Origins of Crisis May2010

8/8/2019 Origins of Crisis May2010

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CONFIDENTIAL

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Economic crisis, origins & impact

18 May 2010

Lars Kalbreier, CFA

Managing Director

Head of Global Equities and Alternatives Research


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Produced by: Lars Kalbreier, CFADate: May 2010

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The several steps of the current crisis

Stage 1

Stage 2

Stage 3

Stage 4

Stage 5

house prices start to fall

delinquency rate in subprime mortgages rises

Investors suffer from losses and investmentbanks have to write down

Banks reduce their balance sheets

forced deleveraging of hedge funds

Stage 7 Impact on real economy

Stage 6 break-down of credit market


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How did we get into the current crisis? Cheap loans andmortgages ...

Positive expectation for economic growth, low unemployment, re-assuringanalyses by credit rating agencies


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... and a booming housing market ...

100

150

200

250

300

350

400

450

1987 1991 1995 1999 2003

300

500

700

900

1100

1300

1500

S&P/Case-Shiller Composite-10 Home Price Index

US New One Family Houses Sold (rhs)

Index

Source: Bloomberg

Source: Bloomberg, Credit Suisse

New home sales & Home prices


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...eventually came to an end ...


US home sales & home prices

200

400

600

800

1000

1200

1400

1600

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 20090

50

100

150

200

250

US new home sales (lhs) S&P/Case Shiller Composite 10 (rhs)


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6

pushing up default rates rapidly


US Foreclosures Total US Foreclosures as % of loans

0

5

10

15

20

25

Sep 02 Sep 03 Sep 04 Sep 05 Sep 06 Sep 07 Sep 08 Sep 09

Foreclosures as % of total loans Prime ARM foreclosures as % of total loans

Subprime ARM foreclosures as % of total loans, NSA

in %

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10

US foreclosures


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7

0

200

400

600

800

1000

1200

1400

Ame

ricas

Eu

rope

Asia

Fannie

Mae

Citig

roup

Freddie

Mac

Wachovia

BankofAm

erica

AIG

JPMo

rgan

Cha

se

RoyalBankof

Scotland

UBS

MerrillL

ynch

leading to large losses for major financial institutions


Data as of 11.05.2010

Losses for financial institutions, in USD bn

1187

551

41

Most impacted financial institutions:

151 130 118 102 98 97 69 57 57 56


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600

800

1000

1200

1400

1600

03/08 06/08 09/08 12/08 03/09 06/09 09/09 12/09 03/10

Analysis of the crisis:Sharp acceleration after the Lehman collapse...


AIG rescue

Fed to Buy CP

Lehman collapse

TARP passed

G7 & EU summit

Concerted rate cuts

MSCI World Index

Bear Stearns rescue

Banks reduce theirbalance sheets

Forced HFdeleveraging

Credit freeze Impact on realeconomy

Lowest Philly Fed Businessoutlook since 1990

Lowest US consumerconfidence since 1974

US Unemployment > 10%

Profit warnings:Daimler, SAP, Sony, Apple, EBay,

TALF announcedUS Unemployment at highest level since 1983

US IP is down 13% YoY


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0

0.51.0

1.52.0

2.5

3.03.54.0

4.5

5.0

Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10

USD 3M TED Spread EUR 3M TED Spread

%

...followed by very tight liquidity conditions in the money market...

Fears on the money market

Source: DataStream, Credit Suisse

TED spreads, daily

Lehman

Bear Stearns


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... because the interbank refinancing mechanisms ...

Source : Bloomberg, Credit Suisse

Bank A Bank B

provides funds tomeet requirements

Central Bank

sets reserve requirements

pays interests


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... got frozen ...


Bank A Bank B

Central Bank


Risks of defaults (Whatis on the book? Is it thenext Lehman?)



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leading to an urgent need for central banks interventions


Bank A Bank B

Central Bank


Guarantee funds

Injects capital



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What followed after the financial crisis?


Depression

long-drawn recession &slow recovery

typical recession & sharprecovery


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0

2

4

6

8

10

12

14

May 70 May 74 May 78 May 82 May 86 May 90 May 94 May 98 May 02 May 06 May 10

US savings rate (as percentage of disposable income) Average (1970-1990) = 9.2%

%

14% US personal savings as % of disposable income, 3mma

Typical recession & sharp recovery:No, headwinds were too strong

Source: Datastream, Credit Suisse

Last data point: February 2009, Value: 4.2%

?

Typical Recession: 6 to 9 months

Headwinds were too strong: US consumer, unemployment, costs of credit crisis

The cost of the credit crisis will be over USD 4 trnWorld economy to shrink by 1.3% this year

IMF statement, April 2009

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Apr 90 Apr 92 Apr 94 Apr 96 Apr 98 Apr 00 Apr 02 Apr 04 Apr 06 Apr 08 Apr 10

US unemployment rate Avg

Index


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Depression scenario: AvoidedDemand from Emerging Markets remained firm

-8

-3

2

7

12

17

22

2004 2005 2006 2007 2008 2009

EM 8

(proxy)

G3

Last data point: 12/2009 Source: IDC, Bloomberg Credit Suisse

YoY % Retail sales


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0

1

2

3

4

5

6

01/07 07/07 01/08 07/08 01/09 07/09 01/10

Depression scenario: AvoidedDifferent policy measures today than in the 1930s...


2 . 5 0

2 . 7 0

2 . 9 0

3 . 1 0

3 . 3 0

3 . 5 0

3 . 7 0

3 . 9 0

4 . 1 0

4 . 3 0

4 . 5 0

J a n 1 9 3 1 J a n 1 9 3 2

Prosperity is round the corner Herbert Hoover, 1931

1930s: No measure to stabilize the financial system 50% of banks went bankrupt

1930: Monetary policy mistakes: interest rate hikes

In the near term, the highest priority is to promote a global economic recovery. The Federal Reserve retainspowerful policy tools and will use them aggressively to help achieve this objective Ben Bernanke, January2009

US interest rates 1930s US interest rates today


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10

30

63

190

560 884

0

50

100

150

200

250

300

India UK Germany Japan China USA

Depression scenario: Avoidedthanks to stimulus packages


Stimulus packages

US 6% of GDP vs. 7% in the New Deal, but only 5 years into the crisis

Stimulus packages implemented on a global scale

560 884


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and automatic stabilizers for the economy


Charities should provide for theunemployed Herbert Hoover, 1932

Government sector much larger now than in the 1930s (close to 40% of GDPvs 9%) higher impact to steer the economy

In the 1930s only 1 out of 4 unemployed families received unemploymentbenefits of $ 2.39 (= $160 in 2008USD)

US-Unemployment in the 1930 reached 25%

$ 9.60 (= $160 per month in 2008 USD)Monthly unemployment benefit in New York in 1933, worth a full

appartment rent ...


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In the current crisis, unprecedented measures to helpbanks have been taken by authorities

Bank recapitalizations : AIG, RBS, Hypo Real Estate, Citigroup

Guarantee of deposits: Ireland, UK, Germany, France, Australia,

Bank loan guarantee: Senior bank debt guarantee worth EUR 400 bn inGermany, EUR 320 bn in France, USD 200 bn in loan guarantee for consumerand small business loans in the US,

Purchase of bad debt: Fed will purchase as much as USD 600 bn ofmortgage-backed securities issued by Fannie Mae & Freddie Mac, PPIP

Target: reduce systemic risk, reduce fears of bankruptcy, reassure savers


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As a result, Budget Deficits have grown substantially...

Source: Bloomberg, Datastream, Credit Suisse

-10.0

-8.0

-6.0

-4.0

-2.0

0

2.0

4.0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Eurozone EU-15EU-25 US

% of GDP

-16

-14-12-10

-8-6-4

-20

Sweden

Luxembour

Estonia

Finland

Denmark

Germany

Austria

Malta

Bulgaria

Hungary

NetherlandsItaly

Slovenia

Czech

Belgium

Cyprus

Slovakia

Poland

France

Romania

Lithuania

Latvia

Portugal

SpainUK

Greece

Ireland

Maastricht criteria -3%

in % of GDP

Development of Budget Deficits Budget Deficits in Europe


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...and government debt in developed markets has risen

Source: IMF WEO October 2009, Credit Suisse

0

20

40

60

80

100

120

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014

Advanced

economies

% of GDP

Emerging

markets

Forecast


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...leading to the current sovereign debt crisis in Europe

Total refinancing need estimates 2010 (bn EUR)

-

10

20

30

40

50

60

70

80

90

100

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Ireland

Greece

Spain

PortugalItaly

Source: Bloomberg, Dealogic, OECD, Credit Suisse


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...and making austerity measures necessary

The Greek Austerity measures: Cut EUR 30 bn over 3 years

Pay Cuts for public sector workers

Pension Reforms

Tax Reforms Privatizations

And also in other countries announced drastic measures

UK: save EUR 7 bn this year Spain: 5% cut in civil service payMerkel: Bring national

finances in order


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Will fiscal austerity damage the recovery?

-0.7%-0.6%-0.4%-0.3%-0.1%0.1%0.2%

Spain

Greece

Ireland

Italy

Portugal

Netherlands

France

Germany

Euro area

Contribution to change in aggregate Euro area primary balance

over 2009 - 2010 as % of 2009 GDP (2010E deficit in brackets)

Primary deficit increasing,

expansionary policies

Primary deficit falling,

contractionary policies

(-3.9%)

(-2.8%)

(-5.9%)

(-4%)

(-4.6%)

(-0.5%)

(-10.8%)

(-5.1%)

(-7.4%)

Source: OECD, Datastream, Credit Suisse


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Global trade and IP momentum remain strong

-45%

-35%

-25%-15%

-5%

5%

15%

25%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Global trade growth (3m/3m ann, %)

Source: Netherlands Bureau for Economic Policy Analysis, Credit Suisse

-25%

-20%-15%

-10%

-5%

0%

5%

10%15%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

Global industrial production growth (3m/3m ann, %)


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Survey data: new orders

25

35

45

55

65

Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09

Index

Russia

ChinaIndia

PMI New Orders

Brazil

Last data point: 4/2010 Source: PMI Premium, Bloomberg, Credit Suisse

10

20

30

40

50

60

70

Feb-06 Nov-06 Aug-07 May-08 Feb-09 Nov-09

Index

USEurozoneJapan

PMI New Orders

Last data point: 4/2010 Source: PMI Premium, Bloomberg, Credit Suisse


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Source: Credit Suisse IB

...suggesting that the global economy will further improve

95

100

105

110

115

120

125

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

Index (Jan '06 = 100)

Forecast


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Country / region 2010 2011 2010 2011 Country / region 2010 2011 2010 2011

Global 4.2 4.5 3.1 3.3 Non-Japan Asia 7.8 8.1 4.1 4.5

G-3 2.5 2.4 1.3 1.0 China 9.5 9.8 3.5 4.5

BRIC 8.6 9.0 5.8 5.9 Hong Kong 5.7 5.3 2.5 3.0

EM-8 7.8 8.0 5.1 5.2 India (fiscal year) 8.2 8.5 8.0 6.5

USA 3.5 2.8 2.2 1.2 Indonesia 5.8 6.0 6.2 6.0

Canada 3.0 3.4 1.4 2.1 South Korea 6.0 5.5 2.6 2.5

Eurozone 1.5 2.1 1.1 1.3 Singapore 4.5 4.9 3.5 4.0

Germany 2.2 2.6 0.5 0.8 Thailand 4.1 4.8 2.8 3.2

Italy 1.0 1.6 1.4 1.5 CEE & Russia 3.1 4.4 7.0 6.5

France 1.9 2.4 1.5 1.6 Poland 2.4 3.5 2.0 2.0

Spain 0.2 1.2 1.2 1.5 Russia 3.1 5.0 8.5 8.0United Kingdom 1.4 2.7 2.3 1.4 Turkey 4.5 4.5 7.5 6.5

Norway 2.5 3.4 2.5 2.0 Latin America 4.2 3.7 6.4 7.2

Sweden 1.0 2.7 1.6 2.8 Argentina 3.5 3.0 8.0 10.0

Switzerland 0.9 2.0 0.8 1.0 Brazil 5.5 4.5 4.5 5.0

Japan-Pacific 2.1 2.1 -0.5 0.2 Mexico 4.0 3.0 5.0 3.5

Japan 1.9 1.8 -1.2 -0.4 Middle East & Africa 4.5 5.0 5.7 5.7

Australia 3.3 3.8 2.5 2.9 GCC 4.8 4.9 3.5 4.1New Zealand 2.7 3.3 2.2 2.1 South Africa 2.7 4.0 5.7 6.7

G-3: EMU, Japan, USA. EM-8: Brazil, China, India, Indonesia, South Korea, Mexico, Turkey and South Africa.

GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE. Regional figures are PPP-weighted. Source: Credit Suisse. 07 April 2010.

InflationGDP

GDP and inflation forecasts

GDP Inflation

Our long term growth forecasts remain solid,mainly on EM

Source: Bloomberg, Datastream, Credit Suisse / IDCLast data point: 10.05.2010


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The US real estate & credit crisis has spread to the world

A key accelerating factor was triggered by the Lehman bankruptcy

The world entered a long-drawn recession, but depression avoided

Recovery is taking place at different paces in developed markets andemerging markets

Budget Deficits and Government Debt increased in developed marketsas a result of the measures taken to avoid a depression.

Austerity measures become necessary

Long-term global growth outlook still intact, mainly on EM

Key points


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Origins of Crisis May2010