Balmaseda GIC April 0711

Recovering Under Stress

Manuel Balmaseda CEMEX Chief Economist Rome, April 2011

Slower than usual recovery

Percent of Deviation of GDP from Potential GDP

10 8 6

Range (max-min) during 10 previous recessions

4 2 0 -2

Average of previous 10 recessions

-4 -6 Current recession/recovery

-8 -10 -7

-6

-5

-4

-3

-2

-1

0

quarters Note: t=0 last quarter of recession Source: St. Louis Fed, BEA and CEMEX

1

2

3

4

5

6

7

Slower than usual recovery. Surprising?

Average % change in real GDP by recession driver

Average duration by recession driver (number of quarters) 8.0

5.0

3.0

Recovery

6.0

1.0 4.0

Recession Recovery

-1.0 2.0

-3.0

Recession 0.0

-5.0 All

Financial crisis

Financial crisis highly synchronized

All

Financial crisis

Recessions triggered by financial crisis tend to be deeper and recoveries are milder and slower Source: IMF

Financial crisis highly synchronized

Slower than usual recovery. Surprising?

Cross Border Synchronization: Housing, Recessions & Banking Crisis (number of countries in a bust or recession as % of total) 100%

Housing price busts Recessions

80%

Systemic Banking Crisis

Hun

Non Systemic Banking Crisis

Nor Fin USA

60%

Swe

Nz

Pol

USA

40%

Mex

Spa

Mex

Czh

Tur

Jap

20%

Fra

Kor Tur

0% 1970

74

78

82

86

90

94

98

2002

Source: Cemex Economics, IMF and Claessens. Klingeibel and Laeven (2004)

Residential adjustments are particularly painful proccesses: excesses’ clean-up, perverse accounting and leads and lags between residential and other activities (banking sector, rest of construction, fiscal accounts,‌)

Crisis resolution policies may have prevented “depression” but limit recovery

Advanced economies

Adjustment of pre-crisis excesses (housing, private leverage, financial) Adjustment of excesses to cope with the crisis (fiscal, monetary)

Creative measures

“There ain’t no free lunch” Limiting growth dynamics (sub-par growth)

Adjustment of bubble excesses well on course Housing Starts (Thousands) US

Spain

2400

800 700

Equilibrium level

2000

Equilibrium level

600

1600 500

1200

400 300

800

200

400

100

0

Residential activity has suffered a very significant adjustment ... ... However, it will take time for excesses to be completely absorved Source: CEMEX

2015

201

209

206

203

20

197

194

19

198

1985

5 1 0 2

1 0 2

9 0 2

6 0 2

3 0 2

0 2

7 9 1

4 9 1

9 1

8 9 1

5 8 9 1

0

Adjustment of bubble excesses well on course US: Saving and Investment by sectors (% of GDP) 8% Private Gap (Private S-I)

5%

Statistical Discrepancy

2% -1% -4% -7%

CA

-10%

Fiscal Balance (CBO's forecast)

1 0 2

8 0 2

5 0 2

0 2

9 1

6 9 1

3 9 1

0 9 1

7 8 9 1

4 8 9 1

8 9 1

8 7 9 1

5 7 9 1

-13%

Private deleveraging replaced by public leveraging. Solving an excesive debt problem with debt?

Source: BEA and CEMEX

In the solution (whether necessary or not) lies the problem.

Excesive deficit to prevent the “depresion” …

… have given rise to debt sustainability concerns.

Fiscal deficit (% GDP) 12 2010

2011

General Government Public Debt (% GDP)

120

US

110

10

100

8

France

90

Spa

80

6

UK

70

Germany

60

4

50 40

2

30

2015

2014

2013

201

201

US

201

UK

209

Spain

208

Portugal France

207

Germany Italy

206

20

0

Deficit consolidation required in most countries.

Source: IMF. Fiscal Monitor update (January 2011)

8

Monetary excesses will also need to be withdrawn eventually ECB has also expanded its balanceECB´s balance sheet has also expanded (M$) sheet

Fed’s balance sheet expanded (QE2) 2400000

2750000

2350000

Off balance sheet securities lent to dealers

2000000

Total Claims 1600000

1950000

1550000

Gold and other assets

Other assets

1200000

Other Bank credit Other securities

1150000

750000

800000

Lending to Credit institutions

400000 US Treasuries

350000

Securities

-0 7 -0 8 -0 8 -0 8 -0 8 -0 8 -0 8 -0 9 -0 9 -0 9 -0 9 -0 9 -0 9 -1 0 -1 0 -1 0 -1 0 -1 0 -1 0 -1 1 -1 1 N v o n a J r a M y a M l u J p e S v o N n a J r a M y a M l u J p e S v o N n a J r a M y a M l u J p e S v o N n a J r a M

vN -0 o 7 Jan -0 8 ar -0 M 8 ay -0 M 8 l -0 Ju 8 Sep -0 8 v -0 o N 8 Jan -0 9 ar -0 M 9 ay -0 M 9 l -0 Ju 9 Sep -0 9 v -0 o N 9 Jan -1 0 ar -1 M 0 ay -1 M 0 l -1 Ju 0 Sep -1 0 v -1 o N 0 Jan -1 1 ar -1 M 1

0

Difficult to differentiate between monetary and fiscal policy.

Source: Federal Reserve and ECB

9

Monetary excesses will also need to be withdrawn eventually ECB interventions (Million â‚Ź) and sovereign spread (bp)

ECB Lending to Euro-Banks (% total assets) 700

3000 Ireland 10 year spread

600

2500 Portugal 10 year spread

500

2000

400 1500 300 Spain 10 year spread

1000

200 100

ECB Security Market Program (right)

ar -1 M 1

Feb -1 1

Jan -1 1

ec -1 D 0

v -1 o N 0

ct -1 O 0

Sep -1 0

g -1 u A 0

l -1 Ju 0

0

n -1 Ju 0

0

500

Difficult to differentiate between monetary and fiscal policy.

Source: IIF

Source: ECB and CEMEX

10

Fiscal and banking excesses are two sides of the same coin, particularly in Europe

Europe. 5 year CDS (bp) by countries 1000

240

Gre

Europe. 5 year CDS (bp) by sectors

220 Sovereign

200 800

180

600

Ire

400

Por Spa

200

Ita Ger

0

160 140

Financial

120 100 80

Corporate

60

Source: Bloomberg

-09 -09 -09 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -10 -11 -11 -11 -11 ctO v o N ec D Jan Feb ar M p A r ay M Ju n l Ju g u A Sep ct O v o N ec D Jan Feb ar M p A r

pr -11 A

Jan -11

ct -10 O

Jul -10

pr -10 A

Jan -10

ct -09 O

Jul -09

pr -09 A

Jan -09

ct -08 O

Jul -08

pr -08 A

Jan -08

40

Source: Markit Itraxx Indices

11

High exposure of core Europe’s banking sector to sovereign debt and banking sector of the periphery

Exposure of German and French Banks to peripheral countries is significant…

800

25%

…and, particular, to Spanish banks 250 Private

POR 700

Public SP

GR IRE

600

Banks

20%

200

SP

IR

SP

IR

IT 500

15%

150 SP

400

% total foreign claims (dcha.)

300

10%

100 GR POR

GR

200 5%

50

0%

0

IR

POR

GR POR

100 0 GER

FR

UK

JP

US

Foreign claims of European Banks vis a vis peripheral countries at end of June 2010. Amounts outstanding. In billions of US$ and % of total foreign claims.

Source: BIS

GER

FR

UK

Foreign claims of European Banks vis a vis peripheral countries by sector at end of March 2010. In billions of US$.

US Banks’ balance sheet are not fully repaired either.

Estimated total commercial real estate debt maturity schedules in the US (B$)

Still fragile banking systems* 400

500

2009-10 loan extensions Debt maturity

350

400

300 250

300

Extended until 2011-13

Europe

200

200

150 100 US

100

50

0

* Asset-weighted average of 5-year CDS spreads on senior Debt.

Source: Bloomberg

J -1 an 1 r -1 p A 1

ct -1 O 0

J -1 an 0 r -1 p A 0 l -1 Ju 0

ct -0 O 9

J -0 an 9 r -0 p A 9 l -0 Ju 9

ct -0 O 8

J -0 an 8 r -0 p A 8 l -0 Ju 8

ct -0 O 7

J -0 an 7 r -0 p A 7 l -0 Ju 7

0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: BIS

Collateral effects on banking sector and emerging markets

Advanced economies

Adjustment of pre-crisis excesses (housing, private leverage, financial) Adjustment of excesses to cope with the crisis (fiscal, monetary)

Creative measures

No macro-imbalances

Emerging economies

Improved fundamentals China strenght (support for commodity prices)

Large capital inflows to EMs

Pressures on exchange rates, inflation, assets..

Abundant liquidity Public support 14

Recovering Under Stress

Manuel Balmaseda CEMEX Chief Economist Rome, April 2011