Slide 1: The Changing Landscape in Europe: A Macro Economic Update and Review of Implications for Treasurers
Citi Transaction Services Eurozone Webinar | October 4th, 2012 The Changing Landscape in Europe: A Macro Economic Update and Review of Implications for Treasurers William Lee Ron Chakravarti Mark Tweedie Managing Director, Managing Director, Managing Director, Office of the Chief Economist, H d – Cl
Slide 2: Euro Crisis In Perspective
October 3rd, 2012 Euro Crisis In Perspective Identifying Fundamental Forces and Policy Prescriptions William Lee Managing Director William Lee@Citi com William.Lee@Citi.com +1-212-816-2621 See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures Citi
Slide 3: Table of Contents
Table of Contents Euro Area Crisis Crisis—Fundamental Fundamental Drivers 4 Banking Crisis 9 External Imbalance Crisis 13 Selected Policy Prescriptions 18 3
Slide 4: Euro Area Crisis — Fundamental Drivers
Euro Area Crisis — Fundamental Drivers 4
Slide 5: Euro Area Crisis: Confluence of Multiple Headwinds
Euro Area Crisis: Confluence of Multiple Headwinds ● Sovereign Debt Crisis – Decade of Increased Leverage “Artificially” Boosted Expenditures and Growth – Fiscal Austerity Necessary to Deleverage (and maintain sustainable debt/GDP) • Deleveraging is Drag on Economic Growth • Slow Growth Worsens Sove
Slide 6: Government Debt and Fiscal Balances for Select Countries
Government Debt and Fiscal Balances for Select Countries 2011 Deficit 10.7 9.4 8.3 13.0 8.9 4.5 5.2 9.1 4.2 1.0 3.9 Source: IMF WEO database April 2012, Citi Research calculations 6
Slide 7: Sovereign Debt Ownership—Domestic and Foreign Shares
Sovereign Debt Ownership—Domestic and Foreign Shares Note: Data are 2011Q2 for Greece, Ireland, United States, 2011Q1 for Japan, 2010Q4 for Portugal, France, Italy, and Germany For US and Japan, Non-Resident holders include foreign official holdings, and for Greece, Ireland, Portugal ECB holdings So
Slide 8: Fiscal Policy: How long until Debt/GDP ratios peak?
Fiscal Policy: How long until Debt/GDP ratios peak? Source: IMF Fiscal Monitor Update July 16, 2012 8
Slide 9: Banking Crisis
Banking Crisis 9
Slide 10: Euro Area Banks Still Leveraged and Vulnerable
Euro Area Banks Still Leveraged and Vulnerable Dependence on Wholesale Funding and Deposit Outflows Risks Credit Crunch Bank Leverage Bank B k Loan-to-Deposit L t D it R Ratio ti (Adjusted tangible assets to Tier 1 Capital) (in percent) Cumulative Euro Area Deposit Flows 2011-12 (Billi (Billions off
Slide 11: Deleveraging and Weakened Bank Funding Capabilities Tighten Lending
Deleveraging and Weakened Bank Funding Capabilities Tighten Lending Banks’ Use of ECB Open Market Operations Bank Lending Rates To Non-Financial Corporations as a Share of Total Assets (New Loans Up to EUR 1 million) 9 24 24% 24 24% 8 20 20 7 16 16 6 12 12 5 8 8 4 4 4 3 Euro Area GR IR SP PO 0 0 2 2
Slide 12: Contagion From Intensified Euro Sovereign/Bank Crisis
Contagion From Intensified Euro Sovereign/Bank Crisis Sharp drop in EA credit growth slows GDP globally through trade and bank linkages T d Linkages Trade Li k Banks B k raise i capital it l buffers b ff with ith less l lending l di and d assett sales l Feedback loops raise risk spreads, bank fundin
Slide 13: External Imbalance Crisis
External Imbalance Crisis 13
Slide 14: Economic Divergence Highlights Imbalances Among Euro Area Countries
Economic Divergence Highlights Imbalances Among Euro Area Countries Change in Real GDP Since Q1-2002 Current Account Balances as Pct GDP % % 35 12 Greece Greece Portugal Ireland 10 30 Portugal Italy Spain Germany 8 Ireland 6 25 Italy 4 20 Spain 2 0 Germany 15 -2 1999 2002 2005 2008 2011 4 -4 10 -6 -
Slide 15: Range of Competitiveness Among Euro Area Countries
Range of Competitiveness Among Euro Area Countries Euro Area Countries — Unit Labour Costs Relative to Euro Area Avg. 40% 40 40% 40 30 30 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 1999 2001 2003 2005 2007 2009 2011 Germany Ireland Greece Spain Source: ECB and Citi Investment Research and Analysis 15
Slide 16: Euro Area Productivity and Growth has Slowed
Euro Area Productivity and Growth has Slowed Potential GDP Growth Most Affected in “Southern Core” (in percent) Source: “Fostering Growth in Europe Now” IMF Staff Discussion Paper SDN 12/07 June 2012 16
Slide 17: How Long for Structural Reforms to Spur Euro Area Growth?
How Long for Structural Reforms to Spur Euro Area Growth? Immediate and Cumulative Effect on GDP (in percent) Source: “Fostering Growth in Europe Now” IMF Staff Discussion Paper SDN 12/07 June 2012 17
Slide 18: Selected Policy Prescriptions
Selected Policy Prescriptions 18
Slide 19: Impact of “Grexit” on Greece - Extreme Case of a General Problem
Impact of “Grexit” on Greece - Extreme Case of a General Problem Level of Real GDP YoY CPI Inflation 25 105 100 20 % April 2012 GEOS Forecast April 2012 GEOS (Without Grexit) Forecast (Without Grexit) 95 May 2012 Forecast 15 May 2012 Forecast (With (With Grexit) Grexit) 90 10 85 5 80 0 75 70 -5 2007
Slide 20: Policies to Mitigate Euro Area Crisis
Policies to Mitigate Euro Area Crisis Acting Entity Potential Measures Likelihood Market Impact European Central Bank LTROs 2 2 Liquidity Policies: • Crisis mgmt Relaxation of collateral 1 1 • Only buys time Refinancing rate cut 1 3 • Fleeting impact Deposit rate cut 1 2 unless Conditional Governmen
Slide 21: ECB to the Rescue with OMT: Outright Monetary Transactions
ECB to the Rescue with OMT: Outright Monetary Transactions “Safeguard Monetary Policy Transmission” and “Singleness of Monetary Policy” ● Unlimited ECB C purchases to ““correct” market distortions in secondary market of sovereign borrower (ESM responsible for primary market purchases) ● EFSF/ESM pro
Slide 22: Contingency Planning
Citi Transaction Services Contingency Planning Ron Chakravarti Managing Director, Head – Clients Solutions & Advisory, Global Liquidity & Investments Ron.chakravarti@citi.com +1 (212) 816-6909 Mark M kTTweedie di Managing Director, Industry Head Technology, Media and Telecom, Corporate Client Sales
Slide 23: Treasury Hot Topics
Treasury Hot Topics Through 2012, key topics have been gaining operational flexibility, improving risk management, and better alignment g with the businesses. Trading 1 Manage through the Euro Crisis Legal and Tax Respond p to accelerating g changes g in Structure 2 Commissionaire financial reg
Slide 24: Corporate Contingency Planning
Corporate Contingency Planning While every company has unique operating characteristics and exposures to the broader European region, all firms should consider contingency g y plans for Eurozone crisis scenarios. Financial Counterparties ations Treas Enterpriise Considera sury Conside Strategic Liqu
Slide 25: Treasury Considerations
Treasury Considerations To prepare their organizations, Treasurers are assessing several considerations within the direct remit of treasury. y Have you assessed cash How would you cope with flow/earnings impacts if substantial— dislocations in operating flows, or but not easily predictable—chang
Slide 26: Other Considerations
Other Considerations Companies are also assessing broader / firm-wide considerations. Inorganic Legal Growth Frameworks “Embedded” Organic Currency Growth Risks Supplier Customer Performance Credit Risks Risks 26
Slide 27: Summary
Summary The focus should be on mitigating direct risks while preparing the organization for various possible scenarios. Treasury Commercial Enterprise Currency Supply Chain Strategic Banking Liquidity Exposures and Customers Position Streamline and Mitigate Supply Define Organic/ Enhance Refine Risk
Slide 28: Sources
Sources Our discussion on corporate treasury priorities and planning is based on our client advisory work, feedback from Citi colleagues around our worldwide platform, and our global research programs—including our proprietary Citi Treasury Diagnostics benchmarking program and projects with independ
Slide 29: Client Responses and CTS Solutions
Client Responses and CTS Solutions Reporting of balances Consumer & Channel across all legal entities, sales incentives to currencies and financial support top line growth in institutions Visibility of Risk constrained markets – Treasury Vision Sales and – Prepaid Cards Adam Smith Award: Omnicom
Slide 30: Questions?
Questions? x0 citi
Slide 31: Contacts
Contacts William Lee Managing Director, Office of the Chief Economist, Citi Research William.lee@citi.com @ +1 (212) 816-2621 Ron Chakravarti Managing Director, Director Head – Clients Solutions & Advisory, Global Liquidity & Investments Ron.chakravarti@citi.com +1 (212) 816-6909 Mark Tweedie Managi
Slide 32: Appendix A-1: Analyst Certification
A Appendix di A-1 A1 Analyst Certification The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analyst's name appears in bold alongside content
Slide 33: Other Disclosures
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analystsy who have pprepared p this report p ((i.e.,, all research analysts y listed below other than those identified as employed p y byy Citigroup g p Global Markets Inc.)) are not registered/qualified as research analysts with FINRA. Such resear
Slide 34: Important Disclosures for Morgan Stanley Smith Barney LLC Customers
Important Disclosures for Morgan Stanley Smith Barney LLC Customers: Morgan Stanley & Co. LLC (Morgan Stanley) research reports may be available about the companies p that are the subject j of this Citi Research research report. p Ask yyour Financial Advisor or use smithbarney.com y to view anyy ava
Slide 35: posted on the Firm's Citi Velocity website. If you have questions regarding Citi Velocity,
posted on the Firm's Citi Velocity website. If you have questions regarding Citi Velocity, please call (81 3) 6270-3019 for help. The Product is made available in Korea by g p Global Markets Korea Securities Ltd.,, which is regulated Citigroup g byy the Financial Services Commission,, the Financial
Slide 36: regulated by the Securities and Futures Bureau of the Financial Supervisory Commission of Taiwan,
regulated by the Securities and Futures Bureau of the Financial Supervisory Commission of Taiwan, the Republic of China. No portion of the Product may be reproduced or qquoted in the Republic p of China byy the ppress or anyy third pparties [[without the written authorization of CGMTS and CSTL].] If
Slide 37: The level and types of services provided by Citi Research analysts to clients may
The level and types of services provided by Citi Research analysts to clients may vary depending on various factors such as the client’s individual preferences as to the q frequencyy and manner of receivingg communications from analysts, y , the client’s risk pprofile and investment focus and ppersp
Slide 38: efficiency, renewable energy and mitigation
IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. Any discussion of tax matters in these materials (i) is not intended or written to be used, and cannot be used or relied upon, by you for the purpose of avoiding any tax penalties and (ii) may have bee