ireland sov crisis nov 2010

8/8/2019 Ireland Sov Crisis Nov 2010

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Ireland:Blurring the Lines between Banking & Sovereign Risk

November 2010

Assessing the Implications of Sovereign Crisis 2.0 on U.S. Capital Markets

Tom Joyce

Debt Capital Markets Strategy

(212) 250 - 8754

Javier Guzman

Debt Capital Markets Strategy

(212) 250 - 3464

Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and securities activities

in the United States.

[email protected] [email protected]


2/48

Irish banks will become significantly smaller than they have in the past, so that they can

We have to fund ourselves as a state with senior debt. And other banks have to fund

.

~ Brian Cowen, Irish Prime Minister (Nov 21, 2010)

themselves with senior debt. You cannot send out a message in an economy like Ireland that

senior debt can be dishonored. We're far too dependent on international investment."~ Brian Lenihan, Irish Finance Minister (Sept 29, 2010)

There may be a contradiction between the interests of the financial world and the interests ofthe political world. We cannot keep explaining to our voters and our citizens why the taxpayershould bear the cost of certain risks and not those people who have earned a lot of moneyfrom taking those risks. ~ Angela Merkel, German Chancellor (Nov 11, 2010)

"Investors must share the cost of sovereign debt restructuring. All stake holders mustparticipate in the gains and losses of any particular situation.

~ Christine Lagarde, French Finance Minister (Nov 10, 2010)

2

What is better than to sit at the end of the day and drink wine with friends, or substitutes forfriends. ~ James Joyce, Irish author (1882 1941)


3/48

Contents

1. Introduction

2. The Irish Crisis

A. The Bankin S stem

B. The Sovereign

3. Potential Solutions

4. Potential U.S. Capital Markets Implications


4/48

Section 1

n ro uc on


5/48

Key Considerations in Sovereign Risk Analysis

Too often, sovereignrisk analysis focuses

narrowly on theabsolute amount of

government debt, andthe liquidity profile of

the soverei n

Key Factors Critical Questions

Total public sector debt Size vis--vis the economy? Trajectory?

Total private sector debt Distribution across financial sector, corporate sector, and

However, a number ofother critical factorsmust also be

considered

at the consumer level?

Debt ownership profile Foreign ownership percentage? Investor profile?

Dependence on capitalmarkets / li uidit rofile

Reliance on international capital markets? Liquidity? Size and stren th of domestic bond market if an ?

Confidence with investors Reputation issues, if any, on quality of data? Historical track record with key government statistics?

Ability to devalue currency Extent of power over own currency?

Ireland performsvery strongly on

some of thesemetrics (liquidit ,

Reserve currency status Is the sovereign a significant global reserve currency? Are their technical reasons for strong demand even if

fundamentals have some weaknesses?

Competitiveness of theeconomy

Flexibility and competitiveness? Structural issues? Ability of economy to grow from under high debt levels?

competitiveness ofthe economy)

and less so onothers (dependence

on international

Ability to deliver on fiscalausterity programs

Social stability and strength of political institutions? Strength and will of government coalition?

Strength of banking system Transparency? Funding access? Capitalization? Liquidity?

capital markets,strength of banking

system)

Assumption of bank sectorliabilities by Government

Size and timing of sovereign exposure to bank liabilities? Transparency of the exposure?


6/48

Understanding the Irish Sovereign Crisis

Bankin Crisis Soverei n Crisis Potential Solutionscrisis and

sovereign crisishave effectively

converged,making the two

(6 Key Issues)

1. The Irish bankingsystem is too big

(5 Key Issues)

1. 2010 fiscal deficit of 32%(12.9% not including bankrescues)

(5 Key Steps)

1. EUR 80-90 billion fromthe EFSF/IMF/EFSM(subject to change)

indistinguishable

Whereas Greecessovereign crisis

was driven by an

2. Sharp asset and creditquality deterioration

3. Significant governmentcapital injections

.94% (~70% on net basis)

3. Strained access to capitalmarkets

. cce era on o scaadjustment program

3. Continued ECB support(bond purchases and bank

Governmentsector (and a

liquidity crisis),

the heart ofIrelands

(EUR 45 billion)

4. Significant bankliability guarantees

(EUR 147 billion)

4. Contagion to Portugal,Spain and Italy

qu ty

4. Clarity on the EUsplanned Orderly

Restructuring Mechanism5. Growth from Irelands

700

sovere gn e tcrisis is more

closely linked tothe Statesdecision to

directly assume

.policy (NAMA)crystallized losses

6. Exceptionally highdependence on Central

.financial system

competitive economy

300

400

500

600significantfinancial sectorliabilities

10 Year Irish Government Bond Spreads to Germany

2008 2009 2009 2010

bps

0

100

200

Jan08 Mar08 May08 Jul08 Se p08 Nov08 Jan09 Mar09 May09 Jul09 Se p09 Nov09 Jan10 Mar10 May10 Jul10 Se p10 Nov10

Source: Bloomberg


7/48

Escalation of the Irish Crisis Since October 29

9

2yrYield 4yrYield 10yrYield

r s overnmen on e s c o er , resenpublic discussionamong European

leaders sinceOctober 29

regarding the

Peak: November 11

7

8

potential losses for

bondholders hasbeen a primary

driver of thewidening in Irish

October 29

5

6%

overnment onyields

Uncertainty as to

the likelihood andtiming of an EFSF

4

bailout has alsobeen a critical

factor

1

Oct

4

Oct

7

Oct

10

Oct

13

Oct

16

Oct

19

Oct

22

Oct

25

Oct

28

Oct

31

Oct

3

Nov

6

Nov

9

Nov

12

Nov

15

Nov

October 29, 2010

7

European Union leaders endorse idea of linking bondholder losses to future bailouts

November 12, 2010 EU leaders forced to clarify at G-20 meetings that existing bondholders will be protected

Source: Bloomberg


8/48

Escalation of the Irish Crisis Since October 29

The Irish crisis has

Dates Details

escalated rapidlysince October 29,

when GermanChancellor Merkel

and FrenchPresident Sarkoz

October 29 German Chancellor Angela Markel proposes orderly restructuring mechanismrequiring bond holders to take haircuts in the event of a sovereign crisis Investors immediately responded by re-pricing sovereign default risk

November 4 Irish Finance Minister Brian Lenihan announces changes to allocate EUR 6 bn ofthe 4- ear EUR 15 bn fiscal lan to 2011

endorsed the

possibility of bondholder losses onfuture bailouts

November 9 German Finance Minister Wolfgang Schaueble discloses some detail onGermanys 2-tier orderly resolution crisis mechanism (with bondholder losses)

November 10 French Finance Minister Christine Lagarde publicly supports Germanys proposal

later clarified onNovember 12th

Irelands bank liability guarantee program (ELG) extended to June 2011

November 11 Clearinghouse LCH Clearnet increases margin requirements for customers

trading Irish bonds (raised again in following week) Irish soverei n debt markets s ike. The 10 ear ield reaches record levels of 9%

Key Market Dates

and Irish CDS widens above 700 bps

November 12 Joint statement by France, Germany, Italy, Spain, and UK at G-20 Summitconfirming that orderly restructuring will not require existing bond holderhaircuts for debt issued prior to 2013 (investor concerns eased)

Oct. 29 / Nov. 11:Record sell-off inIrish bonds andCDS

November 16 Sharp global sell-off across risk asset classes as Ireland refuses initial EU/ IMF/ECB bailout efforts at EU Finance Minister meetings in Brussels Declines in global equities, HY bonds, commodities, and currencies

November 21 Ireland finall a rees to acce t bailout from EU and IMF details to be ne otiated

.

rally as worries overrestructuring plandissipate

Nov. 16: Global

8

in subsequent weeks)mar e se -o asIreland initiallyrefuses bailout


9/48

Assessing the Magnitude of Ireland

Country %ofEuro 16 %ofEuro 27

Germany 27.4% 20.5%

France 21.2% 15.9%

Ital 16.9% 12.6%

e a ve conomy ze

Population: 4.6 million

GDP: EUR 156.1 billion

ey ac s on re an s o ov

Spain 11.4% 8.5%

Netherlands 6.4% 4.8%Belgium 3.8% 2.9%

Austria 3.0% 2.3%

Greece 2.5% 1.9%

GDP per capita: EUR 34,907

Finland 1.9% 1.4%

Portugal 1.9% 1.4%

Ireland 1.7% 1.3%

Slovakia 0.7% 0.5%Luxembourg 0.4% 0.3%

.

Sovereign debt outstanding: EUR 146.2 billion

Slovenia 0.4% 0.3%

Cyprus 0.2% 0.1%

Malta 0.1% 0.0%

UK NA 14.0%

Sweden NA 2.8%

op an s o a asse s: ~ on

Top 6 banks total assets / GDP: ~ 3.33x

Poland NA 2.7%Denmark NA 1.9%

Czech Republic NA 1.2%

Romania NA 1.0%

Hungary NA 0.8%

Total bank bailout (Nov 2010): ~ EUR 45 billion

Bank liability guarantees (Nov 2010): ~ EUR 147 billion

Bulgaria NA 0.3%

Lithuania NA 0.2%

Latvia NA 0.1%Estonia NA 0.1%9

Assets transferred to NAMA (bad bank): EUR 53 billion (nominal)

Source: Irish Central Bank. Deutsche Bank Global Markets Research, IMF (October 2010) , Bloomberg, Irish Times (October 2010). EuroStat.


10/48

Reason for Optimism: Irelands Competitive Economy

Reasons for O timism on Irelands RecoverWith a properlystructured bank

sector bailout,Irelands economyoffers a number of

compelling reasons

Consideration Description

Fiscal adjustmenttrack record

Proven track record: Ireland moved early on its fiscal adjustment (begannearly 2 years ago); bodes well for forthcoming EUR 16 billion adjustment

to be optimisticabout its fiscal

turnaround

Irelands economyrew annuall at a

Bank sector loan

clean-up

On target to have removed EUR 73 billion of bad loans from bank balance

sheets via NAMA; only EU country to have moved early on such an initiativePolitical / socialstability

Though current coalition Government has narrow majority, Ireland has strongand stable political institutions

rate of 6.5% from

1990 to 2007

and the economydoubled in size

Highly educated &flexible workforce

Youngest labor force in Europe (36% under age 25); English-speaking Education system ranks 7th globally for higher education Education expenditures over last 10 years increased 10% per year on

average, versus 3% in EU

ending 2006

Most importantly,Irelands foreign

direct investment

,

Strong exportengine

EUR 39 billion balance of trade surplus in 2009, and EUR 28 billion as ofAugust 2010

Highest in EU on a per capita basis

Stron Forei n 5x reater than the OECD avera e

very well during thecrisis

Direct Investment EUR 139 and 169 billion in 2008 and 2009, respectively IDA Ireland, agency targeting FDI, says 2010 has been the best in 7 years

Lowest corporatetax rates in Europe

12.5% corporate tax rate is lowest among major European economies 25% R&D tax credit

10Source: Deutsche Bank Global Markets Research.IMF. IDA Ireland: Vital Statistics (Oct 2010), Central Statistics Office(October 2010). Credit Sights.

Strong GDPoutlook

Only one of Greece, Portugal and Spain with positive 2011 GDP growthforecast (DB estimate of +1.2% growth in 2011)


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Reasons for Concern: Contagion

structured packagefor Ireland, the risk

of contagion isstill the greatest

area of concern in

ey reas o oncern or on ag on

How much further can bank sector losses deteriorate?

Will the country continue to deliver on its strong two year track record forfiscal austerit ro rams?

markets

Thefundamentals of

Greece, Ireland,

Ability to deliver on its fiscal austerity programs? Is the economy competitive enough to eventually grow out from underneath

its debt levels?

ortuga , pa n,and Italy are very

different, butcontagion risk is

still high

Will Portugal be able to improve upon its comparatively poor track record onfiscal austerity (vis--vis other peripherals in 2010)?

Is the economy competitive enough to eventually grow out from underneaths e eve s ow o ump-s ar arge y s a e econom c grow

Potential for bank sector losses to accelerate significantly? Transparencyand market confidence?

Has differentiated itself on fiscal olic direction but how to um -start

Key Market Concern

In a worst case

largely stalled economic growth? 20% unemployment?scenar o, are pa nand Italy effectivelytoo big to fail?

Ability to deliver on fiscal austerity programs?

Ability to continue to tap capital markets in order to meet its massive 2011

11Source: Deutsche Bank Global Markets Research.

2012 funding needs?


12/48

Key Upcoming Dates

upcoming events

will be important toproperly assessing

the path ahead

Key Upcoming Dates

Dates Details

Weeks of Nov 22 / 29 Decisions around current Irish negotiations with EU, IMF and ECB?

November 25 Irish bi-Elections (Donegal)

November 30 Deadline for the approval of the Portuguese 2011 budget

ecem er ounc ee ngs: ec s ons on qu y reg me expec e

December 7 Irish budget meetings Failure to approve the budget would effectively result in a no confidence vote in

the Government, and could force a national election

Dec. 16 17 EU Council Meetings: Draft text for the orderly restructuring mechanism due (criticalfocus area for international bondholders)

December 23 Last ECB 6-month and 12-month LTROs expire

December 28 Final ECB weekly MRO tender of the year

January 12, 2011 Portuguese presidential election

12

2011 EU regulators plan to repeat the EU bank stress tests of July 2010

Source: Deutsche Bank Global Markets Research. Mark Wall. Thomas Mayer. Gilles Moec.


13/48

Section 2

e r s r s s


14/48

Section A

e an ng ys em


15/48

The Irish Banking Crisis: 6 Key Issues

ey ssues

The Irish Banking System is Too Big

Top 6 banks assets represent 3.33x GDPIssue # 1

Shar bank asset and credit ualit deterioration:

crisis

perspective, adefining momentof the Irish crisis,

in retrospect,

Issue # 2- Phase 1: Construction and commercial real estate loan losses

- Phase 2: Residential mortgage losses

Significant government capital injections into banking system:

may e race othe decision by

the IrishGovernment to

assumesignificant

Issue # 4

- EUR 45 billion to date

- Significantly more expected in EU / IMF bailout underway

Significant banking sector liability guarantees-

liabilities from anoversized

banking sector

Issue # 5

,

Irelands Bad Bank policy (NAMA) crystallized losses

Ireland is among the few countries to have actually removed toxic loansfrom the balance sheets of its banking system

Issue # 6 Exceptionally high dependence on Central Bank funding

Driven by deposit outflows and limited access to capital markets

Size of the program (EUR 73 billion) and discounts (~58%) have resultedin massive bank sector capital injections

15

Record ECB funding: EUR 130 billion (~30% of all ECB funding)

Record Irish Central Bank funding: EUR 20 billion of exceptionalliquidity extended to Irish banks in Sept and Oct (in addition to ECB funds)


16/48

Issue # 1: The Irish Banking System is Too Big

The size of theIrish banking

system relative toits economy has

been a core issuein this crisis

Irelands GDP EUR 156 billion

Irelands Top 6 Banks Assets ~ EUR 520 billion

~ .

Estimated Irish Banking System Crisis Losses

(Includes Foreign-Owned Banks in Ireland)

EUR 85 billion

Estimated Bank Losses / GDP ~ 50%

By contrast, thenearly 8,000banks in theUnited Statesrepresent approx0.85x (or 85%) ofU.S. GDP

Bank of Ireland Allied Irish Banks Anglo Irish Bank

Government Aid Received EUR 3.5 bn EUR 3.5 bn EUR 23 bn

Government Stake 36% Over 90% 100% Nationalized

The banks were too big a problem for the country. I accept that.

(currently 18% but set to rise)

Note: Irelands 6 largest banks used as a proxy for the Irish banking system (Allied Irish Banks, Bank of Ireland,Anglo Irish, Permanent TSB, Irish Nationwide and Ulster Bank). Life insurance assets not included.

Source: Central Bank of Ireland.

~ Brian Lenihan, Irish Finance Minister (on Nov 19, 2010)

16


17/48

Issue # 2: Asset and Credit Quality Deterioration

-

The seniorunsecuredratings of

Irelands 3 largest

Phase 1: Construction and developer losses

Commercial real estate prices declined over

Phase 2: Residential mortgage losses

Over 40,000 borrowers (5% of Irish mortgage

public policy

decisions of theIrish Government,

for now, topreserve the

Primary driver of EUR 45 billion in bank capitalinjections to date

Sept 30, 2010); represents EUR 7.8 billion of

mortgages 25% of outstanding home loans (nearly 200k

mortgages) expected to be underwater by2011; some estimates as high as 350k

sanc y o ebank senior debtmarket (and notmandate senior

bondholderlosses)

Irish residential mortgage debt soared toEUR113 billion in March 2010 from EUR 49billion in 2003

1000

1200

AngloIrish AIB BoI

A1 / A- (Neg) / A- (Neg)

200

400

600

bpsA1 / BBB+ (Neg) / A- (Neg)

17Source: The Irish Times (November 2010), Wall Street Journal (November 2010). DB Global Markets Research. CreditSights.

Oct08

Nov

08

Dec

08

Jan

09

Feb

09

Mar09

Apr09

May

09

Jun

09

Jul09

Aug

09

Sep

09

Oct09

Nov

09

Dec

09

Jan

10

Feb

10

Mar10

Apr10

May

10

Jun

10

Jul10

Aug

10

Sep

10

Oct10

Nov

10

-


18/48

Issue # 3: Significant Government Capital Injections

Total ca ital in ections to date: EUR 45 billion ~ 30% of GDPbillion of capital

injections intoIrish banks dwarfs

the planned EUR15 billion fiscal

- Anglo Irish Bank: EUR 29 billion recapitalization to date (split into asset recovery and fundingbanks with 10-15 year workout)

- Bank of Ireland: Recapitalized through EUR 3.4 billion equity offering earlier this year (throughwhich Irelands national pension fund (NPRF) converted EUR 1.7 billion preferred to equity)

a us men , anhas exceeded the

fiscal capacity ofthe State (over

30% of GDP)

- Allied Irish: Total capital need of EUR 10.4 billion; approx EUR 3.5 raised, and remainder well

underway through asset sales, and potential share offerings and conversions to / with NPRF

- Irish Nationwide: EUR 5.4 billion re-capitalized; no viable future as independent entity

-

- Irish Life & Permanent: has not required any government support

Gross Fiscal Costs of Banking Crises Bank Bail-outs (% of Home Country GDP)

Thailand

Turkey

SouthKorea

ng o r s an 11.26%

AngloIrish

RBS

In total, Ireland hasspent ~EUR 45 billion,

% of GDP

1997

2000

1997

~18%

Ireland

Uruguay

Malaysia

UBS

or ~30% of GDP,rescuing its banks2008

2002

1991

0 10 20 30 40 50

apan

Finland

Source: Irish Central Bank. Wall Street Journal. Financial Times. DB Global Markets Research.

180% 2% 4% 6% 8% 10% 12%

Citigroup1997

1991


19/48

Issue # 4: Significant Bank Liability Guarantees

verv ew

Name

Irelands decision inSeptember 2010 to

extend over EUR 30billion in bank debt

September 30, 2008: Originally introduced as CIFS (Credit InstitutionsFinancial Support Scheme)

December 9, 2009: Changed to ELG (Eligible Liabilities Guarantee)

Expiry Date

guaran ees was apivotal moment in

the Irish crisis

June 2011:- Originally due to expire on September 29, 2010

- First extension to December 31, 2010

Size

- econ ex ens on o une

- Subject to EU review every 6 months

EUR 147 billion

CoveredLiabilities

New senior bonds with maturities up to 5 years

Excludes dated subordinated debt (as of Sept 29, 2010)

EUR 31 billion bank debt issuance

Corporate and retail deposits Short term bank liabilities and debt securities

19Source: Irish Finance Ministry. Financial Times. Wall Street Journal.


20/48

Issue # 5: Bad Bank (NAMA) Crystallized Losses

Ireland was oneof the only

countries duringthe financial

Purchases to Date

Established: December 2009

Program Overview

Target Size: EUR 73 billion (nominal)

quickly around

the concept of abad bank toremove the toxic

loans from its

Chief Executive: Brendan McDonagh

Approval / Timing: by European Commission;all loans must be transferred by Feb 2011

Purpose: Bring stability to the banking system

Expected average discount rate: 58%

Purchases to Date: EUR 53 billion (nominal)

an a ancesheets

Such early action

to cleanse theIrish bank

by removing impaired loans from balance sheetsof individual banks

Domicile of Loans: 33% outside Ireland (6 %

Northern Ireland, 21% UK)

The creation of Irelands bad bank (NAMA)has allowed Ireland to crystallize losses in itsbanking sector much more quickly, and

transparently, than most other global banking

balance sheetswill pay benefits

through therecovery

un ng: oans pa or w overnmenguaranteed securities (NAMA bonds)

Impact to Sovereign Debt: Treated as off-balance sheet and not included in EuroStat debtmetrics

sys ems mpac e y e nanc a cr s s

The United States, for example, pursued asimilar initiative for toxic bank loans in 2009,called the PPIP loan program, but ultimatelyabandoned the lanned olic

20Source: National Asset Management Agency

If the discount is too light, the banks are enriched as a result. If the discount is too deep,the banks become illiquid. A balance has to be struck.

Brian Lenihan, Irish Finance Minister


21/48

Issue # 6: High Dependence on Central Bank Funding

Record ECB borrowings (as of Oct. 2010): EUR 130 billion

Irish bank borrowings account for ~30% of total ECB loans (EUR 440 bn)

ECB currently funding ~20% of Irish bank assets

Irish banks havemade record useof both ECB and

Irish Central bankfunding

ey ssues

Figures includefunding for bothIrish and foreign

Equal to ~ 83% of Irish GDP

Driven by deposit outflows and limited access to capital markets

Record Irish Central Bank borrowings: EUR 20 billion of exceptional liquidity extended toIrish banks in Sept and Oct (in addition to ECB funds)

The accelerationof this need has

been driven by anincrease in

deposit outflows,and limited access

Ireland

130

to private capitalmarkets funding Irish Bank ECB Borrowings

(Jan. Oct. 2010)

European Peripheral Euro-Zone Share of GDP

vs. Share of ECB Funding

Shareof

GDP Share

of

FundingTotal ECB loans: EUR 440 bn

110

120

Rbn

Ireland

Portugal

~

80

90

E

U

Greece

S ain

70

Jan

10

Feb

10

Mar

10

Apr

10

May

10

Jun

10

Jul

10

Aug

10

Sep

10

Oct

10

21

Source: Central Bank of Ireland, Central Bank of Spain, Central Bank of Greece, Central Bank of Portugal, Wall Street Journal (Nov. 2010)

0% 5% 10% 15% 20% 25%


22/48

Section B

e overe gn


23/48

Irelands Sovereign Crisis: 5 Key Issues

An accurate ey ssues

2010E Fiscal deficit of 32% (12.9% excluding bank rescues)

2011 Target: Under 10%

Issue # 1

assessment of theIrish States debt

burden necessarilyrequires more

certainty around

Issue # 2 2010E Gross debt / GDP of 94% (~ 70% on a net debt basis) Ireland has over EUR 45 billion in cash (EUR 22 billion + SWF assets)

Gross and net debt / GDP projected to peak in 2013

Irish banking

system

Although Ireland ispre-funded

Issue # 3 Highly strained access to capital markets

Sovereign pre-funded through mid 2011

Suspended remaining 2010 Government bond auctions on Sept 30

- ,its ability to accessthe capital markets

in early 2011remains very

uncertain

Issue # 4

Market access and pricing effectively prohibitive at this time

Contagion to Portugal, Spain and Italy

The fundamentals of Ireland, Portugal, Spain and Italy are very different

From an EU policyperspective,

containing thecontagion from

Spain and Italy is a

Issue # 5

ar e s expec or uga o nee un s soon a er re an

Contagion to Spain and Italy would be a game changer

Contagion to the European financial system

primary goal

23

UK banks have most exposure, followed by Germany and France

Significant ECB exposure as wellSource: DB Global Markets Research. Irelands National Treasury Management Agency.


24/48

Issue #1: 32% Fiscal Deficit (12.9% Excl. Bank Rescues)

Overview of Irelands Twin DeficitsExcludin bank

2010E Fiscal Deficit (% of GDP) 2010E Current Account Deficit (% of GDP)

2010E Including Bank Rescues: (- 32%)

bailouts, Irelands2010E fiscal deficit

is still high at12.9%, but is

projected to come 2010E Current Account: (-1.0%)

2010E Excluding Bank Rescues: (-12.9%)

Irish Government Fiscal Austerity Plan: 4years; EUR15 billion; EUR 6 billion front-loaded to 2011

2011, targeting 3%

by 2014

2011E Current Account: 0.0%

2010 Balance of Payments: EUR 28 billionsurplus as of August 2010

=

-3

: - .

2014E Fiscal Deficit: (-3.0%)

6

8

+ Balance of payments (exports, less imports)+ Net factor income (interest; dividends)+ Net transfer payments (i.e., foreign aid)

-13

-8

%o

fGDP

-2

0

2

4

ofGDP

3% limit set byEU MaastrichtTreaty

-28

-23

-

-8

-6

-4

%

Excluding bank rescues

Including bank rescues Ireland had a EUR 28 billionbalance of payment surplusas of August 2010

-33

24

-12

-32%



25/48

Issue #2: Irish Gross Debt to GDP at 94%

verv ew

Irish government gross debt stands at EUR146.8 bn or 94% of GDP

Approximately 70% on a net debt basis

Ireland has over EUR 45 billion in cash (EUR 22 billion + SWF assets)

Irelands debt to GDP(gross and net) are

projected to peakin 2013

The current debt levels, and lack of clarity around Irelands bank sector, have createdsignificant solvency concerns with investors

Liquidity is not a primary concern as was the case with Greece (pre-funded through mid 2011)

2010E Peripheral Total Debt (EUR bn) 2010E Peripheral Total Debt as % of GDP

Spain Greece

Greece Ireland 94%

Ireland PortugalEUR 146.8 bn

250 200 400 600 800

Portugal

0% 50% 100% 150%

Spain

Source: IMF (October 2010)


26/48

Issue #3: Highly Strained Access to Capital Markets

7

8

9

,-funded through

mid 2011 (with ~EUR 46 billion in

liquid assets), butthe primary

Sept 30: Irish government suspendsbond sales for the remainder of 2010

4

5

6

the Irish debt crisis

are not liquiditybased %

15

20

at er, t esolvency of the

banking system,and the State itself,

has been theprimary focus of

Irelands Favorable Maturity Profile is Not the Primary Focus of Investors

5

10

investors, and theprimary obstacle to

capital marketsaccess E

URbn

0

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

In our super-cycle era of Western market leverage, we need capital markets to be fully functioning 24 / 7. Any

26

Source: Bloomberg. Irelands National Treasury Management Agency

.most refinancing are Governments.

~ Jim Reid, Deutsche Bank Macro Strategist (April, 2010)


27/48

Issue #4: Contagion to Portugal, Spain & Italy

Peri heral 10 r Credit S reads vs. German Peri heral 5 r CDS S reads(Oct. 1, 2010 Present)

(Oct. 1, 2010 Present)

Irish 10y spread over Germany reachedrecord levels of 646 bps (and bond yields9.1%) on November 11, 2010

Irish 5y CDS reached record levels of 595bps on November 11, 2010

The risks posed byGreece, Ireland

and Portugal(combined 5% of

EU) can be wellabsorbed by EU

1000

1200

a y reece or uga pa n

1000

1200

a y reece or uga pa nrescue

mechanisms

however,contagion to Spainand Ital over 20%

600

800

600

800

b

ps b

ps

of EU) would raisesignificant

questions on boththe willingness and

ability of the EU to

0

200

400

0

200

400

To be sure, theEFSF would not be

sufficientlyadequate in size

1O

ct

8O

ct

15

O

ct

22

O

ct

29

O

ct

5N

ov

12

Nov

1Oct

8Oct

15

Oct

22

Oct

29

Oct

5No

v

12

No

v

(and some insistthe same is true for

Spain)

The Irish say they are not Greece. The Portuguese say they are not Irish. The Spanish

27Source: Bloomberg

.what Italy is not.

~ Wolfgang Munchau, Editorialist, The Financial Times(Nov 22, 2010)


28/48

Issue #4: Contagion to Portugal, Spain & Italy

expect Portugal

will have to followGreece and Irelandin tapping EU / IMF

funds

2010E Portugal Spain Italy

Spain has

positivelydifferentiated itself

on fiscal policy,but markets are

ons . , ,

% of EU Economy 1.4% 8.5% 12.6%

Unemployment Rate 10.7% 20% 8.7%

still very focusedon this risk

To be sure,

contagion of thecrisis to Spain and

2010 Sovereign Debt 142.2 667.2 1,843.6

2010 Debt / GDP 83.1% 63.5% 118.4%

2010 Fiscal Deficit -7.5% -9.0% -4.9%Italy would be a

watershed momentin the European

debt crisis

a ame-chan er

10 Yr Govt Yield(Nov 20, 2010)

6.7% 4.3% 4.7%

5 Year CDS(Nov 20, 2010)

416 bps 260 bps 181 bps

This containmenthas become theprimary focus ofthe EU and ECB

Key Questions:

Although the fundamentals of Portugal, Spain and Italy are very different from Ireland,how will the markets react in the weeks / months ahead?

28Source: Bloomberg as of November 20. DB Global Markets Research, IMF (October 2010), Portugal Finance Ministry, Spain Finance Ministry, ItalyFinance Ministry

In particular, how vulnerable are Spain and Italy to contagion? How would the Euro construct survive contagion to these two countries (over 20% of EU)?


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Issue #5: Contagion to European Financial System

Investors havebegun to pay much

closer attention on acountrys reliance

on internationalcapital markets for

omes c vs. ore gn o ngs o e y oun ry

Ireland heavily relies on foreign investors to finance government debt:

- A sovereigns dependency on international capital markets is a critical area of focus in sovereign riskanalysis

funding

To this end, Irelandis one of the most

heavil reliant

- Japan, for example, has had significant sovereign debt levels for two decades but has largely

avoided a funding crisis because it has been able to finance its onerous debt levels domestically

Domestic Foreign

Irish Debt Holdings

countries on foreignholdings of itspublic debt (a

concern which the

EU / IMF bailout

Foreign holdingsDomestic holdings

%

28% 72%

mitigate)

A large part of Irishdebt is held by the

sector includingbanks, insurance

companies, andpension funds

29

Source: IMF: Fiscal Exit: From Strategy to Implementation, OECD


30/48

Ke Details To 20 Banks b Net Ex osure

Issue #5: Contagion to European Financial System

Bank sector exposure to the Irish crisiscan take many different forms:

Direct losses on loans, bonds and otherdebt issued

Similar to the Greececrisis, the European

banking system isthe primary source

Bank

1 RBS 4.3 bn

2 Allied Irish Banks 4.1 bn

Exposure

Losses at individual, corporate or sovereign

level Higher costs of capital

Less lendin activit

o con ag on n eIrish crisis

3 Bank or Ireland 1.2 bn

4 Credit Agricole 929 mm5 HSBC $816 mm

6 Danske Bank 655 mm

Lower profitability via economic impact7 BNP Paribas 571 mm

8 Group BPCE 491 mm

9 Societe Generale 453 mm

10 Banco BPI 408 mmForeign Banks Total Exposure to Irelandmm

12 Bank of Cyprus 356 mm

13 DZ Bank 310 mm

14 Postbank 300 mm

15 Norddeutsche Landesbank 274 mm

, ,

(US$ Billions)

UK

Germany

16 WestLB 244 mm17 WGZ Bank 244 mm

18 Caixa Gral. De Depositos 231 mm

19 Rabobank 222 mm

U.S.

France

Italy

Japan

30Source: Financial Times. Wall Street Journal. Bank of International Settlements.

20 SNS Bank 209 mm

0 50 100 150 200 250

Spain


31/48

DB European Peripheral Economic Forecast

ea(% Growth)

onsumer(% Growth)

Current Account(% of GDP)

sca a ance(% of GDP)

2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E

-0.5% 1.2% -1.5% 0.5% -1.0% 0.0% -29.2% -9.8%

-4.3% -2.7% 4.7% 1.7% -8.0% -7.0% -8.0% -7.6%

1.6% 0.0% 1.4% 1.5% -10.5% -8.0% -7.5% -6.0%

-0.5% 0.0% 1.6% 1.4% -5.0% -4.5% -9.0% -7.1%

31Source: Deutsche Bank Global Markets Research. Mark Wall. Thomas Mayer. Gilles Moec.


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Section 3

o en a o u ons


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Potential Solutions: 5 Key Steps

otent a o ut ons: ey teps

Step # 1:

EUR 80 90 billion from the EFSF / IMF / EFSM

For both the sovereign and bank sector

a o cap a mar e s nves ors wan

Transparency:

On bank sector losses (in stress-case scenario)

Consistency:

Step # 2:

Acceleration of Irelands EUR 15 billion fiscaladjustment

Credible support from opposition parties critical

On Government policy decisions, both nationally

and at the EU level Agreement among EU countries on path forward

Clarity:

Step # 3:

Continued ECB support

Sovereign bond purchases / bank liquidity

Ste # 4:

On the treatment of bondholders, currently and inthe future

Markets will re-price risk accordingly

Confidence:

EU creation of an Orderly Restructuring Mechanism

Clarity around treatment of bondholders, bothcurrently, and in the future

Step # 5:

On ability to deliver fiscal austerity measures

In commitment of opposition political parties, andsocial willingness to support

Certainty:

Growth from Irelands competitive economy Maintaining Irelands corporate tax rate of 12.5%, and

strong FDI flows, will be important to its growth outlook

On all of the above, as much as possible

33

There may be a contradiction between the interests of the financial world and the interests of the political world. We cannotkeep explaining to our voters and our citizens why the taxpayer should bear the cost of certain risks and not those people whohave earned a lot of money from taking those risks. ~ Angela Merkel, German Chancellor (Nov, 2010)


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Step # 1: EUR 80-90 billion from EFSF/ IMF/ EFSM

On Nov 21, IrelandsPrime Minister

and EU officialsindicated that

Ireland will in factapply for a bailout

Question What we do and dont know (as of Nov 21)?

What? Sunday, Nov 21: Irelands cabinet approves application for EU / IMF aid Negotiations on details should continue for several weeks

from the EuropeanUnion and IMF

To be sure,negotiations

underwa in Dublin

2 part bailout package expected (though details not finalized as of Nov 21):1. Sovereign: Funds for the Sovereign to cover 2011 2012 funding

2. Banks: Ireland pushing for contingency fund structure to recapitalize itsbanks (details to be determined by further stress testing of the system)

will continue overthe coming weeks

and be focused on acloser examination

of Irish bank balance

How much? EUR 80 90 billion expected (less than Greeces EUR 110 billion) Approximately 1/3 expected to come from the IMF

When? EU/ IMF/ ECB Assessment: Began in Dublin on Thurs, Nov 18

as well asresolving the

inherent conflict ofinterest between the

Application: On Nov 21, Irelands cabinet approves application for EU/ IMF aid

Negotiations on Conditionality: Likely to take weeks; structure of bankcontingent capital fund, and Irish corporate tax rate, will be a key focus

contain thecontagion, andIrelands desire to

maintain theindependence of its

Where? Review and negotiations underway in Dublin, Ireland

At the Irish Central Bank, Irelands bond agency, and the Finance Ministry

34

econom c po cy

Source: Deutsche Bank Global Markets Research. Public comments of key Irish and EU officials on Nov 21, 2010.

The European authorities have agreed to our request. The formal process of negotiation willnow commenceto be finalized shortly, within the next few weeks.

~ Brian Cowen, Irish Prime Minister (on Nov 21, 2010)


35/48


Sources of EU / IMF Rescue Funds EUR 750 billion / US 1 TrillionIn addition to

440 billion 250 billion

European Financial StabilityFacility (EFSF)

European FinancialStability Mechanism (EFSM)IMF Loans

60 billion

potential bilateral

loans from the UKand Sweden, the EU

has assembled aEUR 750 billion war

chest to address the

Source ofFundin

Self funding vehicle:

- AAA rated

IMF Expansion of pre-existing EU Balance of

EU sovereign crisis(over US $1 Trillion)

Approximately 1/3 of

- Will not pre-fund (as needed)

Guarantees from EU memberstates

UK not involved in funding

ayments ac tyfunded with EU bondissuance

Previously used in 2008

for Hungary, Latvia, andRomania

expected to come

from the IMF

However, use of the

UK is involved infunding

Terms EU Approval: Must have

unanimous support from all Subject to IMF

ne otiation and EU Approval: Only

ma orit needed not

significant portion of

the package couldbe viewed as critical

to its credibility inthe market

members

Maturity: 3-5 years (expected)

3 year Rate: 3m Euribor + 300bps

4-5 ear Rate: 3m Euribor +

conditionality

unanimous as for EFSF)

Requires unanimous EU

35

400 bps

Service Fee: +50 bps



36/48


Self-Funding vehicle:

Funding

Headquarters: Luxembourg

DetailsUse of the EFSF forthe Irish Crisis will

be important for itscredibility, and will

verv ew o e

- Executed by German Debt Office(DMO), but EFSF is issuer

- Guaranteed by member states

-

CEO: Klaus Regling

Operational: August 4, 2010

Ratings: AAA/ Aaa/ AAA

e y e wereceived by markets

No pre-funding (funds only upon request) Expiry: Later of June 30, 2013 (3 years),

or at latest maturity date of outstandingloans (up to 5 years)

Conditionality: Linked to strict policyTerms

billions

Germany 122.8

France 92.3

Guarantees

Guarantee: Over-collateralized; 20% inexcess of total funding volume

ECB eligible: Yes

Maturity limits: None (3 5 yearsexpected)

No currency limitations (EUR, US$, etc.)

Rates: Same as Greece

a y .

Spain 53.9

Netherlands 25.9

Belgium 15.7

Austria 12.6

Portu al 11.4

Approvals: Requires unanimous supportby participating countries - 3 years: 3m Euribor + 300 bps

- 5 years: 3m Euribor + 400 bps

Finland 8.1

Ireland 7.2

Slovakia 4.5

Slovenia 2.1

Luxemburg 1.1

36

Cyprus 0.9

Malta 0.4

Total 440.0

EFSF funds in place are sufficient to cover Ireland, Portugal and Spain, but not Italy The implications of Italy having to tap the EFSF would be devastating



37/48

Step # 2: Acceleration of Fiscal Adjustment

Details Planned Composition of Fiscal Adjustment

Ireland is in theprocess of

accelerating a veryaggressive (and IMF-

like) fiscaladjustment program

Nov. 4, 2010: Ireland Proposes further Fiscal Adjustment

Largely Mix (broadly Largely

Late November announcement expected

Inclusion in Dec 7 budget deadline

Subject to EU / IMF conditionality

that is impressivelyfront-loaded for 2011

Credible supportfrom opposition

olitical arties and

Deficit (2009) Expenditure-

based

equally-

based)

Revenue-

based

Ireland Greece

Japan India

High deficit(above 10% of

GDP)

Total Size:

Total Adjustment: EUR 15 billion over 4 years

Breakdown:

the broaderpopulation, will becritical to investor

reaction

UK

Portugal Russia

Canada

FranceMedium

- EUR 6bn in 2011 (front-loaded)

- EUR 9bn 2012-2015

Fiscal Targets:

announced plan, of

course, is nowsubject to EU / IMF

conditionality

Italy

Latvia

Lithuania

South Africa

deficit

(between 5%

and 10% of

GDP)

2011 fiscal deficit: Below 10% by 2011 (from12.9% currently, excluding bank rescues)

2014 fiscal deficit: Below 3% (as required byEUs Maastricht Treaty)

Turkey

Australia Mexico China

Germany

Korea

Low deficit

(below 5% of

GDP)

37

We can opt to do this adjustment or we can keep expressing ourselves through anger andthe denial of the problem.

Brian Lenihan, Irish Finance Minister

au ra a

Source: IMF: Fiscal Exit: From Strategy to Implementation


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Step # 3: Continued ECB Support

130

Continued ECBsupport is critical

to resolving theIrish and European

Overview

Continued ECB support is critical on both:

Irish Bank ECB Borrowings

(Jan. Oct. 2010)

Ireland bank funding

100

110

120sovereign debtcrisis

One of the keygoals of the EU/

IMF rescue

. ,

2. Bank sector liquidity, as needed

Sovereign debt purchases: sharplyreduced since June put recent pick-up in Irishbonds

EURbn

now accounts for~30% of ECB funding

70

80

90

n10

b10 r

10 r10 y10

n10

ul10 g

10p10

ct10

package, however,will be to reduce

Irelands banksector dependence

on ECB funding

Bank sector liquidity: ECB role has beenformidable, especially for Ireland (~30% of ECBtotal)

Key goal of EU / IMF bailout is toJ F

eM A M

Ju J A Se O

14000

16000

ECB Sovereign Debt Purchases Since May 10, 2010

Cumulative Total: EUR 65.1 bn

4000

6000

8000

10000

12000

EURMm

Recent pick-up in Irish bond purchases

0

2000

38Source: ECB


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Step # 4: Clarity on EUs Restructuring Mechanism

October 29, 2010: Germany presents a proposal of a 2 tier permanent debt crisis mechanism to beeffective by 2013:

- Phase 1: Fiscal austerity measures for EU countries struggling with fiscal targets

Clarity on thetreatment of

bondholders iscritical to well

functioning bondmarkets

ey ac s on e s r er y es ruc ur ng ec an sm

- Phase2: Private creditors would be subject to haircuts

November 12, 2010: Joint announcement at G-20 partially alleviating market concerns:- Mechanism will only apply to new debt issued after 2013

- No forced losses for existin bondholders

The uncertainty on

this topic betweenOctober 29th and

November 12th wasver disru tive to

December 15 16, 2010: Details of a future Orderly Restructuring Mechanism (applicable after2013) to be disclosed in the European Council meetings

markets

Investors willadjust and re-price

risk accordingly (as Pros and Cons of Orderly Restructuringprovided)

For now, theconfusion around

the details and

Pros Cons

Could potentially improve market confidence:

- Assures tax payers that creditors will bearrestructurin costs

Adverse selection:

- Restructuring premium would makerestructurin more ex ensive for countries tr in

new plan hascreated anoverhang issue in

the market

- Cheap pre-funding option for Ireland and Portugal- Proposes a more organized and standardized

restructuring process

Could potentially smoothen crisis situations by

to correct fiscal imbalances

- Fiscally mismanaged countries might opt to usethe mechanism as a cheaper restructuring option

Potential opposition from other governments

39

ma ng use o t e

- Less risk of lengthy litigation

- Flow of priority financing

Lack of clarity if not designed and executedwith consistency



40/48

Step # 5: Growth from Irelands Competitive Economy

uropean orpora e ax a es y oun ry

25

30

35

re an s os on n o a an ngs

Rank Competitiveness Ranking

# 1 For corporate taxes

Despite the crisis,Ireland still ranks

as one of the mostcompetitive

economies in theworld

Ireland: 12.5%EU Average: 23%

%

10

15

20# 4 For availability of skilled labor

# 4 For openness to new ideas

# 6 For labor productivity

To be sure,

maintaining itscompetitivenesswill be critical todeliverin on an

0

5

# 7 For availability of financial skills

# 7 For flexibility and adaptability of people

aggressive fiscalausterity program

Importantly,

Irelands foreign

DBs 2011E Euro Peripheral Real GDP Growth Estimates

1.2

0 00.5

1.0

1.5

(FDI) has held up

very well during thecrisis

DB has forecasted

%

2.5

2.0

1.5

1.00.5

0.0

growth for Irelandin 2011

40

2.73.0

Ireland Portugal Spain Greece

Source: Deutsche Bank Global Markets Research (Mark Wall, Thomas Mayer, Gilles Moec. IMD WorldCompetitiveness Yearbook 2010). EuroStat.


41/48

Section 4

o en a . . ap a ar e s mp ca ons


42/48

Summary Implications for MarketsDirectional

Markets Impact Potential Implications (Depending on Crisis Depth)

U.S.TreasuryYields

Currently being driven by 3 macro themes:

1) Federal Reserve policy and QE2

2) China tightening and inflation risk

3) European sovereign credit risk

Impact of Irish and European Debt Crisis: If crisis accelerates, directional impact on UST

yields will be decidedly downward as investors seek safe haven

US$ Bond Currently: marginal impact (so far); volatility has put a soft lid on volumes, and introduced avolatilit remium into ricin albeit limited im act so farar e

Week of Nov 15th was expected to be a blockbuster US$ issuance week

Ended up being the lowest volume week of the (3 week) month so far (US$15 billion ofissuance was a sizeable drop from the nearly US$24 billion the prior week)

Potential: If crisis accelerates, could be significant (U.S. bond markets effectively closed therdbe a game changer

Credit Spreads: Some upward pressure, but limited so far

US$ market in 2010 has been driven largely by favorable technicals (record fund flows)

If crisis accelerates, that can change quickly

New Issue Premiums: Some upward pressure, but minimal so far

YankeeBankIssuance(US$ Market)

Impact of Irish crisis already evident in November

As of Sept 30, non-U.S. issuers accounted for ~ 35% of US$ IG bond market issuance

However, volumes from Europe have been down sharply in November

42

The two main concerns [in markets] are the sovereign debt crisis in Ireland and the inflation bubble risk in China.Global growth depends on the resolution of those two problems. ~ European Asset Manager (November 19, 2010)


43/48

Summary Implications for Markets

Directional

Markets Impact Potential Implications (Depending on Crisis Depth)

U.S. Banks Direct Exposure: $114 billion of direct exposure to Ireland (loans, bonds and other debtissued by Irish companies, individuals and governments)

More indirect impact: U.S. bank spreads still very vulnerable to exogenous shocks at this

European IGBond Markets

Full impact will depend on extent of the contagion Sovereign Market: Stabilization of this sector is critical to the overall market

Corporates: European corporate credit markets have proven to be remarkably resilient as

time; contagion effect; higher cost of capital

compared to the peak of the Greek crisis in May 2010

The blue-chip iTraxx Europe index of 125investment grade corporates (as well as theEurope Crossover index of 50largely non-IG names) has remained resilient as the Irishcrisis has peaked

Corporate credit curves have also steepened (bullish sign showing comfort on front end) Financials: Significantly more vulnerable, but market still very much open for stronger

financial players

Mid-caps and second tier financial names have been more impacted

Public Policy Issues: Critical to get market clarity on the issue of bail-ins (creditor losseson rescues) very soon in order to improve investor risk appetite

EuropeanBanks

UK Bank Exposure: US$ 222 billion of direct exposure to Ireland (loans, bonds and otherdebt issued by Irish companies, individuals and governments)

German Bank Exposure: US$ 206 billion

French Bank Exposure: US$ 86 billion

Italian Bank Exposure: US 29 billion

Spanish Bank Exposure: US$ 16 billion

Cost of capital: Strong upward pressure if crisis accelerates; higher debt costs and

increased equity capital needs43


44/48

Summary Implications for Markets

Directional

Markets

Impact Potential Implications (Depending on Crisis Depth)

Commodities

(Oil, Other)

Impact from acceleration of Irish crisis in November has been limited

Will increase markedly if contagion not contained

days in the market (such as November 16th when Ireland initially refused EU rescueloans)

Gold Has and will continue to be a safe haven for investors when the Euro crisisaccelerates

Has also been an important market for investors to hedge sovereign risk generally

Euro / US$

Exchange

Relief rally expected on the back of the Irish application for EU / IMF aid on Nov

21 (and likely to track the pace of negotiations in subsequent weeks)Rate As the crisis accelerated in early November, the Euro moved down sharply from

1.43 to 1.35

Not nearly as strong a decline as with the Greece crisis in May

Generally, if the contagion accelerates, downward pressure on the Euro has theotential to be uite stron

Contagion to Spain and Italy would be a game-changer

Potentially too big to fail?

Would raise questions about the longer term viability of the Euro

44

The VIX Volatility Index


45/48

The VIX Volatility Index

. ,

Greece Crisis Peaks (Week of May 3rd): VIX jumped a breathtaking 85%

Irish Crisis Accelerates (Oct 29 Nov 16): VIX jumps ~ 5%, but then rallies to lower levels asdetails of Irelands reluctant acceptance of EU / IMF aid begins to emerge

The VIX has notreturned to the 80

levels of the Lehmanbankruptcy, but didreach as high as 40

80

in May during thepeak of the Greece

crisis

For now, the indexhas remained

Lehman Bankruptcy

60

largely contained asthe Irish crisis has

accelerated inNovember 2010

40

20

O

ct08

N

ov08

D

ec08

Jan09

F

eb

09

M

ar09

A

pr09

M

ay09

J

un09

Jul09

A

ug09

S

ep09

O

ct09

N

ov09

D

ec09

Jan10

F

eb

10

M

ar10

A

pr10

M

ay10

J

un10

Jul10

A

ug10

S

ep10

O

ct10

N

ov10

45Source: Bloomberg

I t th E


46/48

Impact on the Euro

,expect a relief rally

in the Eurofollowing the

Ireland EU/ IMFrescue package

verv ew as o ov ,

Despite a strong rally since September, the Euro declined sharply in November as the IrishCrisis accelerated:

- Irish Crisis High: On Nov 4, Euro /US$ hit its highest point since January ($1.43)

However, the scopeand pace of

contagion will becritical to any

longer term

- Irish Crisis Low: On Nov 16, following Irelands refusal to tap EFSF funds, Euro/ US$ closed at a3 month low (1.35)

What to expect from here?

Relief rally expected coming out of the Irish bailout announcements of Nov 21

Euro USD PPP PPP+20% Band 20%

assessments

The Euro has

Euro/USD Spot vs. Euro/USD Purchasing Power Parity (PPP) (January 1, 2010 Present)

The ability to contain the contagion of the crisis will be critical to any forecasts from here

1.3

1.4

1.5

traded around 20%above its

purchasing powerparity since

January

1

1.1

1.2

USD/E

UR

Irish Crisis Accelerates

0.8

0.9

Jan10 Feb

10 Mar

10 Apr

10 May

10 Jun

10 Jul

10 Aug

10 Sep

10 Oct

10 Nov

10

46Source: Bloomberg

Impact on the Euro


47/48

Impact on the Euro

Bullish View Bearish View

Market has priced in the EFSF:

- EFSF is now read and full o erational

The EFSF has not been proven:

- Si nificant uncertaint as to its ca acit be ond

ua ews ver e u ure o e uro

rally in the Eurofollowing the

Ireland EU/ IMFrescue package

- After unofficial rumors surfaced on November 12th

about an Irish bail-out, European credit markets

rallied

QE2 announcement impact:

Ireland and Portugal

Contagion effect to euro financial system:

- Possible contagion effect across Europeanperipherals, leading the market concerns overfurther use of the EFSF by Spain or Italy

over the medium to

longer term must

consider a range offactors

-policy, despite global market criticism

Irish fiscal adjustment plan:

- Plan will be approved by Dec 7, and will be a

turning point in the balancing the deficit

- EFSF would not be capable of financing Spain orItaly if needed, leading to crisis in the Euro zone

European financial system, the primary creditprovider in the European economy, will bestressed with dra on lendin and li uidit -

-20 announcement regar ng or er yrestructuring:

- Confirmed that creditors will not take hits on debtissued prior to 2013

More transparent European market:

provider activities)

Market reaction to December 16th:

- Details on the orderly restructuring mechanismdisclosed in December might not be positivelyviewed by the market

- Orderly restructuring and fiscal adjustments could

be perceived as a more transparent and potentiallymore stable market in the mid to long term

Portugal may need EFSF funds, but crisis will becontained from impacting Spain and Italy

Possible failures of fiscal adjustment:

- Fiscal adjustment of EUR 15 bn is only a fractionof the increasing Irish bank bail-outs

- Greece, Portugal, Spain and Italy have long and

47

European economy will stabilize, and embark ona steady path of GDP growth (albeit slower thanhistorical cycles)


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ireland sov crisis nov 2010

Documents