RMES: Julian Callow

Research

Julian Callow Chief International Economist julian.callow@barclays.com +44 20 777 31369

Can Europe shed ‘zombie’ status?

July 2013

PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 114

Fiscal adjustment: OECD ‘headwind’ to lessen in 2014 Fiscal impulse: change in structural budget balance/GDP ratio (pp) Change in structural budget balance/ GDP ratio pp Austria Belgium Finland France Germany Greece Ireland Italy NL Portugal Spain Others Euro area Japan Sweden UK (FY) US OECD

2010

2011

2012 E

2013 F

2014 F

€A weight

0.2 0.4 -1.2 0.3 -1.3 6.3 1.7 0.7 0.7 0.2 1.4 ...

0.2 -0.5 0.2 0.6 0.6 0.3

1.0 -0.3 0.9 1.4 1.3 3.6 1.8 0.1 0.1 1.7 0.3 ...

0.9 -0.6 -0.7 2.1 1.0 0.8

0.4 0.9 -0.5 1.3 0.5 3.9 1.4 2.1 1.1 2.1 2.0 ...

1.3 -0.6 -0.2 2.1 1.0 0.9

0.0 1.6 0.4 1.7 0.0 2.2 0.6 0.7 1.3 1.5 2.0 ...

1.0 -1.0 -0.8 0.6 1.8 1.0

0.3 0.6 0.6 0.7 0.0 2.1 2.1 0.2 0.9 1.4 0.9 ...

0.5 0.2 0.1 1.1 0.5 0.5

3.1% 3.8% 1.9% 21.4% 26.8% 2.6% 1.8% 16.9% 6.4% 1.8% 11.7% 1.8% 100.0% ... ... ... ... ...

Source: OECD, European Commission, IMF, Barclays, BdI, BdE Last updated: 19 June 2013

2

The debt issue: private de-leveraging but aggregate rises Outstanding gross interest paying liabilities of non-financial sectors (% GDP) US*

Euro area 450

450

450

Total debt

400

Japan**

Total debt ex government

400 350

350

300

300

300

250

250

250

200

200

200

150

150

150

100

100

100

50

50

50

0

0 70

78

86

94

02

Total ex government

400

Total ex government

350

0 1916 31 46 61 76 91 06

Total debt

Total debt

10

64 69 74 79 84 89 94 99 04 09

Source: Barclays Research, Haver Analytics, BIS, Census * thin lines show historic series from Census Bureau; ** thin lines show the previous series

3

Financial conditions can overcome fiscal consolidation Financial stress still lower

Euro area Composite Indicator of Systemic Stress (ECB, LHS) 0.9

US Financial Stress Index (Cleveland Fed, RHS)

Impact of financial conditions (LHS)

US 3.0

Impact of fiscal conditions (LHS)

Euro area

4

Combined impact of fin. & fiscal conditions

Japan

2.5

0.8

Stronger outlook for ‘G3’ GDP

Financial conditions rise

2

2.0

6

US-EA-JP GDP (% q/ q saar RHS)

EM Asia 2

0.7 1.5

1

3

0

0

-1

-3

0.6 1.0 0

0.5

0.5

0.4

0.0 -2

-0.5 0.3

-1.0 0.2 -1.5 0.1

-4

Barclays forecast for 'G3' real GDP growth

Impact of fiscal, financial conditions on real GDP

-2

-2.0

-6

Index

0.0

-2.5

-6

91 93 95 97 99 01 03 05 07 09 11 13

-3 95

98

01

04

Source: Barclays Research, Markit, Haver Updated: July 2, 2013

4

07

10

13

-9 99

01

03

05

07

09

11

13

Financial conditions overcome fiscal drag: regional analysis US

10

% q/ q saar

Euro area

US GDP (LHS) FFCI (LHS) US FCI (RHS)

5

Euro area GDP (LHS) FFCI (LHS) EA FCI (RHS)

Index 5

4

4

4

6

3

2

3

4

2

2

1 0

-2

-1

Forecast

0

2

0

1

-2

0 -4

Forecast

8

% q/ q saar 6

Index

-1

-2

-6

-3

-8

-3

-8

-4

-10

-4

-10

-5

-12

-5

-4

-6

95

98

01

04

07

10

13

00

03

06

09

-2

12

• In the FFCI (Financial & Fiscal Conditions Indicator) we combine the FCIs with the change in the structural budget deficit, as a second explanatory variable, to estimate real GDP

Note: The methodology shown here is based on that from the OECD, and includes the bank loan officer survey Source: Barclays Research, OECD, Haver Analytics

Updated: 2 July, 2013

5

A recent unwelcome rise in bond yields

10y sovereign yields (%)

10y sovereign yields minus nominal trend growth

Senior bank debt yields (%)

(real potential growth+5Y inflation expectations) 10

Portugal Spain Italy Ireland EA GDP-weighted(ex Greece) Germany Banking senior (Euro aggregate)

14 12

9

8

6 --------Monetary union--------

10 6

3

8 4

6

0

4 2

Italy

-3

Spain

2

France Germany

0 06

07

08

09

10

11

12

13

0 Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Italy Spain France Germany

Latest: 2 July 2013

-6 93 95 97 99 01 03 05 07 09 11 13

Source: Barclays Research, Haver Analytics

l

6

Global forecasts – Barclays’ projections for 2013-2014 Actual

Real GDP (% y/ y) weight* Global 100.0 Advanced 50.6 US 21.3 Canada 2.0 Australia 1.3 Japan 6.2 Euro area 14.9 France 3.0 Germany 4.3 Greece 0.4 Ireland 0.3 Italy 2.4 Netherlands 0.9 Portugal 0.3 Spain 1.9 UK 3.1 Switzerland 0.5 Emerging 49.4 Brazil 3.2 Mexico 2.4 China 17.8 India* * 6.6 Indonesia 1.7 South Korea 2.2 Taiwan 1.2 Poland 1.1 Russia* * * 3.4 Turkey 1.5 South Africa 0.8

2012 3.1 1.2 2.2 1.7 3.6 1.9 -0.5 0.0 0.9 -6.4 0.9 -2.4 -1.3 -3.2 -1.4 0.2 1.0 5.0 0.9 3.9 7.8 5.1 6.2 2.0 1.3 1.9 3.4 2.2 2.5

Barclays forecast (consensus) 2013 3.0 1.0 1.6 1.7 2.7 2.1 -0.5 -0.1 0.5 -4.3 0.9 -1.7 -1.0 -2.6 -1.7 0.9 1.4 5.0 2.3 2.5 7.4 5.4 5.8 2.9 3.0 0.9 3.0 3.7 2.3

Global manufacturing confidence

2014 (3.2) (1.1) (1.9) (1.7) (2.5) (1.9)

(-0.5) (-0.3) (0.5) (-4.9) (0.8) (-1.7) (-0.8) (-2.6) (-1.6) (0.9) (1.4) (5.3) (3.0) (3.2) (7.8) (6.0) (6.1) (2.6) (2.9) (1.2) (2.9) (3.9) (2.5)

3.8 1.9 2.3 2.1 2.3 2.1 1.3 1.1 2.0 0.2 2.2 0.8 0.9 0.3 0.6 1.8 1.4 5.6 2.7 4.2 7.4 6.7 5.8 3.9 3.7 2.9 3.5 4.9 3.2

(3.9)

6m/ 6m change, saar 15

(1.9)

normalised diffusion balance 2

(2.7)

10

(2.4)

1

(2.8)

5

0

(1.5) 0

(0.9) (0.6)

-1

-5

(1.6) -10

(-0.9)

-2 Global industrial production* , LHS

-3

Global manufacturing confidence -15 (Barclays), RHS New orders less fin. goods inventories -20 (Barclays), RHS 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

(1.9) (0.4) (0.6) (0.1) (0.3)

Note: *Barclays aggregate. Source: Barclays Research, Markit, Haver

(1.7) (1.6)

Global GDP indicator vs GDP growth

(5.8) (3.6)

6

% q/ q saar

Barclays' global GDP forecasts (to Q4 2014)

(4.0) 4

(7.8)

2

(6.8) (6.2)

0

(3.5) (3.9)

-2

(2.6)

-4

(3.6)

Q2 13 E

-6

(4.9)

-8

(3.4)

Source: Haver, Barclays Research, Consensus Economics. Last updated: 28 June 2013 Consensus forecasts are as of June 2013 except for Latin America and EM Europe countries which are for May 2013. **Consensus forecasts for India are for FY; ***Consensus inflation for Russia is % change Dec/Dec. Note: *Based on the IMF PPP based GDP weights, 5yr centred moving averages;

7

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Global GDP*

Global GDP indicator*

Note: *Barclays aggregate. Source: Barclays Research, Markit, Haver

fc

-4 -5

Global trade held up by China; euro area a sustained drag Global trade volumes 150

•

EXPORTS: general signs of a slowdown in all areas

150

Exports

Imports

(2007 = 100)

(2007 = 100)

•

140

140

130

130

120

120

110

110

100

100

90

90

80

China

US

Euro

Japan

80

70

70 Jan 07 = 100, SA

G5

60

60 07

08

09

10

11

12

07

13

Source: Barclays Research, Haver Analytics Last updated: 3 July 2013

8

08

09

10

11

12

13

IMPORTS: ongoing significant weakness in euro area and also some in US and Japan

A loss of momentum from global trade • From the European perspective, Asian exports (particularly to China) drove the recovery… the slowdown had been in export orders from outside the eurozone, but more recently weakening within it • Americas & energy producers were taking up the baton as momentum ebbs from Asia Euro area exports by region

German new industrial orders (ex. special transport)

Rest of W Europe (ex Norway) Americas Asia (inc. Japan, Australia) Emerging Europe (ex CIS) Energy producers (OPEC, CIS, NW)

€bn mthly

40

Rest of world Domestic Euro area

volume index (05= 100) 140 130 120

30

110 100 90

20

80 70 10

60 05

06

07

08

09

10

11

12

13

05

Note: Last updated: 5 Jul 2013.

Source: Barclays Research, Markit, Haver

9

06

07

08

09

10

11

12

13

Europe must tackle surging unemployment Unemployment rates (%) 14 13 12 11

Euro area US UK Japan China (urban areas)

14

France

Belgium

13

Germany

Austria

12

NL

27 25 23

11

21

10

10

9

9

17

8

8

15

7

7

13

6

6

11

5

5

9

4

4

7

3

3

5

2

2

3

95 97 99 01 03 05 07 09 11 13

Spain Ireland Greece Portugal Italy

19

95 97 99 01 03 05 07 09 11 13

95 97 99 01 03 05 07 09 11 13

Source: Barclays Research, Haver Last updated: 02 July 2013

• Unemployment has begun to fall more sharply in the US, while it has stabilised in Germany and surges in much of the remainder of the euro area

10

Investment trends: the world watches China Gross fixed capital investment in the G20 GFCF $bn 4000 3500 3000 2500

2000

GFCF % 50% GDP

US China (inc HK)

45%

EU 27

40%

Japan

35%

Rest of G20

China EM G20 ex China G20 US-EU-Japan

30%

1500 1000

25%

500

20%

0

15%

70 73 76 79 82 85 88 91 94 97 00 03 06 09 12

Note: Updated 29 May, 2013. Source: OECD, national statistics, Barclays Research

11

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Marked differences in corporate sector health Non-financial corporate sector: net fixed investment, and net saving, ratios to net value added US US NFCs: Net investment (FCF)/ net VA (%) US NFCs: Net saving/ net value added (%)

10 9

8

Germany

UK

Euro area

GER: NFCs: Net fixed capital formation/ net value added (%)

12

GER: NFCs: Net saving/ net value added (%)

10 15

8

10

7

6

8

6

10

6

5

4

4

4

5

2

2

3

0

2

-2

1

-4

0

-6 60 65 70 75 80 85 90 95 00 05 10

0

-5 99

01

03

France

05

07

09

11

99

13

10

4

5

-2

-4 13

SP: NFCs: Net fixed capital formation/ net value added (%)

25

12 10

15

8

JP NFCs: Net saving/ net value added (%)

6

5

-4

4

0

-10 -15

FR NFCs: Net fixed capital formation/ net value added (%) -20 78 81 84 87 90 93 96 99 02 05 08 11

JP NFCs: Net fixed capital formation/ net value added (%)

14

20

10

-5

11

Japan

SP: NFCs: Net saving/ net value added (%)

0

-12

99

EA NFCs: Net fixed capital formation/ net value added (%) 01 03 05 07 09

Spain

0

-8

UK NFCs: Net saving/ net value added (%) UK NFCs: Net fixed capital formation/ net value added (%) 01 03 05 07 09 11

Italy

8

FR NFCs: Net saving/ net value added (%)

EA NFCs: Net saving/ net value added (%)

0

99

IT: NFCs: Net saving/ net value added (%) IT: NFCs: Net fixed capital formation/ net value added (%) 01 03 05 07 09 11 13

-5

2

-10

0

-15

-2

-20

99

Source: Barclays Research; Haver Analytics (updated: 2 July 2013)

12

01

03

05

07

09

11

13

-4 80

84

88

92

96

00

04

08

12

Reduction in euro area tail risks, but not entirely eliminated • Four sources of risk in southern Europe: • PUBLIC SOLVENCY • A determined effort by governments, but a very long way to go ► Conclusion: 2013 another critical year for fiscal adjustment; fiscal policy to continue to be a major drag on domestic demand • PRIVATE SOLVENCY • Sharply rising bad debts in countries with excessively leveraged real estate • Major bank recapitalisation and restructuring ► Conclusion: Banks have come a long way to raise capital ratios and to write down bad debts and problems now increasingly localised, but still major in Spain, perhaps Italy also • EURO MEMBERSHIP RISK • Substantial adjustment in current account deficits, mainly through demand • However, exports are improving in Spain, Portugal and Ireland, & unit labour costs reduced ► Conclusion: Substantial adjustment has happened more on demand; extent to which prices adjust down depends on flexibility and ongoing structural reforms • POLITICAL SUSTAINABILITY • So far electorates have been supportive of conservative policies • However, unemployment is advancing rapidly in southern Europe ► Conclusion: Warrants close ongoing attention, and depends on pro-growth environment

13

Challenges for the euro area (and elsewhere) 2013 % GDP (unless otherwise stated)

US

Japan

UK

Can.

Euro

Belg. France Germ. Greece Ire.

Italy

NL

Port. Spain

1 Government gross debt (2013)

108

245

94

87

95

100

93

80

179

122

131

74

122

92

2 Government gross debt (2018 est.)

107

243

98

78

90

93

88

69

144

106

123

75

114

111

89

143

86

36

74

84

87

56

176

106

106

36

115

79

-6.5 -10.6 -5.7

-3.2

-2.8

-2.7

-3.7

0.0

-3.9

-7.4

-3.1

-3.6

-6.0

-6.2

7.2

14.3

7.1

2.8

2.8

2.7

4.1

0.0

7.1

6.4

2.7

2.6

6.5

6.0

10.9

15.9

8.9

5.9

4.2

8.4

5.3

1.9

7.2

8.5

1.9

6.4

8.4

7.1

7 Households’ gross debt

82

66

95

91

66

55

57

58

67

108

45

128

92

80

8 Non-fin. corporates’ gross debt3

77

94

107

49

100

182

107

61

69

200

82

97

161

133

-2.6

0.7

-4.1

-3.3

2.6

-1.2

-2.5

7.1

-1.1

4.6

1.3

12.3

-0.8

1.3

-28

66

-35

-16

-13

63

-16

40

-119

-96

-22

51

-119

-94

11 Real GDP growth, 2001-12 % ar

1.7

0.8

1.4

2.0

0.9

1.3

1.0

1.1

0.2

2.2

0.0

1.1

0.0

1.4

12 Real GDP growth, 2013-18 % ar

3.2

1.2

2.0

2.4

1.5

1.4

1.6

1.3

2.8

2.6

1.1

1.7

1.5

1.3

13 Population growth 2013-18 % ar

0.9

-0.3

0.8

0.9

0.1

0.8

0.5

-0.2

-0.1

0.8

0.2

0.2

0.1

-0.2

AA(neg) A+ (neg)

AAA (neg)

AAA

AA+ (neg)

AA (neg)

AAA

B-

BBB+

AA+

AAA

AAA

AA

AAA

B-

BBB+

Aa3

Aa1

Aaa

Aa1 (neg)

Aa3 (neg)

AA+ (neg) AAA (neg) Aa1 (neg)

Aaa (neg)

C

Ba1 (neg)

BBB+ (neg) BBB+ (neg) Baa2 (neg)

AAA (neg) AAA (neg) Aaa (neg)

GOVERNMENT BALANCES

3 Government net debt (2013) 4 General government balance* 5 Required fiscal adjustment

1

6 Req'd fisc.adj't. (inc. age costs)2 PRIVATE SECTOR BALANCES

EXTERNAL BALANCES

9 Current account* 10 Net external assets POTENTIAL GROWTH

CREDIT RATINGS

14 S&P 15 Fitch 16 Moody's

AA+ AAA (neg) Aaa (neg)

BB BB+ (neg) Ba3 (neg)

BBB(neg) BBB (neg) Baa3 (neg)

Source: BIS; EU Consolidated Banking Data; FDIC; IMF, BIS-IMF-OECD-World Bank Joint External Debt Hub (JEDH); IMF staff estimates; Barclays Research estimates; Standard & Poor's Financial Services; Fitch Ratings; Moody's Investors Service 1 The red/orange/grey shading is applied according to a Barclays Research assessment of riskiness. 2 IMF and OECD estimate of fiscal adjustment needed to achieve a 60% debt/GDP ratio (80% for Japan) by 2030, from 2013 onwards as % GDP 3 IMF estimate, including age-related expenditure costs on budget balance 4 Nonfinancial corporates’ gross debt includes intercompany loans and trade credit, and these can differ significantly across countries.

14

Evidence of asymmetric monetary transmission Eurosystem survey of SMEs Response of those who applied for new/renewed bank loan (ex. overdraft, credit line), past 6 months (%)

15 3

11 12

13

5 6

12 33

13

18

20

16

22

15 24

17

24

20

31

33

43

40

H1 09

H2 12

13 18

19

36 78

H1 09

73

H2 12

France

85

25

36 68

67

H1 09

H2 12

Germany

29

25

H1 09

H2 12

66

57

50

55

H1 09

H2 12

32

H1 09

Greece

H2 12

Ireland

Note: *Refused by the SME because cost too high. Source: Barclays Research, ECB

15

H1 09

H2 12

Italy

Portugal

Spain

Received everything Received part Rejected, or refused*

Euro area deposit and loan flows: Divergent trends Deposit & loan growth at a national level (MFI data) % y/ y

France

Germany

Greece

Ireland

Italy

NL

Portugal

Deposits - larger countries

Spain

Cyprus

Euro area

-8.2 -11.2 -12.0 -11.1 -9.8 -8.5 -8.0 -6.9 -6.5 -5.6 -5.1 -4.6

-0.8 -2.1 -0.4 0.6 -0.5 0.4 -1.0 -3.1 -5.8 -9.8 -16.7 -19.1

1.5 1.1 0.4 0.4 0.4 1.1 1.2 1.2 1.3 1.9 2.0 2.2

-4.9 -5.6 -5.8 -5.8 -6.6 -7.2 -7.6 -7.9 -8.0 -8.2 -8.9 -9.6

7.3 6.4 5.0 5.4 4.0 4.1 4.6 5.7 4.0 2.9 1.7 -2.2

-0.4 -0.2 -0.5 -1.2 -1.5 -1.5 -1.3 -1.5 -1.4 -1.3 -1.9 -2.1

-3.4 -3.4 -3.4 -3.6 -3.5 -3.5 -3.7 -3.8 -3.9 -3.9 -4.1 -4.0

2.7 2.5 2.3 2.3 1.9 1.5 1.7 1.3 0.9 0.4 -0.9 -1.4

1.1 1.0 0.9 0.8 0.8 0.8 0.7 0.4 0.4 0.3 0.3 0.3

1.1 Deposit growth (excluding from other MFIs and of central government) Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13

6.8 5.8 4.4 3.2 2.1 2.2 3.8 1.3 1.1 2.2 3.3 3.8

3.8 4.2 3.7 2.9 3.2 2.7 1.5 1.9 1.7 1.7 1.3 0.9

-20.7 -18.5 -19.3 -15.7 -12.3 -10.3 -6.6 -3.9 0.4 0.6 -0.9 5.3

-2.4 -1.1 -0.1 0.3 0.7 0.6 0.6 1.6 1.4 7.2 5.5 5.3

2.9 3.0 3.4 5.1 3.0 6.0 8.3 6.1 5.5 8.4 8.1 8.9

4.3 4.9 4.7 4.8 5.0 6.4 4.1 6.8 6.7 6.0 5.1 4.4

-5.6 -6.3 -7.0 -7.5 -9.3 -8.8 -9.3 -10.2 -10.2 -8.3 -8.5 -7.0

â‚Źbn, excluding central government and other MFIs 3,200 2,800

2,400 2,000 1,600

1,200 800

06

1.2 Loans to non-financial corporations (adjusted for sales and securitisations, except for Italy) Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13

2.3 1.8 1.9 0.9 0.2 0.9 1.3 0.8 0.9 1.4 1.1 1.2

1.3 1.7 1.7 1.6 1.1 1.2 1.1 0.6 0.5 0.5 0.3 0.0

-5.3 -6.2 -5.7 -6.3 -6.0 -6.0 -6.2 -5.3 -4.8 -2.9 -3.3 -3.8

-3.0 -3.2 -2.8 -3.9 -3.9 -4.2 -3.8 -3.8 -4.1 -4.5 -5.3 -5.6

-1.6 -1.1 -2.1 -3.5 -3.2 -3.8 -2.5 -3.2 -2.9 -3.0 -4.0 -4.1

3.1 5.4 5.1 3.0 3.3 3.9 3.3 4.9 5.1 5.2 3.4 3.3

-5.6 -5.9 -6.3 -6.7 -7.1 -7.1 -5.1 -4.2 -4.3 -3.6 -3.6 -3.3

Germany France Austria/ Benelux Spain Italy

07

08

09

10

11

12

13

Deposits - periphery â‚Źbn, excluding central government and other MFIs 260 240

220 200

1.3 Loans to households (adjusted for sales and securitisations, except for Italy) Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13

4.4 4.1 3.9 3.7 3.5 3.4 3.2 2.7 2.7 2.6 2.7 2.8

1.1 1.2 1.2 1.2 1.3 1.4 1.3 1.3 1.3 1.2 1.2 1.2

-5.0 -5.2 -5.5 -4.9 -4.8 -4.5 -4.2 -4.1 -4.3 -4.3 -4.2 -4.0

-3.8 -3.8 -3.9 -3.8 -3.9 -3.9 -4.1 -4.3 -4.6 -4.5 -4.5 -4.8

0.9 0.1 -0.2 -0.6 -0.7 -1.0 -1.1 -1.2 -1.2 -1.3 -1.3 -1.4

2.3 2.2 2.0 1.9 1.7 1.5 1.5 1.4 1.3 1.3 1.2 0.9

-3.5 -3.7 -3.8 -3.9 -4.1 -4.1 -4.2 -4.2 -4.2 -4.2 -4.3 -4.3

so urce: ECB , B arclays Research

16

180

160

Greece Ireland Portugal

140 06 shown 07 are08 09 flow data 10 and11are not12SA NB: Series based on NB: Series shown are based on flow data and are not SA Source: Barclays, ECB

13

Spanish bank loans sour more rapidly ''Doubtful' (ie, non-performing) loans in Spain (bn euros) (a) Outstanding loans & capital (mthly) 2000

(b) 'Doubtful' loans by sector (quarterly)

250 600

transferred to SAREB

1800

1600

Dom. loans outstanding (LHS)

500

Bank capital + general reserves + provisions

400

1400 1200

200

5474

construction/ real estate firms non-construction firms

150

total households

1000

300

100

800 600

200

'Doubtful' loans

400

100

0

0 07

08

09

10

11

12

27

20

200 0

35

50

47 48 50 58

62

14 16 18 18202122 22 22 24 26

82

28

39 30 36

08

09

10

11

12

Source: Bank of Spain, various reports, Barclays Research. Note: *The data for repossessions in the broader economy are estimated and taken from the IMF's country report (July 2011).

Last updated: 18 Jun, 2013

17

44 45

9 5 6 8 37 38 3 5 2 24 29 31 31 3029 2828 262626 27 29 30 31 34 2 1 4 4 19 4 4 15 11 6 7 8 9

07

13

10

37 39 44

70 74

108 85 77 101 87

13

Italian banks: also suffering from rising NPLs Non-performing loans in Italy

400

Household (inc. non-profits) €bn (LHS) Construction/ real estate €bn (LHS) Rest of economy €bn (LHS) NPL ratio: Household (% RHS) Ratio: Const./ RE (% RHS) Ratio: Other (% RHS)

150

100

15

350 300 NPLs (EUR bn) Restructured loans Capital & reserves

250

10

200

Substandard loans Overdue loans

150 50

5

100 50 0

0 09

10

11

12

0

13

09

10

11

12

13

Net NPLs as % core capital

173%

174%

129% 57%

68%

75%

95%

93% 24%

PMIIM

ISPIM

UCGIM

UBIIM

MONTE

BPIM

33%

SANTAN BBVASM SABSM POPSM

Source: Barclays Research (including Credit Research (bottom slide)); Haver Analytics Last updated: 2 July, 2013

18

74% 36%

BESPL

BCPPL

Foreign debt holdings stabilise Spanish central gov’t securities by holder

Italian government debt by holder Non-residents ex Eurosystem SMP purchases Domestic bank holdings Other domestic financial institutions 45.0 Other domestic

EURbn

900 800

700

35

43

32

42

600

% of total

500 400 300 200 100 0 Mar-09

Mar-10

Mar-11

Mar-12

40.0 33 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 Mar-13

Source: Barclays Research

19

Non-residents ex Eurosystem SMP purchases Domestic bank holdings 55.0 Other domestic financial institutions Other domestic

EURbn 300 250

45.0

42

200

35.0

43

23

150 100

25 % of total

25.0 15.0

50 0 Mar-09

27

5.0

Mar-10

Mar-11

Mar-12

-5.0 Mar-13

Euro: Holding up â‚Źarea current a/c vs real effective exchange rate

Euro area trade in goods and services (SA)

Current a/ c as % GDP (SA), LHS REER - ULC based (adv. economies, 2005=100,IMF, RHS) REER - CPI based (broad, 2010=100, BIS, RHS)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5

29 G+S exports as % GDP

27 75

25

80

23

85 90

21

95 100

19

105

17

110 115 latest est. based on rate on 18 Jun 13 98

01

04

07

10

G+S imports as % GDP

15 Apr 06 Apr 07 Apr 08 Apr 09 Apr 10 Apr 11 Apr 12 Apr 13

120

13

Source: IMF, Haver Analytics, Barclays Research. Last updated: 28 June 2013.

20

S. Europe sees export expansion while suppressing imports Exports of goods and services, % GDP (3m ma, SA)

100

Portugal Italy

45

Ireland NL Germany

Spain France

UK Greece

40 35

80

30

60

25 40

20

20

15

05

06

07

08

09

10

11

12

13

05

06

07

08

09

10

11

12

13

Imports of goods and services, % GDP (3m ma, SA) Ireland NL Germany

90 80

Portugal Italy

50

Spain France

UK Greece

45

70

40

60

35

50

30

40

25

30 05

06

07

08

09

10

11

12

20

13

05 Source: Haver Analytics. Note: Latest update 3 Jul 2013

21

06

07

08

09

10

11

12

13

External imbalance adjustment: S Europe improves • The superior performance of industrial unit labour costs has resulted generally in rising current account surpluses in the “core” countries (with France the main exception) • In the “periphery” current accounts deteriorated rapidly from the start of EMU in 1999 to 2007; they are since narrowing sharply

Current account balances (as % GDP, seasonally adjusted) “Core” 15

“Periphery” 10

Germany

France

Aust.

Belg.

NL

Finland

5

10

0

5

-5 -10

Ireland Italy Spain Portugal Greece

0

-15 -5

-20 -25

-10 91

93

95

97

99

01

03

05

07

09

11

91

13

Source: Haver Analytics; Barclays Research Last updated: 3 Jul 2013

22

93

95

97

99

01

03

05

07

09

11

13

But investment positions still very negative • The divergent trends in current accounts is reflected in major divergence in net international investment positions, with the “core” generally in strong surplus… But the “periphery” is generally in a very negative position (Italy to a much lesser extent)

Net international investment position (% GDP) “Core”

“Periphery”

80

60

60

40

40

20

20

0

0

Ireland (excluding IFSC) Italy Spain Greece Portugal

-20

-20

-40

-40 -60

-60 -80 -100

Germany Austria NL

France Belgium Finland*

-80 -100

-120

-120

91 93 95 97 99 01 03 05 07 09 11 13

91 93 95 97 99 01 03 05 07 09 11 13 Source: Haver Analytics; Barclays Research. Note: *Finland excludes equity portfolio position.

Last updated: 3 Jul 2013

23

Competitiveness adjustment in the euro area (1) Unit labour costs in industry: Evolution vs Germany (indexed at Q1 01) “Periphery”

“Core” 160

140

Germany = 100 Finland France Aust.

Belg.

NL

180 160 140

120

Greece Italy Spain Portugal Ireland Germany = 100

120 100 100

80

80

60

60

91 93 95 97 99 01 03 05 07 09 11 13

91 93 95 97 99 01 03 05 07 09 11 13

Source: Haver Analytics; Barclays Research Last updated: 3 Jul 2013

• The “core” countries have generally kept the evolution of their industrial unit labour costs in line with that of Germany since EMU began

24

Competitiveness adjustment in the euro area (2) • After many years when German compensation has been well below most other countries, it has more recently moved to be the highest – as other countries experience much weaker pressure

Signs of adjustment in wage flexibility

Cumulative changes

Historical perspective

Compensation per employee (% annualised)

Compensation per employee (% y/ y) Germany Spain Greece

10

Italy Ireland

France Portugal

2000-08

08 - 12

5 5.7

5.0 3.6

0

3.0 2.1

2.3

1.1

3.3

2.6 0.8

1.4

0.6

-5

-0.5 -1.6

-10 07

08

09

10

11

12

Ger.

13

Source: Haver Analytics; Barclays Research Last updated: 3 Jul 2013

25

Fra.

Ita.

Spa.

Por.

Ire.

Gre.

EU far from US-style levels of re-distribution Comparing net transfers across EU countries and US states US (average 1996-2005)

EU (2008) 250

140

euro area countries non-euro area countries State per capita GDP, % US average

GNP per capita % euro area average

130

Lux.

200

DK

150 Swe.

Ireland FN

NL Aus

Bel

Ger.

100

Iceland

FR IT UK

Greece

Spain Slov.

P o rtugal CZ Ma Est Latvia SK

Cyprus

50

HN

Pol

Cro TK

Lithuania

Connecticut

New Jersey Mass

120 Califronia

110 N Hamp

Colorado

Virginia

Illinois Minnesota

100

Hawaii Wysconsin Missouri

Michigan

90

Indiana

S Dakota Arizona

N Dakota Idaho Alabama

Utah

Montana

Bulg.

S Car.

0 -1

0

1

Alaska

Wyoming

Nevada

80 Rom.

Maryland

NY

2

3

4

5

70 -10

EU net transfers, % country GDP

Arkansas

New Mexico W Virginia Missi-ssippi

-5

0

5

10

15

Federal spending less receipts, % state GDP

Source: Eurostat, nenw.org, BEA, Tax Foundation

26

20

Appendices

27

Euro area outlook: Key forecasts 2012

2013

2014

Calendar year average

% change q/ q

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1E

Q2E

Q3E

Q4E 2011 2012 2013E 2014E

Real GDP

-0.1 -0.2

-0.1

-0.6

-0.2

0.1

0.2

0.3

0.3

0.4

0.4

0.4

...

...

...

...

Real GDP (saar)

-0.2 -0.8

-0.5

-2.3

-0.8

0.5

0.9

1.1

1.2

1.7

1.7

1.6

...

...

...

...

Real GDP (y/ y)

-0.1 -0.5

-0.7

-1.0

-1.1

-0.8

-0.4

0.4

0.9

1.2

1.4

1.6

1.5

-0.5

-0.5

1.3

Private consumption

-0.2 -0.5

-0.2

-0.6

0.1

0.0

0.0

0.1

0.2

0.2

0.3

0.3

0.2

-1.3

-0.6

0.6

Public consumption

0.0

-0.3

-0.2

0.0

-0.1

0.1

0.0

0.0

0.0

0.1

0.1

0.1

-0.1

-0.4

-0.2

0.1

Investment

-1.4 -1.7

-0.9

-1.4

-1.6

-0.2

0.5

0.5

0.7

0.7

0.8

0.7

1.5

-4.2

-3.3

2.3

- Residential construction

-0.8 -1.6

-0.3

-1.4

-1.1

-0.6

0.0

0.3

0.3

0.3

0.5

0.5

0.5

-3.7

-3.1

1.0

- Non-residential construction

-2.3 -2.2

-0.9

-1.4

-1.6

0.0

0.4

0.4

0.3

0.4

0.4

0.4

-1.3

-5.9

-3.4

1.5

- Non-construction investment

-1.2 -1.6

-1.3

-1.4

-1.7

0.0

0.7

0.6

1.1

1.2

1.1

1.0

3.8

-3.4

-3.3

3.7

Inventories contribution (pp)

0.0

-0.1

-0.1

-0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.3

-0.5

-0.2

0.0

Final dom. demand cont. (pp)

-0.4 -0.7

-0.3

-0.6

-0.3

0.0

0.1

0.1

0.2

0.3

0.3

0.3

0.4

-1.7

-1.0

0.9

Net exports contribution (pp)

0.3

0.6

0.3

0.1

0.1

0.2

0.1

0.1

0.1

0.1

0.1

0.1

1.0

1.6

0.6

0.4

Industrial output (ex construct.) -0.5 -0.5 Employment (q/ q) -0.2 -0.1 Unemployment rate % 10.9 11.3

0.0

-2.1

0.2

0.8

0.0

0.5

0.5

0.1

0.1

0.1

3.2

-2.3

-0.8

1.2

-0.1

-0.3

-0.5

-0.3

-0.1

0.0

0.1

0.1

0.2

0.2

0.3

-0.7

-1.0

0.2

11.5

11.8

12.3

12.4

12.5

12.6

12.6

12.7

12.6

12.7

10.2

11.4

12.4

12.7

CPI inflation (y/ y)

2.7

2.5

2.5

2.3

1.9

1.4

1.4

1.4

1.3

1.6

1.4

1.3

2.7

2.5

1.5

1.4

Core CPI (ex food/ energy) y/ y

1.5

1.6

1.6

1.5

1.4

1.1

1.2

1.1

1.2

1.2

1.0

0.9

1.4

1.5

1.2

1.1

Current account % GDP

0.9

1.2

1.5

1.5

2.3

2.5

2.6

2.7

2.7

2.8

2.7

2.8

0.1

1.3

2.6

2.8

Government balance % GDP

…

…

…

…

…

…

…

…

…

…

…

…

-4.2

-3.7

-2.8

-2.2

1.00

1.00

0.75

0.50

0.50

0.50

0.50

0.50

0.50

0.50

1.00

1.00

0.50

0.50

Refi rate (period end %)

1.00 1.00

Note: Data show percent seasonally adjusted q/q rates of change (unless stated otherwise).

Source: Barclays Research. Last updated 28 June 2013

28

Euro area outlook: Country forecasts Real GDP % y/ y

HICP % y/ y

2010

2011

2012

2013 (F)

2014 (F)

2010

2011

2012

2013 (F)

2014 (F)

Euro area

1.9

1.5

-0.5

-0.5

1.3

1.6

2.7

2.5

1.5

1.4

Germany

4.0

3.1

0.9

0.5

2.0

1.2

2.5

2.1

1.7

1.7

France

1.6

2.0

0.0

-0.1

1.1

1.7

2.3

2.2

1.1

1.2

It aly

1.7

0.5

-2.4

-1.7

0.8

1.6

2.9

3.3

1.6

1.4

Spain

-0.3

0.4

-1.4

-1.7

0.6

2.0

3.1

2.4

1.8

1.1

Net herlands

1.6

1.1

-1.3

-1.0

0.9

0.9

2.5

2.8

2.8

2.0

Belgium

2.4

1.9

-0.3

0.0

0.9

2.3

3.4

2.6

1.1

1.2

Aust ria

2.2

2.7

0.8

0.5

1.8

1.7

3.6

2.6

2.3

2.0

Greece

-4.4

-5.2

-6.4

-4.3

0.2

4.7

3.1

1.0

-0.3

-0.4

Port ugal

1.9

-1.6

-3.2

-2.6

0.3

1.4

3.6

2.8

0.7

0.1

Finland

3.3 0.0

2.8 0.0

-0.2 0.0

-0.2 0.0

1.4 0.0

1.7 0.0

3.3 0.0

3.2 0.0

2.5 0.0

2.1 0.0

Ireland

Unemployment rat es %

Current account (% GDP)

2010

2011

2012

2013 (F)

2014 (F)

2010

2011

2012

2013 (F)

2014 (F)

Euro area

10.1

10.2

11.4

12.4

12.7

0.0

0.1

1.3

2.6

2.8

Germany

7.1

6.0

5.5

5.4

5.6

6.1

6.2

7.1

7.1

7.1

France

9.7

9.6

10.3

11.2

11.4

-1.6

-1.9

-2.3

-2.5

-2.3

It aly

8.4

8.4

10.7

12.1

13.2

-3.6

-3.1

-0.6

1.3

1.8

Spain

20.1

21.7

25.0

26.9

27.0

-4.5

-3.8

-1.1

1.3

2.0

Net herlands

4.5

4.4

5.3

6.9

8.1

7.7

10.1

10.1

11.9

12.5

Belgium

8.2

7.2

7.6

8.6

9.3

1.8

-1.2

-1.4

-1.2

-0.9

Aust ria

4.4

4.2

4.4

4.9

4.9

3.4

1.3

1.8

1.6

2.1

Greece

12.6

17.7

24.3

28.8

29.8

-9.8

-9.4

-3.1

-1.1

0.4

Port ugal

12.0

12.9

15.9

18.7

18.8

-10.6

-7.0

-1.5

-0.7

-0.5

Finland

8.4

7.8

7.8

8.3

8.6

1.5

-1.5

-1.8

-0.5

-0.6

Ireland

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Source: Haver, Barclays Research. Last update: 28 June 2013

29

Euro area outlook: Country forecasts General government balance ( % GDP)

Austria Belgium Cyprus Estonia* Finland* France Germany Greece Ireland Italy Luxembourg* Malta* Netherlands Portugal Slovakia* Slovenia* Spain Total euro US UK Japan Hungary Poland Turkey Estonia Latvia Lithuania

2008

2009

2010

2011

-0.9 -1.0 0.9 -2.9 4.4 -3.3 -0.1 -9.8 -7.4 -2.7 3.2 -4.6 0.5 -3.7 -2.1 -1.9 -4.5 -2.1 -6.6 -5.1 -2.2 -3.7 -3.7 -2.2 -2.9 -4.2 -3.3

-4.1 -5.6 -6.1 -2.0 -2.5 -7.5 -3.1 -15.6 -13.9 -5.5 -0.8 -3.7 -5.6 -10.2 -8.0 -6.2 -11.2 -6.4 -11.6 -11.5 -8.7 -4.6 -7.3 -6.7 -2.0 -9.7 -9.5

-4.5 -3.8 -5.3 0.2 -2.5 -7.1 -4.1 -10.7 -30.8 -4.5 -0.9 -3.6 -5.1 -9.8 -7.7 -5.9 -9.7 -6.2 -10.7 -10.2 -8.1 -4.2 -7.8 -3.9 0.2 -8.3 -7.0

-2.5 -3.7 -6.3 1.2 -0.8 -5.3 -0.8 -9.4 -13.4 -3.7 -0.2 -2.8 -4.5 -4.4 -5.1 -6.4 -9.4 -4.2 -9.9 -7.8 -8.9 3.6 -5.6 -1.0 0.3 -4.5 -5.3

Gross government debt ratio (% GDP)

2012 E 2013 F 2014 F 2015 F -2.5 -3.9 -6.3 -0.2 -1.7 -4.8 0.2 -6.2 -7.6 -3.0 -1.9 -3.0 -4.1 -6.4 -4.9 -3.2 -10.6 -3.6 -9.4 -6.4 -8.8 -2.9 -2.9 -2.0 -2.3 -2.9 -3.0

-2.4 -2.7 -4.5 0.4 -2.0 -3.7 0.0 -4.1 -7.4 -3.1 -1.0 -2.9 -3.6 -6.0 -3.2 -6.9 -6.2 -2.8 -7.7 -6.0 -8.6 -3.0 -2.4 -3.0 -0.7 -3.2 -3.4

-1.8 -2.1 -3.5 0.4 -1.3 -3.2 0.3 -3.1 -4.5 -2.3 -1.3 -2.9 -2.9 -4.4 -3.0 -4.3 -5.3 -2.2 -6.8 -5.8 -7.5 -3.0 -1.9 -3.5

-1.3 -0.7 -2.5 0.3 -0.7 -2.4 0.3 -2.3 -2.3 -2.0 -2.5 -2.8 -2.1 -2.9 -2.9 -4.1 -3.8 -1.5 -6.5 -4.9 -6.9 -3.0 -1.4 -3.5

Note: *Forecasts by European Commission. Last update: 28 June 2013. Source: Haver, Barclays Research

30

2008

2009

2010

2011

64 89 49 5 34 68 67 113 45 106 14 61 59 72 28 22 40 70.2 73 52 174 73 47 40 5 20 16

69 96 59 7 44 79 75 130 65 116 15 66 61 84 36 35 54 80 90 68 194 80 51 45 7 37 29

72 96 61 7 49 82 83 148 92 119 19 67 63 94 41 39 62 85 98 79 200 81 55 42 7 45 38

73 98 71 6 49 86 81 171 106 121 18 70 66 108 43 47 69 87 103 85 213 77 57 40 6 45 38

2012 E 2013 F 2014 F 2015 F 73 100 86 8 53 89 82 162 118 127 21 73 71 124 52 53 84 93 107 92 217 72 56 40 6 45 39

73 101 104 10 57 91 80 173 123 132 23 73 76 129 55 69 91 95 110 94 222 71 55 40 5 47 39

72 101 110 9 58 92 78 169 122 133 26 73 77 129 56 72 96 95 112 98 222 69 53 39

71 98 105 9 59 92 75 162 119 132 29 73 77 129 57 74 98 94 113 99 226 67 51 38

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Important Disclosures (continued) This publication has been prepared by the Corporate and Investment Banking division of Barclays Bank PLC and/or one or more of its affiliates (collectively and each individually, "Barclays"). It has been issued by one or more Barclays legal entities within its Corporate and Investment Banking division as provided below. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients. Prices shown are indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument.

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Disclaimer Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.

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Accordingly, you should seek advice based on your particular circumstances from an independent tax advisor. Š Copyright Barclays Bank PLC (2013). All rights reserved. No part of this publication may be reproduced in any manner without the prior written permission of Barclays.

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