Impact of Eurozone Sovereign Debt Crisis on the U.S.

IMPACT OF EUROZONE SOVEREIGN DEBT CRISIS ON THE U.S. DR. RAJEEV DHAWAN DIRECTOR Roundtable Discussion at the joint conference of GIC and Banque De France in Paris • March 27, 2012

Some Possible Transmission Channels 1. Credit/Banking • •

Capital market freeze in the U.S. aka bank runs Reduced asset buying by Europeans, distress sales by them impacts US property markets (esp. Office and Industrial)

2. Product Demand • •

Trade disruptions esp. U.S. exports Lack of European bank credit reduces U.S. imports that implies less future demand for U.S. products

3. U.S. Sovereign Debt •

Makes us the “Cleanest Dirty Shirt in the Laundry Basket”

4. Indirect aka General Equilibrium Effects • •

China and emerging market slowdown impacts N. European capital goods exports, and adds to European recession woes Ongoing oil shock gets worse with the impending showdown with Iran

2011 U.S. International Trade Exports ($ Millions)

% of Total

Imports ($ Millions)

% of Total

1,480,665

‐

2,206,956

‐

North America

478,433

32.3%

579,616

26.3%

European Union

268,635

18.1%

367,799

16.7%

Germany

49,134

3.3%

98,401

4.5%

United Kingdom

55,964

3.8%

51,176

2.3%

France

27,844

1.9%

39,983

1.8%

PIGS *

20,656.8

1.4%

53,653.3

2.4%

Italy

15,991

1.1%

33,968

1.5%

China

103,879

7.0%

399,335

18.1%

Japan

66,168

4.5%

128,811

5.8%

87,487.8

5.9%

107,331.8

4.9%

Country

Total

BRIT **

* PIGS – Portugal, Ireland, Greece, Spain; ** BRIT – Brazil, Russia, India, Turkey

Gauging a Portfolio’s Exposure to Europe % revenue from Europe

Company Electronic Arts

43.5%

Intercontinental Exch.

40.0%

Dow30 Revenue Growth and Job Gains (%, Y-O-Y)

20%

2500

Q4 Growth only 6%

15%

2000 1500

10%

DuPont

38.0%

Goodrich

33.0%

Kraft

32.0%

-5%

Pfizer

24.6%

-10%

General Electric

21.0%

-15%

Ford Motor

13.7%

-20%

ExxonMobil

10.0%

Source: USA Today , September 30, 2011,

(‘000 Jobs)

1000 500

5%

0 0% -500 -1000 -1500 -2000 -2500 -3000 2001 2003 2005 2007 09q1 09q3 10q1 10q3 11q1 11q3

DOW 30 (Left)

Private Job Gains (Right)

Impact on U.S. Sovereign Debt Market China’s Trade Surplus 350 300 250 200 150

$ Billions

100 50 0 ‐50

1990

1993

1996

1999

2002

2005

2008

2011

Destination of Iranian Oil Exports % of Total China India Japan South Korea Turkey Spain Italy Greece France Others 0

5

10

15

Source: Wall Street Journal, January 6, 2012

20

25

GDP Forecast For the U.S. 2012

Base Case

No Euro Crisis

No China Slowdown

No Oil Shock

Potential Growth

I

1.5

1.9

2.1

2.5

3.0

II

1.5

2.0

2.3

2.6

3.0

III

1.6

1.8

2.2

2.7

3.0

IV

1.9

2.0

2.3

2.7

3.0

I

2.1

2.1

2.4

2.7

3.0

II

2.2

2.2

2.3

2.7

3.0

III

2.4

2.4

2.5

2.8

3.0

IV

2.6

2.8

2.8

3.0

3.0

2013

Special Thanks to the Center’s Executive Sponsors Carl R. Zwerner Chair of Family Owned Businesses

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