
balance % of GDP -1% 5% -2% -1% -2% 2%
Assets €bn 14 932 5 251 4 337 10 473 13 768 4 093
International % of GDP 167% 219% 223% 666% 116% 92%
investment Liab. €bn 16 318 4 308 4 568 10 721 16 268 2 315
position % of GDP 182% 180% 235% 682% 137% 52%
(2009) Net. €bn -1 386 944 -231 -248 -2 500 1 778
% of GDP -15% 39% -12% -16% -21% 40%
AAA AAA AAA AAA AA
Sovereign rating S&P
stable stable negative stable stable
21

22. EMU public finances outlook
Each data point represents one year. 2010-12 EU COM forecasts
Germany 2009
France Italy 2009
Government budget balance (% of GDP)
2009
Belgium 2009
Spain 2009 Portugal 2009
Ireland 2009
Greece 2009
Source: EU KOM
22

23. Consensus 2011 GDP forecasts since
August
Consensus 2011 GDP forecasts
y/y percentage change
3.0
2.2 2.1
2.0
1.7
1.5 1.5 Germany
1.0 1.1 1.0 Belgium
0.6 0.6 France
0.3 Ireland
0.0
-0.2 Italy
Spain
-1.0 Portugal
Greece
-1.9
-2.0
-2.5
-3.0
Jul Aug Sep Oct Nov
23

24. The Spanish economy in brief – high unemploy-
ment, improving current account balance
Percent of GDP
Percent y/y
Net balance
Percent
24

25. The Portuguese economy in brief –
diverging business and consumer confidence
Percent of GDP
Percent y/y
Net balance
Percent
25

26. The Italian economy in brief –
muddling through?
Percent of GDP
Percent y/y
Net balance
Percent
Index
26

27. The Greek economy in brief – when
will GDP stop falling?
Percent of GDP
Percent y/y
Net balance
Net balance
Percent
27

28. The Irish economy in brief – largest
fall in GDP, confidence still low
Percent of GDP
Percent y/y
Net balance
Net balance
Percent y/y
Percent
28

29. Lost decade in competitiveness
29

30. Countries' net exposure to foreigners
International net investment position. % of GDP. SEB estimates
60
40
59
47
20 37 12 59
12
0 -6
-17 -12
-22 -20 -21 -5
-20
-57
-66
-40 -85
-98 -95
-60
-80
-100
Portugal
EU-16
Germany
France
Italy
Greece
China
Denmark
Ireland
Spain
Japan
Finland
PIIGS
US
UK
Norway
Sweden 30
30

31. Yield spreads against Germany
10-year government bonds. Percentage points
31

32. Rates elevated but no “default pricing”
as with Greece in April
Market confidence for
Irish, Portuguese and
Spanish debt is
nowhere near as poor
as it was for Greece at
the height of the crisis in
late April
None of the countries Percent
have the classic default
pricing with inverted
yield curves as Greece
had in April
Probably this is a result
of the EU/IMF rescue
mechanisms now in
place
32

33. Euro zone crises: Financial safety nets
33

34. Euro zone crises: Financial safety nets
Euro zone financial safety net – total EUR 550bn
– EFSM: EUR 60bn (guaranteed by the EU budget)
– EFSF: EUR 440bn (guaranteed by EMU countries)
– (Balance of payment assistance: EUR 50bn for non-EMU countries)
IMF
– EUR 250bn committed to match EFSM and EFSF support
– Has more resources available
ECB toolkit
– Regular tool: Interest rates
– Capital corresponding to EUR 375bn to cover possible credit losses
– Toolkit to ease the crisis (Enhanced credit support)
- Securities Market Programme and covered bond purchases: Ensure
depth and liquidity in private and public debt market (end of Nov EUR
67bn and EUR 61bn respectively)
- Fixed rate full allotment refinancing operations (extended until at least
April 2011)
- More generous terms for what is acceptable collateral
- Longer term liquidity provision
- Swap facilities between central banks (to meet demand of FX,
especially USD)
34

35. Composition of the EFSF (European
Financial Stability Facility)
Share of
paid-up
Maximum amount EUR 440bn
capital of Guarantee
the ECB, commitments
Maximum
guaranteed (bn
Individually guaranteed by
% (bn EUR) EUR)* E-Z members states in relation
Belgium 3.5 15 18
Germany 27.1 119 143
to their share of ECB capital
Ireland 1.6 7 8 +20%
Spain 11.9 52 63
France 20.4 90 108 Countries with active
Italy
Cyprus
17.9
0.2 0.9
79 95
1.0
programmes do not provide
Luxemburg 0.3 1.1 1.3 guarantees (at present Greece
Malta 0.1 0.4 0.5 and Ireland)
Netherlands 5.7 25 30
Austria 2.8 12 15 Terms and conditions for loans
2.5 11 13
Portugal
Slovenia 0.5 2 2
similar to the IMF
Slovakia
Finland
1.0
1.8
4
8
5
9
Note: Greece does not receive
Greece 2.8 12 15 support from EFSF but from
Total 100 440 separate ad hoc support facility
*120% of proportional amount
Source: ECB, SEB
35

36. More on the EFSF/EFSM
Own legal entity. Shareholders: the 16 euro area members
Will raise necessary funds by issuing bonds (carried out by the German Debt
Management Office) in order to provide loans to member states in financial difficulty
(this is different to the Greek support which consists of bilateral loans pooled by the
EU Commission). Issuance will start in second half of January 2011; EUR 5-8bn (for
Irish support)
Loans are envisaged to have a maturity of three to five years. EFSF borrowing
structure should be similar of lending
Interest rates similar to Greek package* => 3-mth Euribor or swap rates for the
relevant maturity + charge of 300bps for maturities up to three years and an extra
100bps per year for loans with longer maturities + one time service fee of 50bps =>
cost of three year loan currently around 5.0% (1.9% euro swap rate + 300bps)
The EFSF does not have any currency limitation but is expected to issue the
majority in euro. The EFSM only issues in euro.
EFSF will not be a preferred creditor to other sovereign claims on the borrowing
country (unlike the IMF)
EFSF bonds will be eligible as collateral to the ECB
A cash buffer will be deducted from the cash amount remitted to a borrower. The
cash buffer will be invested in ”safe and liquid assets” managed by the German
DMO
See also http://www.efsf.europa.eu/attachments/faq_en.pdf
36

37. Eurozone credit sovereign credit ratings
Euro area credit ratings* Outlook
Belgium AA+ stable
Germany AAA stable The EFSF has been
Ireland AA- negative (w) assigned the best possible
Spain AA negative ratings from the S&P,
France AAA stable Moody’s and Fitch (AAA and
Italy A+ stable
Cyprus A negative
Aaa respectively)
Luxemburg AAA stable Only 6 out of 16 member
Malta A stable states have a AAA-rating
Netherlands AAA stable
Austria AAA stable Total maximum guarantee
Portugal A- negative (w) from AAA member states is
Slovenia AA stable EUR 306bn or 70% of the
Slovakia A+ stable maximum size of the EFSF
Finland AAA stable
Greece BB+ negative (w)
*S&P (w) on watch
37

38. IMF resources will be enough
Conclusion: Our assessment is that IMF will have enough funds
to assist countries in need. Practice has shown that whenever there
is political will to help a country, IMF resources are almost unlimited. If
IMF needs more funds, they will most probably get it. Liquidity problem
are more likely to come from the EU/EMU
Resources:
– Quota based (main IMF funding arrangement): approx USD 380bn.
Proposal exist to double quota resources
– GAB (General Agreement to Borrow) – agreement between IMF
and countries/central banks ~ USD 26bn
– NAB (New Arrangements to Borrow) – agreement between IMF and
countries. Currently under expansion to up to USD 600bn (from pre-
crises USD 250bn; not all agreements in place yet)
Member countries can borrow up to 200% of their quota annually and
600% cumulative. Access can be higher in exceptional circumstances
IMF has committed to match EFSF and EFSM support by providing 1/3
of overall funding (EUR 250bn)
In August 2010, IMF had USD 215/EUR 165bn in one-year forward
commitment capacity, excluding prudential balance
38

39. PIIGS consolidation measures
- on the right track, but additional measures might be necessary
39

40. Fiscal consolidation measures
- on track, but more will probably come
PIIGS: Fiscal consolidation measures, % of GDP
2011 2012 2013 2014 2011-14
Majority of consolidation for all
Greece
Lower expenditures 3.83 1.67 1.33 6.83
PIIGS on expenditure side – in
Higher revenues 1.92 0.83 0.67 3.42 line with international experience
Total 5.75 2.50 2.00 10.25
Ireland that expenditure cuts are more
Lower expenditures 2.40 1.20 1.09 1.09 5.77
Higher revenues 1.30 1.00 0.81 0.81 3.93 efficient consolidation measures
Total 3.70 2.20 1.90 1.90 9.70
Italy
Lower expenditures 0.50 0.15 0.15 0.80
Packages in all countries are
Higher revenues
Total
0.25
0.75
0.08
0.23
0.08
0.23
0.40
1.20
frontloaded
Portugal
Lower expenditures 2.70 0.66 0.46 3.82
Countries with low taxes
Higher revenues
Total
1.40
4.10
0.34
1.00
0.24
0.70
1.98
5.80
(especially Ireland) have more
Spain
Lower expenditures 2.00 1.45 3.45
room for increased taxes
Higher revenues
Total
0.75
2.75
0.55
2.00
1.30
4.75 We expect that some more
PIIGS
Lower expenditures 1.47 0.78 0.25 0.06 2.56 measures will be necessary for
Higher revenues
Total
0.66
2.13
0.35
1.13
0.14
0.39
0.04
0.10
1.19
3.75
most countries going ahead for
them to meet their targets
Measures until 2010-12-01
Source: National Finance Ministries, SEB
40

41. PIIGS financing need 2011-2013
- is EFSF/EFSM big enough to manage Portugal and Spain?
41

42. PIIGS financing need 2011-2013
EUR billion
2011 2012 2013
Maturing Maturing Maturing
debt Deficit Total debt Deficit Total debt Deficit Total
Greece 38.5 20.0 58.5 31.7 18.9 50.6 27.7 11.4 39.2
Ireland 4.3 22.6 26.9 5.9 20.8 26.7 6.0 17.3 23.3
Italy 279.4 75.2 354.6 190.3 52.9 243.2 123.8 59.7 183.5
Portugal 26.2 13.1 39.3 9.5 10.7 20.2 9.8 7.7 17.5
Spain 124.5 90.4 214.9 73.8 76.7 150.5 66.3 63.5 129.8
Total 472.8 221.4 694.3 311.2 180.0 491.2 233.6 159.6 393.2
Per cent of GDP
2011 2012 2013
Maturing Maturing Maturing
debt Deficit Total debt Deficit Total debt Deficit Total
Greece 16.5 8.6 25.1 13.4 8.0 21.4 11.4 4.7 16.1
Ireland 2.7 14.0 16.6 3.5 12.4 15.9 3.4 9.8 13.2
Italy 17.5 4.7 22.2 11.5 3.2 14.7 7.3 3.5 10.8
Portugal 15.1 7.6 22.7 5.4 6.1 11.5 5.4 4.3 9.7
Spain 11.7 8.5 20.2 6.7 7.0 13.7 5.8 5.6 11.4
Note: Source: Bloomberg, SEB
Refinancing need of maturing debt decreases over the years as short-term debt is only noted in data once (and to
avoid double-counting of refinancing need).
Before the support package to Ireland, Irish financing need was said (according to Irish officials) be met without
further borrowing until mid-2011. Debt redemptions until mid-2011 is assumed to be already covered without further
borrowing. EUR 3 bn for bank-support has been added to net lending each year as there is a bookkeeping difference
between net lending and financing need.
42

43. What size of packages to Portugal and
Spain in case of assistance from EU/IMF?
Assuming:
– A support package for Portugal and Spain of a similar size as Greece and Ireland
(approximately 50 % of GDP)
– That IMF takes 1/3rd of the burden
Portugal would then need roughly EUR 85bn and Spain EUR 530bn. Including Ireland,
total support would be EUR 686bn, of which 457bn from EFSF/EFSM and bilateral
lenders
This would be within the EUR 750bn limit (EUR 452bn of the EUR 500bn EFSF/EFSM limit;
EUR 5bn less than in the table, next page, provided by bilateral lenders), but too close to
the limit given that use of the EUR 500bn EMU-support package might be capped at EUR
440-450bn due to:
– 1) countries receiving support will not be part of the countries giving EFSF a guarantee
the 500bn frame is lowered by ~10bn (in this case EMU-countries not receiving
support will guarantee the full 120% of their EFSF-share)
– 2) the market might ask for a safety margin to keep the EFSF AAA rating (10% margin
would reduce EFSF ~50bn)
– 3) EFSF needs a cash balance to operate;
– This would reduce the present EFSF/EFSM 500bn to approximately 440-450bn
To manage assistance to Portugal and Spain it is highly possible that EMU countries and
IMF might have to commit more resources through increased overall support-frames or
additional bilateral lending
43

44. Borrowing need from EU/EMU and IMF
Greek and Irish package approximately 50 % of GDP
3 cases, borrowing need 2011-2013: 40, 50 and 60 % of GDP
Borrowing need from EMU/IMF
EUR Billion, 3 cases (Greek and Irish package approximately 50 % of GDP)
EUR billion
Borrow 40% of GDP Borrow 50% of GDP Borrow 60% pf GDP
EU/EMU IMF Total EU/EMU IMF Total EU/EMU IMF Total
Greece Support through other facility
Ireland 45.0 22.5 67.5
Italy 426.8 213.4 640.3 533.5 266.8 800.3 640.3 320.1 960.4
Portugal 46.1 23.1 69.2 57.6 28.8 86.5 69.2 34.6 103.8
Spain 283.8 141.9 425.6 354.7 177.3 532.0 425.6 212.8 638.5
Ireland,
Portugal
and Spain 374.9 187.4 562.3 457.3 228.7 686.0 539.8 269.9 809.7
Source: Bloomberg, SEB
Of the EU/EMU EUR 45 billion to Ireland, 5 billion is by bilateral lenders (primarily UK, also
Sweden and Denmark).
44

45. Is a 50% of GDP support enough to
cover financing need 2011-2013?
Given our forecast of public finances and debt redemptions, a 50% of GDP
support package seems to be enough to cover financing need 2011-2013 for all
PIIGS except for Greece, see table
BUT, if Portugal and Spain receive support, and including support to Ireland,
funds committed by EMU countries will be fully used. If additional EMU
countries need assistance, EFSF/EFSM support frames have to be increased
PIIGS refinancing need
Per cent of GDP, accumulated 2011-2013
2011 2012 2013
Greece 25.1 46.5 62.7
Ireland 16.6 32.5 45.7
Italy 22.2 36.9 47.6
Portugal 22.7 34.2 43.9
Spain 20.2 33.9 45.4
Source: Bloomberg, SEB
Figures for 2011 is refinancing need for 2011, 2012 is refinancing need 2011 and 2012, 2013 is
refinancing need for 2011, 2012 and 2013.
45

46. PIIGS: Rising cost of servicing
sovereign debt not the main problem
- PIIGS are back to situation before joining the Euro
46

47. PIIGS’ cost of servicing sovereign debt
Interest rates on marginal lending are high, but given maturity of government debt, the effect
on gov’t total interest expenditure is limited Rising cost of borrowing is a short term
borrowing problem…
...the cost as a share of GDP is comparable to the situation before joining the euro
Deficits 2012 are expected to be broadly in line with pre-EMU, debt somewhat higher
All PIIGS had a join-the-Euro-windfall with lower interest rates reducing cost of servicing
sovereign debt dropping fast. Implicit interest rates were reduced by between 40-50 per cent
At today's levels, nominal interest rates are still higher than pre-euro-days. One difference
though is inflation that were higher in all PIIGS in the mid-1990s and pre-crises compared to
today (nominal GDP will grow at a lower pace, real rates back at pre-euro-levels)
Investors are now more focused on public finances – the era of one interest rate for all in
the euro-club is over
The problem for PIIGS of honouring borrowing agreements are more long term. If deficits
develop as forecast, the big issue is to get growth back on track. The denominator effect
(nominal GDP is the denominator) is a powerful tool to reduce debt burden (debt/GDP-ratio)
General government cost of servicing sovereign debt, deficit and debt
Per cent of GDP
1995 2008 2012
Interest Deficit Debt Nom GDP Interest Deficit Debt Nom GDP Interest Deficit Debt Nom GDP
Portugal 5.6 -5.0 61.0 8.1 3.0 -2.9 65.3 2.0 4.3 -5.1 92.4 1.7
Ireland 5.3 -2.1 82.1 13.3 1.4 -7.3 44.3 -5.0 5.2 -9.1 114.3 4.2
Italy 11.6 -7.4 121.5 7.9 5.1 -2.7 106.3 1.4 5.9 -3.5 119.9 3.2
Greece 11.2 -9.0 97.0 12.2 5.0 -9.4 110.3 5.6 7.6 -7.6 156.0 1.5
Spain 5.1 -6.5 63.3 7.7 1.6 -4.2 39.8 3.3 3.4 -5.5 73.0 3.0
Source: OECD, SEB
47

48. General government interest cost
Per cent of GDP
14
12
Portugal Ireland
Italy Greece
10 Spain Sweden
8
6
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: OECD, SEB
48

49. Political agenda – key event 2011-2012
49

50. Some key events 2011/2012
Events 2011
JAN Hungary EU Presidency (H1); World Economic Forum; Presidential election in Portugal
FEB G20 finance ministers/central bankers meeting, France
MAR Parliamentary elections in Estonia
APR IMF/World Bank Spring meetings, Parliamentary elections in Finland
MAY Presidential election in Latvia; Referendum in UK (voting reform); Local/regional elections in Spain
JUN BIS Annual meeting (meeting of central bankers), EU summit expected to decide on new ECB-
president
JUL Poland EU Presidency (H2); Parliamentary election in Turkey
AUG
SEP IMF/World Bank Annual meetings; Parliamentary election in Greece
OCT Presidential election in Ireland; Parliamentary election in Poland
NOV New President of ECB; G20 Summit, France
DEC Parliamentary election in Russia
Key events 2012
Mexico G20 Presidency; Denmark EU Presidency (H1); Cyprus EU Presidency (H2)
Presidential elections: Finland (Jan), Russia (Mar), France (spring), India (Jul) USA; (Nov), Korea (Dec)
Parliamentary elections: Spain (Mar), Korea (Apr), Ireland (May), Canada (Oct)
50

51. Rising political risk premium
- on Euro zone and G20 levels
Global environment: Tensions within G20 over economic policies
have emerged and intensified in recent months
Euro zone: Last decade hasn't delivered an optimal currency area
=> more difficult to find optimal economic policy solutions
Countries like France, Italy, Belgium have not yet delivered
reasonable/credible fiscal consolidation programs
The imbalances within the euro zone redistribute economic - and
political - power in an unpredictable way; countries' sovereignty and
independence are now questioned
BIGGEST CHALLENGE: Do countries have governments/politicians
that have the endurance to implement necessary (decided/upcoming)
austerity measures? Do countries have the leaders that will continue
to develop/reform the euro zone?
51

52. Exposure of the banking system
52

53. Household liabilities (Eurostat)
Per cent of GDP
Liabilities, household sector
150
140
130
120
110
100
90
80
70
60
50
40
Italy Finland Norway Ireland
Belgium Greece Spain Netherlands
Austria Sweden Portugal US
Germany Switzerland UK Denmark
Source: Eurostat
53

54. High corporate debt in Ireland
according to Eurostat…
Per cent of GDP
Liabilities, non-financial corporations
275
250
225
200
175
150
125
100
75
50
Belgium Finland France Spain
Greece Italy Netherlands Portugal
US Germany Denmark Sweden
Switzerland Austria UK Ireland
Source: Eurostat
54

55. ….not so high according to BIS
Per cent of GDP
Liabilities, non-financial corporations
170
160
150
140
130
120
110
100
90
80
70
Belgium Finland Austria UK
Greece Irland France Spain
US Italy Netherlands Portugal
Switzerland Germany Denmark Sweden
Source:Eurostat, BIS
55

56. Bank sector assets – PIIGS-countries
around mean-value
Statistical sources differ (this is Riksbank). Assets are for both
domestic and foreign assets, e.g. a large share of Nordea’s
assets are classified as Swedish
Bank sector assets, % of GDP
700 SW 700
600 600
500 500
NL UK
SE
400 400
DK
AU IE DE FR ES
300 Mean LU PT
300
200 IT GR
BE 200
100 FI 100
0 0
Source: The Riksbank
56

57. BIS statistics on banks foreign liabilities –
Ireland clearly tops the league
Bank sector foreign liabilities, % of GDP
IR
400 400
300 300
UK
200 200
SW
FI NL
BE
SE
DK
100 FR 100
AU PT
ES NO DE
GR IT
JP US
CA
0 0
Source: BIS
57

58. Banks exposure to PIIGS
From Riksbanks’ latest MPR, per cent of GDP
58

59. Renegotiation of debt:
A comparison with Argentina (2001) and Russia (1998)
59

60. Conclusions
Most defaults occur against a background of debt sustainability issues, but are
triggered by refinancing problems, often accompanied by large external shocks
Large part of sovereign debt denominated in foreign currency makes the situation
more difficult
For PIIGS: Significant consolidation necessary even to reach a primary balance. A
quick default would in the short term increase financing problems. For Greece and
Portugal: in a few years a large part of sovereign debt will be guaranteed by fellow
EMU-members it will politically be difficult to default on that debt.
Comparing the situation in Russia and Ukraine with PIIGS – some issues are
similar, some are not:
– Similarities: high indebtedness, fixed exchange rate, economy in recession
– EMU/IMF safety net solves the main trigger for default – short term financing
– Russia and Argentina could print money and inflate away own currency debt,
PIIGS cannot (large foreign debt reduces the power of this mechanism)
– Russia and Argentina regained competitiveness through devaluation; PIIGS does
not have this possibility but have to pursue internal devaluation
– Lack of confidence in the fixed exchange rate put pressure on Russia and
Argentina – that is not the case for PIIGS which are not vulnerable to speculative
currency attacks
Situation in especially Greece looks worse from the outset, but the country enjoys
stronger support (from Euro zone countries and ECB) to manage the short-term
financing situation that can buy time to solve longer term issues
60

61. Argentina
The run-up to default
– Currency pegged to a strengthening USD loss of competitiveness
against major trading partners
– Recession in 1999 caused vicious circle: tax revenue dropped,
widened budget deficit, concern about gov’t ability to service debt,
markets dropped, even deeper recession etc
– High debt and contractive economic policy. IMF kept lending money
and postponing repayments
– Inflow of funds made it easy to increase debt (note that public debt
was only ~50 % of GDP in 2001)
– 2001: Less confidence in local currency flight of money to USD
Late 2001 default on debt and ‘Pesoification’ of USD-accounts
Debt restructuring:
– Foreign investment fled the country, capital flows to Argentina
ceased
– 2005: Deal with 76% of bondholders, redemption of 25-35% of
original value; now attempts to get agreement from ‘holdouts’
61

62. Russia
The run-up to default
– Background: lost competitiveness, floating-peg exchange
rate, fiscal deficit, government debt: 50% of GDP in 1996
rose to >100% in 1998, lack of confidence that situation
would be solved flight of capital
– Triggered by the Asian crises and decline in world commodity
prices
– Restructuring of debt repayments and widening of exchange
rate band in August 1998
Debt restructuring:
– Restructuring of debt falling due from Aug 1998-Dec 1999
(24% of GDP, reduced by 40-75%)
– Quick bounce-back. Rising oil-prices 1999-2000, import
substitution after the devaluation, completed IMF repayments
2005 ahead of schedule
62