origins of crisis may2010
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CONFIDENTIAL
1
Economic crisis, origins & impact
18 May 2010
Lars Kalbreier, CFA
Managing Director
Head of Global Equities and Alternatives Research
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The several steps of the current crisis
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
house prices start to fall
delinquency rate in subprime mortgages rises
Investors suffer from losses and investmentbanks have to write down
Banks reduce their balance sheets
forced deleveraging of hedge funds
Stage 7 Impact on real economy
Stage 6 break-down of credit market
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How did we get into the current crisis? Cheap loans andmortgages ...
Positive expectation for economic growth, low unemployment, re-assuringanalyses by credit rating agencies
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... and a booming housing market ...
100
150
200
250
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350
400
450
1987 1991 1995 1999 2003
300
500
700
900
1100
1300
1500
S&P/Case-Shiller Composite-10 Home Price Index
US New One Family Houses Sold (rhs)
Index
Source: Bloomberg
Source: Bloomberg, Credit Suisse
New home sales & Home prices
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...eventually came to an end ...
Source: Bloomberg, Credit Suisse
US home sales & home prices
200
400
600
800
1000
1200
1400
1600
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20090
50
100
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200
250
US new home sales (lhs) S&P/Case Shiller Composite 10 (rhs)
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pushing up default rates rapidly
Source: Bloomberg, Credit Suisse
US Foreclosures Total US Foreclosures as % of loans
0
5
10
15
20
25
Sep 02 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09
Foreclosures as % of total loans Prime ARM foreclosures as % of total loans
Subprime ARM foreclosures as % of total loans, NSA
in %
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10
US foreclosures
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0
200
400
600
800
1000
1200
1400
Ame
ricas
Eu
rope
Asia
Fannie
Mae
Citig
roup
Freddie
Mac
Wachovia
BankofAm
erica
AIG
JPMo
rgan
Cha
se
RoyalBankof
Scotland
UBS
MerrillL
ynch
leading to large losses for major financial institutions
Source: Bloomberg, Credit Suisse
Data as of 11.05.2010
Losses for financial institutions, in USD bn
1187
551
41
Most impacted financial institutions:
151 130 118 102 98 97 69 57 57 56
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600
800
1000
1200
1400
1600
03/08 06/08 09/08 12/08 03/09 06/09 09/09 12/09 03/10
Analysis of the crisis:Sharp acceleration after the Lehman collapse...
Source: Bloomberg, Credit Suisse
AIG rescue
Fed to Buy CP
Lehman collapse
TARP passed
G7 & EU summit
Concerted rate cuts
MSCI World Index
Bear Stearns rescue
Banks reduce theirbalance sheets
Forced HFdeleveraging
Credit freeze Impact on realeconomy
Lowest Philly Fed Businessoutlook since 1990
Lowest US consumerconfidence since 1974
US Unemployment > 10%
Profit warnings:Daimler, SAP, Sony, Apple, EBay,
TALF announcedUS Unemployment at highest level since 1983
US IP is down 13% YoY
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0
0.51.0
1.52.0
2.5
3.03.54.0
4.5
5.0
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10
USD 3M TED Spread EUR 3M TED Spread
%
...followed by very tight liquidity conditions in the money market...
Fears on the money market
Source: DataStream, Credit Suisse
TED spreads, daily
Lehman
Bear Stearns
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... because the interbank refinancing mechanisms ...
Source : Bloomberg, Credit Suisse
Bank A Bank B
provides funds tomeet requirements
Central Bank
sets reserve requirements
pays interests
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... got frozen ...
Source : Bloomberg, Credit Suisse
Bank A Bank B
Central Bank
sets reserve requirements
Risks of defaults (Whatis on the book? Is it thenext Lehman?)
provides funds tomeet requirements
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leading to an urgent need for central banks interventions
Source : Bloomberg, Credit Suisse
Bank A Bank B
Central Bank
sets reserve requirements
Guarantee funds
Injects capital
provides funds tomeet requirements
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What followed after the financial crisis?
Source: Bloomberg, Credit Suisse
Depression
long-drawn recession &slow recovery
typical recession & sharprecovery
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0
2
4
6
8
10
12
14
May 70 May 74 May 78 May 82 May 86 May 90 May 94 May 98 May 02 May 06 May 10
US savings rate (as percentage of disposable income) Average (1970-1990) = 9.2%
%
14% US personal savings as % of disposable income, 3mma
Typical recession & sharp recovery:No, headwinds were too strong
Source: Datastream, Credit Suisse
Last data point: February 2009, Value: 4.2%
?
Typical Recession: 6 to 9 months
Headwinds were too strong: US consumer, unemployment, costs of credit crisis
The cost of the credit crisis will be over USD 4 trnWorld economy to shrink by 1.3% this year
IMF statement, April 2009
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Apr 90 Apr 92 Apr 94 Apr 96 Apr 98 Apr 00 Apr 02 Apr 04 Apr 06 Apr 08 Apr 10
US unemployment rate Avg
Index
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Depression scenario: AvoidedDemand from Emerging Markets remained firm
-8
-3
2
7
12
17
22
2004 2005 2006 2007 2008 2009
EM 8
(proxy)
G3
Last data point: 12/2009 Source: IDC, Bloomberg Credit Suisse
YoY % Retail sales
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0
1
2
3
4
5
6
01/07 07/07 01/08 07/08 01/09 07/09 01/10
Depression scenario: AvoidedDifferent policy measures today than in the 1930s...
Source: Datastream, Credit Suisse
2 . 5 0
2 . 7 0
2 . 9 0
3 . 1 0
3 . 3 0
3 . 5 0
3 . 7 0
3 . 9 0
4 . 1 0
4 . 3 0
4 . 5 0
J a n 1 9 3 1 J a n 1 9 3 2
Prosperity is round the corner Herbert Hoover, 1931
1930s: No measure to stabilize the financial system 50% of banks went bankrupt
1930: Monetary policy mistakes: interest rate hikes
In the near term, the highest priority is to promote a global economic recovery. The Federal Reserve retainspowerful policy tools and will use them aggressively to help achieve this objective Ben Bernanke, January2009
US interest rates 1930s US interest rates today
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10
30
63
190
560 884
0
50
100
150
200
250
300
India UK Germany Japan China USA
Depression scenario: Avoidedthanks to stimulus packages
Source: Datastream, Credit Suisse
Stimulus packages
US 6% of GDP vs. 7% in the New Deal, but only 5 years into the crisis
Stimulus packages implemented on a global scale
560 884
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and automatic stabilizers for the economy
Source: Datastream, Credit Suisse
Charities should provide for theunemployed Herbert Hoover, 1932
Government sector much larger now than in the 1930s (close to 40% of GDPvs 9%) higher impact to steer the economy
In the 1930s only 1 out of 4 unemployed families received unemploymentbenefits of $ 2.39 (= $160 in 2008USD)
US-Unemployment in the 1930 reached 25%
$ 9.60 (= $160 per month in 2008 USD)Monthly unemployment benefit in New York in 1933, worth a full
appartment rent ...
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In the current crisis, unprecedented measures to helpbanks have been taken by authorities
Bank recapitalizations : AIG, RBS, Hypo Real Estate, Citigroup
Guarantee of deposits: Ireland, UK, Germany, France, Australia,
Bank loan guarantee: Senior bank debt guarantee worth EUR 400 bn inGermany, EUR 320 bn in France, USD 200 bn in loan guarantee for consumerand small business loans in the US,
Purchase of bad debt: Fed will purchase as much as USD 600 bn ofmortgage-backed securities issued by Fannie Mae & Freddie Mac, PPIP
Target: reduce systemic risk, reduce fears of bankruptcy, reassure savers
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As a result, Budget Deficits have grown substantially...
Source: Bloomberg, Datastream, Credit Suisse
-10.0
-8.0
-6.0
-4.0
-2.0
0
2.0
4.0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Eurozone EU-15EU-25 US
% of GDP
-16
-14-12-10
-8-6-4
-20
Sweden
Luxembour
Estonia
Finland
Denmark
Germany
Austria
Malta
Bulgaria
Hungary
NetherlandsItaly
Slovenia
Czech
Belgium
Cyprus
Slovakia
Poland
France
Romania
Lithuania
Latvia
Portugal
SpainUK
Greece
Ireland
Maastricht criteria -3%
in % of GDP
Development of Budget Deficits Budget Deficits in Europe
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...and government debt in developed markets has risen
Source: IMF WEO October 2009, Credit Suisse
0
20
40
60
80
100
120
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014
Advanced
economies
% of GDP
Emerging
markets
Forecast
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...leading to the current sovereign debt crisis in Europe
Total refinancing need estimates 2010 (bn EUR)
-
10
20
30
40
50
60
70
80
90
100
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Ireland
Greece
Spain
PortugalItaly
Source: Bloomberg, Dealogic, OECD, Credit Suisse
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...and making austerity measures necessary
The Greek Austerity measures: Cut EUR 30 bn over 3 years
Pay Cuts for public sector workers
Pension Reforms
Tax Reforms Privatizations
And also in other countries announced drastic measures
UK: save EUR 7 bn this year Spain: 5% cut in civil service payMerkel: Bring national
finances in order
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Will fiscal austerity damage the recovery?
-0.7%-0.6%-0.4%-0.3%-0.1%0.1%0.2%
Spain
Greece
Ireland
Italy
Portugal
Netherlands
France
Germany
Euro area
Contribution to change in aggregate Euro area primary balance
over 2009 - 2010 as % of 2009 GDP (2010E deficit in brackets)
Primary deficit increasing,
expansionary policies
Primary deficit falling,
contractionary policies
(-3.9%)
(-2.8%)
(-5.9%)
(-4%)
(-4.6%)
(-0.5%)
(-10.8%)
(-5.1%)
(-7.4%)
Source: OECD, Datastream, Credit Suisse
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Global trade and IP momentum remain strong
-45%
-35%
-25%-15%
-5%
5%
15%
25%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Global trade growth (3m/3m ann, %)
Source: Netherlands Bureau for Economic Policy Analysis, Credit Suisse
-25%
-20%-15%
-10%
-5%
0%
5%
10%15%
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Global industrial production growth (3m/3m ann, %)
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Survey data: new orders
25
35
45
55
65
Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09
Index
Russia
ChinaIndia
PMI New Orders
Brazil
Last data point: 4/2010 Source: PMI Premium, Bloomberg, Credit Suisse
10
20
30
40
50
60
70
Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09
Index
USEurozoneJapan
PMI New Orders
Last data point: 4/2010 Source: PMI Premium, Bloomberg, Credit Suisse
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Source: Credit Suisse IB
...suggesting that the global economy will further improve
95
100
105
110
115
120
125
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Index (Jan '06 = 100)
Forecast
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Country / region 2010 2011 2010 2011 Country / region 2010 2011 2010 2011
Global 4.2 4.5 3.1 3.3 Non-Japan Asia 7.8 8.1 4.1 4.5
G-3 2.5 2.4 1.3 1.0 China 9.5 9.8 3.5 4.5
BRIC 8.6 9.0 5.8 5.9 Hong Kong 5.7 5.3 2.5 3.0
EM-8 7.8 8.0 5.1 5.2 India (fiscal year) 8.2 8.5 8.0 6.5
USA 3.5 2.8 2.2 1.2 Indonesia 5.8 6.0 6.2 6.0
Canada 3.0 3.4 1.4 2.1 South Korea 6.0 5.5 2.6 2.5
Eurozone 1.5 2.1 1.1 1.3 Singapore 4.5 4.9 3.5 4.0
Germany 2.2 2.6 0.5 0.8 Thailand 4.1 4.8 2.8 3.2
Italy 1.0 1.6 1.4 1.5 CEE & Russia 3.1 4.4 7.0 6.5
France 1.9 2.4 1.5 1.6 Poland 2.4 3.5 2.0 2.0
Spain 0.2 1.2 1.2 1.5 Russia 3.1 5.0 8.5 8.0United Kingdom 1.4 2.7 2.3 1.4 Turkey 4.5 4.5 7.5 6.5
Norway 2.5 3.4 2.5 2.0 Latin America 4.2 3.7 6.4 7.2
Sweden 1.0 2.7 1.6 2.8 Argentina 3.5 3.0 8.0 10.0
Switzerland 0.9 2.0 0.8 1.0 Brazil 5.5 4.5 4.5 5.0
Japan-Pacific 2.1 2.1 -0.5 0.2 Mexico 4.0 3.0 5.0 3.5
Japan 1.9 1.8 -1.2 -0.4 Middle East & Africa 4.5 5.0 5.7 5.7
Australia 3.3 3.8 2.5 2.9 GCC 4.8 4.9 3.5 4.1New Zealand 2.7 3.3 2.2 2.1 South Africa 2.7 4.0 5.7 6.7
G-3: EMU, Japan, USA. EM-8: Brazil, China, India, Indonesia, South Korea, Mexico, Turkey and South Africa.
GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE. Regional figures are PPP-weighted. Source: Credit Suisse. 07 April 2010.
InflationGDP
GDP and inflation forecasts
GDP Inflation
Our long term growth forecasts remain solid,mainly on EM
Source: Bloomberg, Datastream, Credit Suisse / IDCLast data point: 10.05.2010
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The US real estate & credit crisis has spread to the world
A key accelerating factor was triggered by the Lehman bankruptcy
The world entered a long-drawn recession, but depression avoided
Recovery is taking place at different paces in developed markets andemerging markets
Budget Deficits and Government Debt increased in developed marketsas a result of the measures taken to avoid a depression.
Austerity measures become necessary
Long-term global growth outlook still intact, mainly on EM
Key points
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