Vineet Mishra (82) Shailesh Patel ( 09) Sh il h P l (109) Mayuri Potdar (117) Abhishek Raje (120)

Country Risk, in general refers to the risk associated with those factors that Risk determine or affect the ability and willingness of a sovereign state or borrower from a particular country to fulfill their obligations towards one or more foreign lenders and / or investors. The analysis of country risk consists of the assessment of the political, economic and financial factors of a borrowing country or FDI1 host. These factors give an indication of the stability and profitability in an economy economy. Two forecasts are produced for each time period a Worst Case Forecast (WCF) and a Best Case Forecast (BCF). The WCF is produced by extrapolating the worst-case trend for each risk component in each risk category to produce a WCF for Political, Economic, and Financial Risk. The BCF is produced by extrapolating the best-case trend for each risk component in each risk category to produce a BCF for Political, Economic, and Financial Ri k Fi i l Risk.
2

Economic Risk

Macroeconomy Prospects International Transactions Government Finance Economic Policy Business Environment Government Stability Social Stability International Diplomacy Legal System Non-Insurance Financial System Risk: Banking System Vulnerability y Reporting Standards & Regulations Sovereign Debt Insurance Financial System Risk: Government & L i l ti G t Legislation Supervisory authority Insurer Accountability

Political Risk

Financial System Risk

The risk in countries can be categorized loosely to provide a basis of comparison, provided that country-by-country differences are acknowledged. Therefore, CRTs country by country acknowledged Therefore can be classified, in a typical scenario, by the following: Predictable and transparent legal environment, legal system and p g , g y business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. regulation; mature insurance industry framework. Developing legal environment legal system and business environment environment, with developing capital markets; developing insurance regulatory structure. Relatively unpredictable and nontransparent political, legal and y p p p , g business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. Unpredictable and opaque political, l U di bl d li i l legal and b i l d business environment i with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry.

CRT-1

CRT-2

CRT-3

CRT-4

CRT-5

A credit rating evaluates the credit worthiness of an issuer of specific type of d l h d h f f f f debt, specifically, debt issued by a business enterprise such as a corporation or a government. It assesses the credit worthiness, calculated from past financial history & current assets & liabilities. A credit rating t ll a l d or i dit ti tells lender investor th probability of th subject b i able t the b bilit f the bj t being bl to pay back a loan. A poor credit rating indicates a high risk of defaulting on a loan, and thus leads p g g g , to high interest rates. Credit is important since individuals and corporations with poor credit will have difficulty finding financing and will more likely have to pay more due to risk of financing, default. The ratings are expressed in code numbers which can be easily comprehended by lay investors

Some Rating agencies: Moody's Standard & Poor's Fitch Ratings Some Rating agencies (India): CRISIL (Credit Rating & Information Services of India Ltd.) ICRA (I (Investment I f t t Information & C dit R ti A ti Credit Rating Agency of I di Ltd ) f India Ltd.) CARE (Credit Analysis & research Ltd.) Rating Symbols: g y High Investment Grades: AAA& AA Highest safety. A Adequate safety. BBB moderate safety Speculative Grades: BB - inadequate safety B high risk C substantial risk D - default

We shall cover the following issues: W h ll th f ll i i 1- A reminder: the crisis is the result of a nave construction 22 A chronology of the rescue packages and the three h l f h k d h h problem-countries so far: Greece, Ireland and Portugal 3 3- Two fundamental questions about the bail-out: bail out:
How was this crisis management made possible? Is the rescue total amount enough?

4- How to deal with the structural solvency problem? 5- A necessary reassessment of Sovereign risk in advanced countries 6- EURO The Road Ahead

1- A reminder: the crisis is the result of a nave construction

10

The governance regime of Euroland resulted from the lowest common denominator : monetary discipline to be enforced by an independent Central Bank in the sole name of price stability and fiscal discipline to be covered by the Euro Stability and Growth P t which set th f G th Pact hi h t the famous 3% ceiling f ili for th annual the l budget deficit. In other words, a rather loose construction bent on national interests with a lot of loopholes.

The debt i i f the Euro A Th d bt crisis of th E Area is caused for a good part by the misplaced faith by the Euro founding fathers in a con ergence process of the convergence members economies and by the genetic flaws of the EMU

The conjunction of a common j monetary policy with uncoordinated national budgetary policies was the original sin. No wonder that at the start of Euro, it was like in a dream: the Bundesbank transferred its credibility to the Frankfurt-based ECB and everyone behaved as if a free lunch had been served!

11

In 1999, the Euro became the official currency of the Eurozone. Essentially when an economic powerhouse like Germany shares a currency with a much smaller economy, such as Greece or Portugal, the smaller country inevitably faces a lot of trouble competing in the world marketplace. When a small economy finds itself unable to trade its goods with the rest of the world, their currency naturally decreases in value, making their goods cheaper and more attractive to the rest of the world world. Essentially, countries like Greece, Portugal, and Ireland were forced by the common currency to fight above their weight class and the fundamentals of their economies suffered. ff d Additionally, the adoption of the euro allowed countries like Ireland, Greece, and Portugal to borrow money at unnaturally low interest rates. Hence they developed a dependence on deficit spending funded by low-rate borrowing as a means of maintaining a high standard of living for their populations. l ti
12

The rules regulating g g g government spending contained in the Maastricht p g agreement were flouted by nations like Greece; the fact that fundamental rules, like the one allowing no member to exceed its yearly budget deficit by the equivalent of 3% of GNP, were broken literally hundreds of times. Secondly in 2008, the collapse of the American housing bubble led to a global recession, hitting European economies particularly hard. Government budget deficits exploded worldwide as widespread unemployment caused tax revenues to drop off and spending to increase. The resulting sovereign debt crisis began to affect the value of the Euro Euro. Large European banks found themselves woefully under-capitalized, as Dollar, still the worlds most useful reserve currency became expensive in relation to Euro. Large bailouts of Portugal, Greece, and Ireland were executed by the Eurozones most powerful economies with the help of the International Monetary Fund.

13

2011 saw the Eurozones sovereign debt crisis blow up into a full-on banking crisis. The IMFs stress tests of Europes banks revealed that they were still woefully under-capitalized, and heavily exposed to losses due to large sovereign debt holdings. g The stock prices of large European banks like Socit Gnrale, Credit Agricole, and BNP Paribas tumbled by as much as 50 percent in September. In an unprecedented move, the European Central Bank enlisted the help of several other central banks, including the American Federal Reserve, to help p p pump Dollars & not Euros into stumbling European banks. g p The European Union now faces two very distinct crises: a Eurozone plagued by sovereign debt and a banking system stuck with too many overvalued government securities and too few American dollars dollars.
14

Beyond the question of credibility of guaranteeing a world-class reserve currency , Jean-Claude Trichet and the Board of ECB want Euro to play a leadership at a time when the Dollar and the US economy are less convincing and when the Yuan is not ready yet to assume the leading role that it will eventually have in the long run g SHARE OF CURRENCIES IN THE WORLDS INTERNATIONAL FX RESERVES In percent 1999 (E (Euro birth) bi h) 2010 (source IMF) US $ 74% 61.3% 6% 4.0% Yen 5% 3.7% SF 1% 0.1% Euro 10% 26.9% Others 4% 4.0%

Provided the US Dollar pursues its descent and Euro its ascent, we could end up with a sort of INTERNATIONAL MONETARY DYARCHY: 2020 54% 3% 2% 0.5% 34%
Dollar / Euro exchange rate since 1999

6.5%

For the Euro to acquire a clear reserve currency Euro, full status at near equality with the US Dollar will provide the Euro Zone with that very privilege that the United States has quite alone enjoyed outrageously for the past sixty years years, namely that of refinancing its deficits in its own money!
15

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal

16

STEP 1 May 2010 Greek Bail-Out (Loan Facility) 110b. at 5.2% (4.5y ave.maturity)*

IM F 30b

U . .E 80b

* extended to 7.5years at 4.2% on March 2011

17

STEP 1 May 2010 Greek Bail-Out (Loan Facility) 110b. at 5.2% (4.5y ave.maturity)*

STEP 1bis May 2010 Euro Area Bail-Out Transitory Bail Out Facility Official lending capacity: 750b

In fact available capacity under AAA rated creditors 470b

IM F 30b

U . .E 80b

IMF 250b E F FS 440b

E FSM 0 6b

IM F 155b ES FF 255b ES FM 60b

* extended to 7.5years at 4.2% on March 2011

18

STEP 2 November 2010 Ireland Bail-Out 85b. at 5.7% (7.5y ave.maturity)*

B ilat. 4.8b

STEP 3 March 2011 European Stability Mechanism Arithmetic lending capacity: 700b (should permanently replace EFSF)
P -inK aid 80b

P -inK aid 15b

ES FF 17.7

C allable 360b

IM F 22,5 ES FM 22.5

C allable 2b 60

Paid-in K 0 8b

* Interest reduction under discussion

500 after 2017

C allable 2b 40

19

STEP 4 June 2011 Portugal Bail-Out (78b. under construction and dependent upon national p p elections+future Govmt.)

20

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal 3- Two fundamental questions at this point:
How was this crisis management made possible? The role of Germany and France - their fear of another bank crisis

21

Chancellor Angela Merkel looks like holding the future f t re of Europe in her hands E rope hands.

However, when she tries to convince the stubborn and resentful German opinion that to financially assist Greece, Ireland and now Portugal is not only an European necessity but in Germanys i t i G interest t t too. FOR TWO REASONS:
1- One way or another, the country that runs up external surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible! 2- Besides, Germans have accepted to bail-out countries when they got aware of their own banks exposure to the public and private debts of Greece, Ireland and Portugal.

Lets have a look at the potential banks losses related to Greece, Ireland, Portugal and Spain
22

But the global picture (EXPOSURE) must take into account the creditor banks nominal total exposure vis--vis the GROSS EXTERNAL DEBT (public and private) of GREECE, PORTUGAL, IRELAND and SPAIN , , BIS reporting banks at end 2010
German In billions (end 2010) I billi ( d Exposure to GREECE Exposure to PORTUGAL Exposure to IRELAND = TOTAL 3 PROBLEM COUNTRIES (% of respective Capital & reserves) + Exposure to SPAIN p = TOTAL 4 COUNTRIES (% of respective Capital & reserves)
Some related ratios: % of BIS assets on Euro Zone % of the respective national creditor exposure vis--vis non residents % of total assets of creditor banks 22.6% 30.8% 5.3% 17.5% 23.8% 4.2% 20.3% 7.8% 2.4% 60.4% 14.8% 3.6% 39.6% 6.4% na 100% 8.1% na

French banks b k 69 34 59 162 (34.1%) 170 332 (69.9%)

Other EuroZone E Z 31 104 82 217 (17.9%) 167 384 (31.7%)

Total EuroZone E Z 153 175 298 625 (30.1%) 520 1,145 (55.2%)

Other World W ld 58 68 316 442 na 309 751 na

BIS Total T t l 210 243 614 1,067 na 829 1,896 na

banks b k 52 37 157 246 (63.5%) 183 429 (110,7%)

Sources: BIS (May 2011), Bundesbank, Banque de France, E.C.B., Eurostat.

23

Chancellor Angela Merkel looks like holding the future of Europe in h h d f fE i her hands.

However, we must also back her when she tries to convince the stubborn and resentful German opinion that to financially assist Greece, Ireland and now Portugal is not only an European necessity b t i G E it but in Germanys i t interest t t too. FOR TWO REASONS:
1- One way or another, the country that runs up external surpluses must either lend or grant transfers to the deficit countries that make its own surpluses possible 2- Besides, Germans have accepted to bail-out countries when they got aware of their own banks exposure to the public and private debts of Greece, Ireland and Portugal.

In other words, compared with the potential costs of a full-blown default by Greece, Portugal and Ireland, the amounts that Germany is requested to pour into guarantees and paid-in capital for EFSF and ESM look like a much better deal...
24

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal 3- Two fundamental questions at this point:
How was this crisis management made possible? The role of Germany and France - their fear of another bank crisis Is the rescue total amount enough? Yes, in terms of liquidity needs, it seems

25

Euro Zone: an attempt to measure the financial requirements (1)

All figures in Euros () GDP 2010 billion Euro Zone -G Germany - France - Italy P ortugal I reland G reece Total PIG S pain Total PIGS Other OECD - U.K. - U.S.A - Japan 1705b. 11037b 4069b. 4069b 82% 99% 234% 9107 2528 1954 1558 171 156 236 563 1052 1615 % 100% 27.8% 27 8% 21.5% 17.1% 1.9% 1 9% 1.7% 2.6% 6.2% 11.7% 17.8% Public debt 2011 %/GDP 87% 77% 87% 119% 87% 102% 139% 113% 70% 84.9%
(average)

Fiscal deficit
2011/GDP 100%
90% 80% 70%

Interest 2011 WHO HOLDS THE PUBLIC DEBT? %Residents / fiscal Non-residents receipts 5.2% 3.6% 3 6% 6.0% 10.1% 7.0% 7 0% 8.5% 15.8% 11.2% 6.6% 8.3%
(average)

-5.2%

-2.9% 2 9% -6.4%

-4.6%

-5 5.8% 60% 8%
50% 40%

-11.2% -7.8% -9.3%

30% -6.9%

-7.3% 20%
(average)
10% 0% -8.6%

na na na

-9.8% -10 0% 10.0%

Sources: IMF (April 2011)

26

Euro Zone: an attempt to measure the financial requirements Source: IMF (April 2011) (2)
All figures g GDP Public debt 2011 % 100% 27.8% 21.5% 17.1% 1.9% 1.7% 2.6% 6.2% 6 2% 11.7% 17.8% %/GDP 87% 77% 87% 119% 87% 102% 139% 113% 70% 84.9%
(average)

Fiscal

Interest 2011 % / fiscal receipts 5.2% 3.6% 6.0% 10.1% 7.0% 8.5% 15.8% 11.2% 11 2% 6.6% 8.3%
(average)

Financing needs* g

in Euros ()

2010 billion

deficit
2011/GDP

2 years=2011+2012 %/GDP 17.5% 11.1% 20.0% 23.0% 21.4% 18.8% 25.8% 22.5% 22 5% 19.0% 20.2%
(average)

= billion 1640 b 575 b. 805 b. 730 b. 78 b. 58 b. 118 b. 254 b b. 392 b. 646 b. 2011 only

Euro Zone - Germany - France - Italy P ortugal I reland G reece Total P.I.G. PI G S pain Total PIGS Other OECD - U.K. - U.S.A - Japan

9107 2528 1954 1558 171 156 236 563 1052 1615

-5.2% -2.9% -6.4% -4.6% -5.8% -11.2% -7.8% -9.3% -9 3% -6.9% -7.3%
(average)

1705b. 11037b 4069b.

82% 99% 234%

-8.6% -9.8% -10.0%

na na na

14.7% 27.2% 54.2%

260 b. 3240 b. 2280 b.

Note: * maturing debt + interest on debt + primary deficit = total financing needs

27

Spain, we should not forget it, has been the good pupil of the Euro class for years. Its public debt to GDP was and still is significantly lower than that of Germany. Its fiscal deficit was on average near nil from 2004 to 2008. But Spain share several of the weaknesses of Greece, Ireland and Portugal: On the other hand, Spain is quite different:

Spain is a much bigger (the Euro Zone Like Portugal and Greece, it is not competitive fourth GDP), more diversified and thus more g p resilient economy th th th ili t than the three others. th Like Ireland, Spain had a run-away real Its debt market is far more liquid. Everyone estate boom that may translate into a pile of is scared nowadays by the shaky financial sour property loans. situation of the Cajas but relative to the size C R E T A C U T D F ITS U R N C O N E IC of the overall economy, their losses, both (p ent o G P) erc f D % actual and potential, remain manageable.
0 -2 -4
-5,2 -4,5 -3,7

After some initial hesitations, Prime Minister Jose Luis Zapatero has taken some tough structural measures and will not stand in next year election.

-6
-7,4 -7,6 -9,0 , -9,5 -9,4 -9,6 -9,7 -10,5 -7,8 78

-8 -10 -12 -14 -16

-10,3

-10,0 -11,3

-10,0

-12,6

-11,0

-14,5 -14,7

20 05

20 06

20 07

20 08

20 09

21 00

21p 01

Portugal

G reece

Spain

28

Euro Zone: an attempt to measure the financial requirements (RECAP)

Source: IMF (April 2011) Source: E.C.B. (March 2011)

All figures in Euros ()

Financing needs needs* 2 years=2011+2012 %/GDP = billion 1640 b 575 b. 805 b. 730 b. 78 b. 58 b. 118 b. 254 b b. 392 b. 646 b.

NPL / total loans 2011 (est) %/loans >4.5% 3.2% 4.3% 6.9% 5.7% 16.5% 9.8% 14.1% 14 1% 6.8% 9.7% = billion >1500b. 185 240 220 30 170 80 280 b b. 200 480b.

Euro Zone - Germany - France - Italy P ortugal I reland G reece Total P.I.G. PI G S pain Total PIGS

17.5% 11.1% 20.0% 23.0% 21.4% 18.8% 25.8% 22.5% 22 5% 19.0% 20.2%

= > 1,100
So Spain appears for the moment out of the danger zone. g Given its European partners resolution, Spain is neither too big to fail nor too big to bail ! bail!

+ = +

254 280 534 592

b. b. b b. without Spain b. Spain

billion

As seen earlier, with some 375 billion lending capacity provided by the sole AAA-rated Euro members, the current EFSF-EFSM facilities up to mid2013 is quite sufficient, with p q , parallel financing (and g( monitoring) from IMF ( 155-250 billion), to cover Greece, Ireland and Portugals financing needs during this two-year period

29

A REASSESSMENT OF SOVEREIGN RISKS IN ADVANCED COUNTRIES

It ought to take rating agencies back on earth!

Situation at Dec.2008
S&Ps
D J F M A M

2009
J J A S O N D J F M A M

2010
J J A S O N D J F

2011
M A M

AAA AA+ AA AAA+ A ABBB+ BBB+ BBBBB+ BB BBB+

IRELAND (- 4 notches in 4
months!)

Portugal (down 3
notches in 2 months!)

GREECE (downgraded

to junk bond status!)

as well as market sentiments

30

Five-year Sovereign CDS

The P.I.G.S. are now worse off than most poorly rated D l d Developing countries l i i
In basis point ( p) (bp) Greece Ireland Portugal Spain U.S.A. Japan U.K. Germany y France Italy Belgium g Poland Hungary 5-yr CDS Prices
Range A R Apr. 2011

In basis point ( p) (bp) Venezuela Argentina Nigeria Russia Ukraine Mexico Brazil South Africa Turkey Egypt Philippines Vietnam Indonesia Thailand South Korea

5-yr CDS Prices

Range Apr. 2011

S&Ps
May 2011

S&Ps
May M 2011

1019-1042 553-598 > 500 124-135 412-436 98-115 100-105 110-118 115-135 280-354 128-137 284-327 131-142 105-117 95-105

BBB B+ BBB B+ BBB BBBBBB+ BB BB BB BBBB+ BBB+ A

31

1090-1140 510-670 579-675 201-250 40-46 76-86 49-59 43-46 63-79 125-159 115-150 139-150 239-255

BBBBB+ BBBAA AAA AAAAA AAA AAA A+ AA+ AB+

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal 3 3- Two fundamental questions about the bail-out: bail out:
How was this crisis management made possible? Is the rescue total amount enough?

4- How to deal with the structural solvency problem?

The Haircut option, plea for a voluntary debt Reprofiling or Exit of Greece from Euro.

32

Deprived of the option of a currency devaluation and, so far, of the extreme Euro exit option,

THE OPEN DEBATE ABOUT THE HAIRCUT OPTION

THE PROS
1- With Greece and to a lesser extent Portugal and Ireland, we are facing a solvency crisis, not a liquidity crisis.

and

THE CONS
1- In a situation widely left to the market sentiment, the frontier between a solvency , y crisis and a liquidity one is particularly blurred! 22 All depends in fact on the credibility (amounts and resolution) of the bail-out financial packages offered to distressed Euro members. 3- That is true, Euro Area problem countries and their population are suffering. But prior to the crisis, they had enjoyed the dangerous free lunch offered by the creation of Euro and the financial euphoria that came with it! 4- A default of their public debt would brutally cut-off market access to defaulting countries, countries even to finance their exports. In exports addition, a default will immediately transmit into a domestic bank and insurance companies crisis 33

2- Indeed, 2 Indeed this is the point: Euro Area politicians have not been credible enough! In addition the IMF/European medication through stringent budget reductions are killing growth and employment prospects for the foreseeable future while debt ratios will worsen rather than improve 3- For all this, it would certainly have been y wiser to push Greece and Portugal at the onset of their crises to declare a debt moratorium in order to purge the patient! 4- fact, 4 In fact we repeat: the sooner the better! The aim ought to be an improvement in debt ratio sustainability. Haircut is inevitable!

THE REPROFILING OPTION

It is not per se a debt restructuring (debt write-off) following a debtors moratorium (default). (default) It is based upon safeguarding the par-value of the principal of the debt, just extending maturities to more sustainable levels. GREECE PERFECTLY FITS THE CASE FOR REPROFILING

(after all most of its debt was issued under Greek laws)
The issue here is to carefully consider the priorities:

Giving priority to Greeces liquidity squeeze: If maturities are extended by say 5 y y years (like in the case of Uruguay in 2003), the resulting NPV effect on the debt will not be significant. But Greece may also request an interest rate cut by swapping fixed-rate bonds for floaters, with a more reasonable risk spread over Euribor.

Giving priority to Greeces long term solvency. Then, the objective is to extend maturities well over 5 years aiming at reaching a sizeable reduction in the NPV of the countrys national debt: 30-40% at least in the case of Greece th G through a 10 15 h 10-15-year extension t i of maturities (on average).

34

ADVANTAGES OF EXIT Control on Monetary Policy.

DISADVANTAGES OF EXIT It would lead to a considerable devaluation of the new (Greek) ( ) domestic currency against the euro, Greece's national deficit would rise to 200 percent of gross domestic product after such a d f h devaluation. l i The withdrawal of a country from the common currency union would "seriously damage faith in the seriously functioning of the euro zone

Control critical interest rates.

Freedom to print & circulate its own currency.

The Greek exports because they will be It would impart serious implications for cheaper to the outer world will be world, the already wobbly banking sector sector. more competitive they will sell better.

35

1. ECB to unveil "non-standard" liquidity measures 1 t il " t d d" li idit 2. The ECB will offer loans of 12 or 13 months to banks, in addition to shorter-term facilities already available, making it easier for Europe's troubled l d ki i i f E ' bl d lenders to access funding. 3. ECB will also resume its purchases of covered bonds debt issued by lenders and backed by their loan books pledging to spend 40bn (35bn).

36

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal 3 3- Two fundamental questions about the bail-out: bail out:
How was this crisis management made possible? Is the rescue total amount enough?

4- How to deal with the structural solvency problem? 5- A necessary reassessment of Sovereign risk in advanced countries

37

A REASSESSMENT OF SOVEREIGN RISKS IN ADVANCED COUNTRIES

Everyone in the advanced economies of the world is getting aware, albeit with astonishment, that Debt R ti D bt Ratios are now f far worse in their nations than in emerging and poor countries The question here is not to hide this painful reality, but to point out essential features of this kind of Sovereign Risks like:

General Government Gross Debt Ratios

First, a Sovereign Risk is not a normal credit risk. p , In particular, it should not be compared to other financial risks such as Corporate risks

38

Overall, the 17-nation EuroZone is one of the financially healthiest part of the OECD club when viewed as a whole: EUROZONE Budget deficit/GDP Public debt/GDP Current A d fi i /GDP C Act deficit/GDP -6.3% 92% -0.4% 0 4% U.S. US -11.3% 92% -3.2% 3 2% U.K. UK -10.5% 79% -2.2% 2 2% JAPAN -9.2% 215% +3.4% 3 4%

But due to the Sovereign debt crisis at its periphery, the comparison stops where market psychology starts! Thence, at the exception of Germany and some tiny Northern economies of the area, all Euro countries are suffering from some combination of big budget deficits, poor growth prospects and high debt burdens. The Good,
Germany 2010 Budget deficit/GDP 2011-12 Growth forecast 2010 Public Debt/GDP -3.4% +2.3% 81,3% France -7.6% +1.8% 84.6%

the Bad
Italy -4.4% +1.0% 119.3% Spain -9.2% +1.1% 60.4% Ireland -32.5% +1.0% 95.4%

and the Ugly

Portugal -7.0% -0.5% 81.7% Greece -9.6% -2.0% 142.7%
39

1- A reminder: the crisis is the result of a nave construction 2- A chronology of the rescue packages and the three problem-countries so far: Greece, Ireland and Portugal 3 3- Two fundamental questions about the bail-out: bail out:
How was this crisis management made possible? Is the rescue total amount enough?

4- How to deal with the structural solvency problem? 5- A necessary reassessment of Sovereign risk in advanced countries
It ought to take market sentiments back on earth! h k k b k h

6- EURO

The Road Ahead

40

Europe is entering a critical week ahead of a euro-zone summit Sunday that is p g y expected to deliver a new plan to address the region's growing sovereign debt crisis. Euro-zone Euro zone leaders are hoping to deliver a comprehensive package to stabilize the euro zone, including steps maximizing the firepower of the euro zone's bailout fund, reinforcing the region's banks and tackling Greece's debt at a summit in Brussels Oct. 23. Meanwhile, a mission of officials from the European Union, European Central Bank and International Monetary Fund said after concluding talks in Athens that Greece is likely to receive the next aid tranche needed to stave off bankruptcy early next month after the euro zone and the International Monetary Fund approve their fifth review of the Greek economy. The known worry list continues: Tuesday, Oct. 18: Spanish and Greek T-bill auctions. Wednesday, Oct. 19-Thursday, Oct. 20: General strike in Greece. Portuguese T-bill auction.
41

Thursday, Oct. 20: Spanish and French bond auctions. Greek parliament votes on austerity bill. Friday, Oct. 21: EUR1.625 billion of Greek T-bills mature. Troika expected to complete 10-day visit to review Ireland's bailout program. EU Finance Ministers meeting ahead of EU summit. ti h d f it Saturday, Oct. 22: EUR1.059 billion of Greek bond interest payments due. Sunday, Oct, 23: EU Council meeting, euro-zone summit. Monday, Oct. 24: Troika may issue report on Greece. EU and Chinese leaders meet in Tianjin China Tianjin, China. Tuesday, Oct. 25: Spanish T-bill auction. Friday, Oct. 28: Italian bond auction. Saturday, Oct. 29: Three months since Moody's Investors Service put Spain's Aa2 rating on review for possible downgrade Reviews are typically concluded within downgrade. 2-3 months. Monday, Oct. 31: Belgian bond auction.
42

Tuesday, Nov. 1: Mario Draghi replaces Jean-Claude Trichet as president of the ECB. Wednesday, Nov. 2: Portuguese T-bill auction. Thursday, Nov. 3: ECB policy meeting. Spanish and French bond auctions. Thursday, Nov. 3-Friday, Nov. 4: Meeting of G20 leaders in Cannes. Monday, Nov. 7: Meeting of Eurogroup finance ministers. Tuesday, Nov. 8: Greek T-bill auction. y, Thursday, Nov. 10: Italian T-bill auction. Friday, Nov Friday Nov. 11: EUR2.0 billion of Greek T-bills mature EUR2 0 T bills mature. Monday, Nov. 14: Italian bond auction.

43

Tuesday, Nov. 15: Greek T-bill auction. Tuesday Nov T bill auction Wednesday, Nov. 16: Portuguese T-bill auction. Thursday, Nov. 17: Spanish and French bond auctions. Friday, Nov. 18: EUR1.3 billion of Greek T-bills mature. Sunday, Nov. 20: Spain holds general election. Friday, Nov. 25: Italian T-bill/bond auction. Tuesday, Nov. 29: Italian bond auction.

44

45

Many thanks for your kind attention

46