The age of global crisis.by R.Ziemba

By Rachel Ziemba, Director of Emerging Europe and
Global Macro

© Roubini Global Economics Copyright 2011
No reproducing or redistribution without written consent. Roubini Global Economics

roubini.com | americas@roubini.com Tel: 212.645.0010 | europe@roubini.com / asia@roubini.com Tel: +44 (0) 207 420 2800

Global Headwinds For the Black Sea Region
• Global outlook has darkened especially in Europe, with
recession risks high
• Downside risks for Black Sea Region in near
term, undermining long-term growth prospects.
– Financing strains could put pressure on currencies and banks
– Global weaknesses will exacerbate any domestic
vulnerabilities, especially for Ukraine, Romania
– But policy space remains constrained.
• Policy Response
– Use policy space available to improve balance sheets
– Infrastructure and Institutions to support intra-regional trade
– Improve Balance sheets

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Global Story: Private Debt Crisis to Public Burden
U.S., U.K., Japan EZ PIIGS—Explosive Baseline/Shock
Baseline/Adverse Debt Paths Debt Paths

Note: Baseline is the IMF WEO Projection; Adverse Scenarios are RGE 1-standard
Source: IMF and RGE Calculations deviation shocks to GDP growth and interest rates over the last decade—a
relatively benign PIIGS scenario

• Sovereign credit risk will stay sky high in the EZ PIIGS, keeping the world on the edge of crisis
given the threat of disorderly default or EZ break-up
• Heavy public debt burdens in the United States, United Kingdom and Japan will weigh on
recovery, but should not threaten collapse; all can monetize public debt
• This will draw attention also to the EM countries that have weaker balance sheets


Global Story: Too Much Debt in Advanced Economies
EZ/U.K. Warning Signals Flash Amber/Red, Less So in the United States
US Japan UK Canada EZ Belgium France Germany Greece Ireland Italy Portugal Spain
Government Gross Debt, 2011 100 229 83 84 87 97 88 80 152 114 120 91 64
Government Net Debt, 2011 72 128 75 35 67 82 78 55 n.a. 95 101 86 53
Primary Balance, 2011 -9 -8.6 -5.5 -4.1 -1.7 -0.5 -3.5 -0.3 -0.9 -7.5 0.2 -1.6 -4.6
Households Gross Debt 91 74 107 93 72 55 69 62 68 129 50 103 90
Households Net Debt -230 -231 -184 n.a. -129 -204 -131 -130 -56 -60 -178 -126 -74
Nonfinancial Corporates Gross Debt 76 138 128 n.a. 142 161 157 69 71 278 119 154 205
Nonfinancial Corporates Debt over
Equity (percent) 105 176 89 72 106 43 76 105 218 113 135 145 152
Financial Institutions Gross Debt 97 188 735 n.a. 148 139 148 95 21 664 99 65 113
Bank Leverage 13 23 24 18 26 30 26 32 17 18 20 17 19
Bank Claims on Public Sector 8 76 7 20 n.a. 22 19 25 27 28 32 16 22
Total Economy Gross External
Liabilities 144 64 696 91 174 417 254 181 194 1,598 153 293 215
Total Economy Net External Liabilities 19 -55 14 7 13 -43 11 -39 99 102 20 106 90
Government Debt Held Abroad 32 7 27 20 29 68 64 53 61 59 47 57 50
Bank Leverage (Tier 1) 9 21 20 18 n.a. 21 23 22 17 20 11 16 16
Source: IMF; RGE

• Debt-led growth is a symptom of structural barriers to sustainable, balanced growth
• [Excessive] Debt brings forward [too much] activity; will be followed by low growth
• EZ/U.K. problems run deeper and wider than U.S., but all face severe challenges
• There are no quick fixes; the only way forward is to commit to debt relief upfront, and structural
and fiscal adjustment later, to reduce risk of depression / stagnation now


Global Scenarios—No Way to escap adjustment Costs
Present to End of 2011 2012 Probability Policy Response 2013-15 Probability

DMs fall into
A weak, U-shaped recovery
recession, likely in late
60% Adequate policy support continues, with volatile
2011 or early 2012. Triggers
(QE and fiscal stimulus growth in DMs (amid
include a financial crisis
across DMs and possibly balance-sheet repair and
following disorderly
some EMs) staves off the possible EZ uncertainty) and ~55%
default(s) in the EZ or policy
failure of systemic EMs growing near potential.
mistakes (lack of or
institutions. China's broken investment-
insufficient timely support).
led growth model gives out.
DMs are at stall Gradual rebalancing ensues.
speed, while EMs are
growing near potential.
DMs face a risk of
falling into recession in
2011.
The growth environment is The policy response is
A deep recession takes hold
volatile, but DMs avoid inadequate (no QE or
of DMs and possibly
technical recession (though too-little, too-late QE;
not growth recession) and lack of adequate fiscal
globally, requiring an ~45%
EMs keep growing around 40% aggressive, coordinated
stimulus and possible
potential. policy response.
fiscal drag).


Global Growth: DM Recession, EM Slowdown
Growth Inflation
2011 2012 2011 2012
U.S. 1.5 0.7 3.1 2.3
EZ 1.6 0.8 2.5 1.8
Japan -0.7 2.0 0.1 0.1
G7 1.3 1.0 2.6 1.9
Advanced Economies ₁ 1.3 1.1 2.6 1.9
Emerging and Frontier Markets 6.3 5.7 6.5 5.2
Asia/Pacific ₂ 5.9 6.1 4.8 3.5
Emerging Asia ₃ 7.5 7.0 5.9 4.2
Latin America ₅ 4.5 3.5 8.9 7.8
Emerging Europe ₆ 4.6 3.3 6.6 6.0
Middle East and Africa ₇ 3.4 3.0 6.2 6.1
BRIC 7.5 7.1 6.6 4.9
World 3.7 3.3 4.5 3.5
1. U.S., Canada, Japan, UK, Eurozone, Sweden, Norway, Australia, Switzerland
2. Japan, Australia, China, India, Hong Kong, Indonesia, Malaysia, Philippines, Singapore, Vietnam, South Korea, Taiwan, Thailand
3. Asia/Pacific ex-Japan and Australia
4. Hong Kong, Korea, Malaysia, Philippines, Singapore, Taiwan, Thailand, Vietnam
5. Brazil, Argentina, Mexico, Chile, Peru, Colombia, Venezuela
6. Czech Republic, Hungary, Poland, Turkey, Russia
7. Israel, Egypt, Saudi Arabia, United Arab Emirates, South Africa

Based on IMF PPP Weights for 2011 and 2012


Risks Are to the Downside
• Policy responses moving too slow in Europe-> and
economic indicators highlight rising risk of recession or at
best stagnation.
• A disorderly default could add to financing strains
– The chance of a Greek exit in next 12 months is growing
• US too will barely grow, as underlying debt issues have not
been addressed.
• EM too will be affected through trade and financing
channels.
• EMEA most exposed due to trade links and weaker balance
sheets – still recovering from past credit/asset booms.
• Some good news -Inflation has eased from early
2011, helped by good harvests and modest increases in oil
supply.


EM Consumption Can’t Pick Up the Slack Yet
Nominal Consumption, USD billion • DM balance-sheet repair will
subtract from aggregate demand
12 000 • Negative wealth
effects, forced deleveraging
10 000
, fiscal consolidation all
8 000 contribute to adverse
feedback loops
6 000

4 000 • EM consumption cannot lift the
world economy:
2 000
• Most of EM has substantial
0 consumption shares in GDP
US Europe Japan Key EM levels and growth
Private consumption, annualized, 2010 • China remains export- and
investment-led, and is unable
Note: “Europe” includes EZ and UK; “Key EM” includes BRICS plus to change this model fast
Indonesia and Turkey
Source: IMF, national statistical agencies, RGE


Emerging Europe Growth Slowing Down
Growth OECD Leading Indicators Points to Stall/Recession
2011 2012 115
Hungary 1.8 1.1
110
Poland 3.9 2.7
105
Turkey 7.6 3.3
100
Romania 1.5 1.3
Russia 4.1 3.9 95

Eurozone 1.6 0.8 90

Germany 2.9 1.2 85
US 1.5 0.7
China 9.1 8.3
EM 6.32 5.7
Hungary Russia South Africa Poland Czech Republic

Growth Falling or Staying Below Trend
Inflation Moderating too, Giving More Policy Space for some


EM Europe: Balance Sheet Vulnerabilities
• Tepid recovery has prevented more of an improvement in regional
balance sheets.
• Eurozone supported regional recovery, especially Czech R and other
countries shifted to exports as primary growth driver.
• New Trading partner - Countries are also trading more with China
(especially commodities)
• Many economies (Hungary, Romania, Ukraine Baltics) had to begin
fiscal austerity, weakening domestic demand and overall growth.
• Turkey has seen the size of its external deficit grow, credit growth
soar, and now has less policy space than in 2008.
• Romania, Bulgaria and others remain constrained by high levels of
FX lending and debt service which adds to weak domestic demand
and bank balance sheets.


Balance Sheet Repair Is Underway
External Debt (%GDP) External Deficits Forced to Improve

Hefty FX debt burden in Bulgaria, Romania Loan to Deposit Ratios Starting to Improve
Domestic FX loans (latest)
(% GDP)
of which % FX credit
in total
Total pvt sector
Corp. HH lending /2

Bulgaria
44.7 34.7 10.0 61.9
Georgia
20.2 … … 74.3
Romania
24.9 12.4 12.5 62.5
Russia 9.1 8.3 0.7 20.3
Turkey 14.9 … … 27.8
Ukraine
31.8 19.1 12.7 46.3


How Much Policy Space
• EMEA balance sheets still weaker than Asia/Latam.
• FX mismatches increasing vulnerability to FX
depreciation.
• Much less maturity mismatches than in 2008.
• Inflation is easing -> but limited space for CBs to cut
• Wide fiscal deficits, limit space for stimulus
• Multilateral institutions could provide support
• CBs still have cushions but are starting to run out of
reserves ammunition.
• Other EM stimulus (china) will keep commodity
demand from plunging


Long-term positives
• Chance of boosting yields through agriculture.
Population growth will put pressure on
agricultural commodities which will
outperform.
• Space for infrastructure, technology transfer
• Convergence/catch up with advanced
economies
• Greater intra-regional trade
• Improving macro/institutional frameworks.


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