Hsbc - Alliott Group

47
Eurozone – Keeping it together Madhur Jha Global Economist HSBC Bank plc +44 20 7991 6755 [email protected] Global Economics Research October 2011 View HSBC Global Research at: http://www.research.hsbc.com Issuer of report: HSBC Bank plc Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Transcript of Hsbc - Alliott Group

Page 1: Hsbc - Alliott Group

Eurozone – Keeping it together

Madhur Jha

Global Economist

HSBC Bank plc

+44 20 7991 6755 [email protected]

Global Economics Research

October 2011

View HSBC Global Research at: http://www.research.hsbc.comIssuer of report: HSBC Bank plcDisclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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• We do not expect the Eurozone to break up; a break-up would threaten another Great Depression

• Current proposals aim to limit contagion but only address symptoms

• More long-term solution needs political will

• Acceptance of responsibility by both creditor and debtor nations

• Eurozone economic recovery remains sluggish as global trade cycle turns down

• Debt reduction is made harder by slowing growth

• Risk is of another credit crunch if a solution is not found to the current crisis

• Spain has managed to differentiate itself from the rest of the periphery

• But the outlook is clouded by weak global growth

• Adherence to medium-term fiscal consolidation plan is paramount

Summary

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What could a Eurozone member achieve by abandoning the euro?

Currency devaluation the only significant advantage Disadvantages of leaving

default would not eliminate the need for fiscal adjustment as primary balances in deficit Increased likelihood of defaults by companies and households now holding FX-debt probable banking system collapse unless capital controls are put in place would have to leave the EU very hard to reinstate a legacy currency (probably become euro-ised) with no nominal anchor, the risk of a wage-price spiral no guarantee that long-term interest rates will be lower.

What about Germany leaving?

Political commitment FX appreciation: impact on Germany’s export performance Would amount to a devaluation of external assets of German households, companies and banks Germany would have to leave the EU

Bottom line: the Eurozone was always a political project and has never been an optimal currency area in terms of structure or country membership. It now requires a political solution to make it more of an optimal currency area, involving closer fiscal integration.

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Parts of the Eurozone that are in trouble are still small

France21%Germany

26%

Italy17% Ireland

2%Austria

3%

Other2%

Greece3% Spain

12%

Belgium4%

Finland2%

Portugal2%

Netherlands6%

Source: Eurostat

2010 Eurozone GDP

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Source: ECB, Bloomberg, HSBC

But the main risk is of contagion spreading

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bps bps5-y ear CDS spread

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• Greece must be supported until a firewall is in place to protect the larger economies in the periphery

• Building the firewall is the problem:

• Expanding the size of the EFSF or Eurobonds could put upward pressure on core bond yields and potentially challenge ratings

• Using the ECB’s balance sheet risks inflation and moral hazard

• The question is: how much must financial markets and economies deteriorate before politicians come up with the solution?

The Eurozone crisis – how bad will it get before the politicians provide solutions?

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The next “Grand Plan”…

– 1) massively increase the firepower of the EFSF/ESM

– 2) large Eurozone-wide bank recapitalisations

…designed to limit the contagion from…

– 3) lowering the size of the Greek stock

Short-term solutions only address the symptoms

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Not hard to see why current “firepower” is viewed as inadequate...

*Effective lending capacity of revamped EFSF. Source: ECB

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Portugal Ireland Greece EFSF* Spain Italy

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2010 Gov ernment debt outstandingEUR bn EUR bn

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…and quite a lot of the EUR440bn has been earmarked already

* The IMF has suggested bank recapitalisation needs could be EUR200bn so we assume half could be provided by the EFSF with the rest being provided privately or by national governments **The Irish government wants to convert the promissory notes it has given banks into EFSF funding Source: ECB, IMF, Reuters, HSBC

Ireland rescue17.7bn

Bank *recapitalisations

100bn

Remainder 192.6bn

** Irish banks31bn

Greece2nd rescue provisional72.7bn

Portugal rescue26bn

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Leverage options

– allow the EFSF to undertake repos

– allow the EFSF to offer credit protection (first loss of 20%)

Other options

– simultaneously lend EFSF funds (via governments) for bank recapitalisations

– bring forward timing of ESM, which is already planned to be more bank-like

and could be granted a legal mandate to buy many more bonds

Most cannot be implemented quickly, which leaves the ECB a big role, but outright QE not imminent, in our view

Options for increasing the firepower

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The next few weeks

EU Council

Troika reports

EUR8bn for Greece

G20 Summit

ECB Meeting

20 October 23 October November 3-4 November late November early January

EFSF buys debt

EUR5bn for Greece

Troika sixth review of Greece

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The ECB is reluctant to follow the Fed or the BoE…

Source: ECB

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Fed ECB BoE

Central bank balance sheets, Jan 2007 =100 IndexIndex

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Source: ECB, Bloomberg, HSBC

…but the EFSF is unlikely to bring a permanent halt to ECB bond buying

ECB gov ernment bond purchases

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ECB debt Purchases (LHS) Greece (RHS) Ireland (RHS)Portugal (RHS) Italy (RHS) Spain (RHS)

% 10y r Bond YieldEURbn

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Central bank liquidity may prevent a bank failure but not a credit crunch

Lending from central banks only includes the MROs and LTROs of the ECB. It does not include the emergency liquidity assistance (ELA) provided by Ireland’s and Greece’s central banks, which is shown in the “other liabilities” category of the balance sheet. Source: ECB, CEIC, National central bank balance sheets

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EUR bnEUR bn Outstanding loans from central bank to country 's

banking sy stem

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Note: Chart shows estimated impact of changes in real short- and long-term interest rates, high-yield corporate bonds, lending standards, the real exchange rate and wealth effects from equities upon the year-on-year GDP growth rate. * Forecasts assume unchanged or early October 2011 levels. Source: ECB, OECD, Bloomberg, HSBC

Overall financial conditions are deteriorating rapidly

-5.0

-3.0

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Real rates High Yield Spread Credit Standards Real Ex change rate Wealth effects

Eurozone Financial Conditions Indicator Forecast*% %

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Banks in France and Italy tightened standards the most since the summer

-40-20

020406080

06 07 08 09 10 11 12

-40-20020406080

France Eurozone

Bal. of opinionsCredit standards applied to new loans to businesses

Bal. of opinions

Sources: Banque de France, HSBC

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Source: Markit, Thomson Reuters Datastream

Industrial sector is about to move into recession...

1520253035404550556065

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-10.5-9.0-7.5-6.0-4.5-3.0-1.50.01.53.04.5

EMU PMI manufacturing output index (LHS) EMU industrial production (RHS)

Index %3m-on-3m

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...so Eurozone can’t rely on exports as the growth driver

Source: Eurostat and HSBC

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96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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Ex ports (LHS) GDP (RHS)

% Yr % YrEurozone

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Source: ECB, Bloomberg, HSBC

Consumer spending may provide some offset…

92949698

100102104

Dec07 Dec08 Dec09 Dec10

92949698100102104

US UKGermany France

Consumption Index , 4Q07=100Index , 4Q07=100

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…but the oil price is unlikely to be the same stabilising factor as it was in 2009

* HSBC calculations based on the inflation contributions from all of the food and energy components of HICP inflation. Assumes oil price stabilises at early October 2011 level of about EUR80/barrel. A negative value denotes a period when energy is adding to the q-o-q change in consumer prices and therefore causing a drag on real wages. Source: Thomson Reuters Datastream, Eurostat and HSBC calculations

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.81.0

08 09 10 11 12

-1.0-0.8-0.6-0.4-0.20.00.20.40.60.81.0

Energy Food

Impact of food and energy on real w ages* % pts% pts

Forecast

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Once inflation is heading lower, the ECB should be more comfortable with cutting rates

Source: Thomson Reuters Datastream, Bloomberg

-2-1012345

-2-1012345

03 04 05 06 07 08 09 10 11 12

Energy contribution Food contribution

HICP inflation

Contribution to EMU inflation % Yr%pts

Forecast

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• Muddle-through is increasingly unsustainable…

• … but a permanent solution will take time, political will and legal changes…

• …which means the ECB will continue to have a critical role to play…

• …in buying bonds, supporting banks and cutting rates

Conclusions

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Spain

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Spain’s fiscal metrics are not as bad as for some other peripheral countries…

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Spain Portugal Greece Ireland

020406080100120140160

Change in gross debt 2007-2010Change in gross debt 2007-2012f2010 gross debt

% GDP% GDP

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Spain Greece Ireland Portugal

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2009 2010 (Actual) 2010 target (from 2011 budget)

% GDP% GDP Budget deficit

Source: European Commission Source: National Ministries of Finance

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…but official assumptions for growth are too optimistic

Source: National Ministry of Finance

Government medium -term GDP forecasts

Real GDP growth

Forecast horizon

US 3.4 2013 -2016UK 2.9 2013 -2015Germany 1.6 2013 -2016France 2.5 2013 -2014Spain 2.5 2013 -2015Italy 1.5 2013 -2014Portugal 2.0 2013 -2016Ireland 3.0 2013 -2015Greece 2.1 2013 -2014

Government medium -term GDP forecasts

Real GDP growth

Forecast horizon

US 3.4 2013 -2016UK 2.9 2013 -2015Germany 1.6 2013 -2016France 2.5 2013 -2014Spain 2.5 2013 -2015Italy 1.5 2013 -2014Portugal 2.0 2013 -2016Ireland 3.0 2013 -2015Greece 2.1 2013 -2014

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Spain’s growth has been largely a net trade story...

Source: Thomson Reuters Datastream, HSBC

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% pts

% qtrContribution to GDP

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…and Spanish exports are higher than they were at the 2007 peak

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Source: Thomson Reuters Datastream, HSBC

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But Spain is facing an industrial recession as the global trade cycle has turned

Source: Thomson Reuters Datastream, Markit

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Index Index

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High unemployment and debt de-leverage imply slow consumption spending

Source: Thomson Reuters Datastream, Eurostat

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Spain Portugal

% GDP% GDP Priv ate sector indebtedness

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Germany EurozoneSpain UK

Unemploy ment rate %%

Source: Bank of Spain and Bank of Portugal

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Regional government finances remain worrisome

Source: Spanish Treasury

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Autonomous regions Central gov ernment

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%GDP%GDP Gov ernment deficit

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Year-beginning target Actual

% GDP% GDP Autnomous regions

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Some progress on structural change...

Note: For EMU, the value is 2008, Population aged 15-64 yrs

Source: Eurostat and HSBC

Persons w ith Tertiary education attainment (%)

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IE FI UK

CH ES FR DE

EMU

GR PT IT RO

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2000 2009

%%Product Market Regulation

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GR BR FR PT IT

DE

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Index Index

Higher

Lower

Note: This indicator measures the degree to which polices promote or inhibit competition in areas of the product market where competition is viable. The indicator covers formal regulation in: state control of business enterprises, legal and administrative barriers to entrepreneurship and barriers to international trade and investment. It is a broad based reflection of state control, barriers to entrepreneurship and barriers to trade and investment. It is not just for manufactured products. *EMU here is weighted average of EU-13 countries

Source: OECD, HSBC.

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...but more still needs to be doneStrictness of Employment Protection Legislation

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Ease of doing Business Ranking 2010

4 5 819 21 24 28 33

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124135

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US IE JP DE

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Note: In total, 183 countries have been ranked globally. The index is survey-based. Especially significant to small to medium sized businesses.Source: World Bank’s Ease of doing business index 2010, HSBC.

Note: Employment Protection are synthetic indicators of strictness of regulation on dismissals and the use of temporary contracts. The higher the index value the higher the strictness of employment protection legislation.EMU here is weighted average of EU-13 countries, Data not available for BR, CN, IN, RU for 2000Source: OECD, HSBC.

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Appendix

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Private sector indebtedness is not high in core Eurozone

Private sector indebtedness ratio

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% of GDP % of GDP

Sources: Banque de France, HSBC

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Early 2012 is a busy time for Italian bond issuance

Bond and Bill redemptions in the periphery

___ Greece_____ ____ Ireland ____ ___ Portugal ____ ____Spain______ _____ Italy______ ___ Belgium ____ Bonds Bills Bonds Bills Bonds Bills Bonds Bills Bonds Bills Bonds Bills

Oct 11 0.00 3.63 0.00 0.00 0.00 3.28 14.09 10.04 0.00 15.68 0.00 6.41 Nov 11 0.00 3.30 4.40 0.00 0.00 3.56 0.00 6.20 15.51 14.85 0.00 6.42 Dec 11 8.10 3.63 0.00 0.00 0.00 2.28 0.00 9.28 0.00 19.96 0.51 6.76 Jan 12 0.02 1.63 0.00 0.00 0.00 2.17 0.00 7.13 0.00 15.20 0.00 5.43 Feb 12 0.00 0.81 0.00 0.00 0.00 1.73 1.34 10.86 36.41 16.74 0.00 3.66 Mar 12 14.44 1.30 5.55 0.00 0.00 1.78 0.00 5.78 27.15 16.25 5.37 3.73 Apr 12 0.00 0.00 0.00 0.00 0.00 0.00 11.94 7.28 27.75 8.25 0.00 1.79 May 12 8.00 0.00 0.00 0.00 0.00 0.00 0.00 4.67 0.00 6.60 0.00 1.95 Jun 12 0.55 0.00 0.00 0.00 10.16 0.00 0.00 5.86 0.00 6.12 0.22 1.62 Jul 12 0.00 0.00 0.00 0.00 0.00 0.00 12.87 4.12 17.05 7.43 0.00 1.07 Aug 12 7.72 0.00 0.00 0.00 0.00 0.00 0.00 7.40 11.50 7.15 0.00 1.70 Sep 12 0.00 0.00 0.02 0.00 0.00 0.00 0.00 3.59 10.44 8.25 12.92 1.04 Oct 12 0.00 0.00 0.00 0.00 0.00 0.00 20.27 2.51 18.37 0.00 0.00 0.00 Nov 12 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 13.48 0.00 0.00 0.00 Dec 12 2.05 0.00 0.00 0.00 0.00 0.00 0.00 2.23 30.52 0.00 7.91 0.00 Jan 13 0.00 0.00 0.00 0.00 0.00 0.00 14.29 0.00 0.00 0.00 0.00 0.00 Feb 13 5.82 0.00 0.00 0.00 0.00 0.00 0.00 2.55 21.01 0.00 0.00 0.00 Mar 13 0.04 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 12.83 0.00 Apr 13 2.72 0.00 6.03 0.00 0.00 0.00 14.94 0.00 29.14 0.00 0.00 0.00 May 13 11.58 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Jun 13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 17.17 0.00 0.11 0.00 Jul 13 0.50 0.00 0.00 0.00 0.00 0.00 14.95 0.00 14.26 0.00 0.00 0.00 Aug 13 5.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 25.16 0.00 0.00 0.00 Sep 13 0.15 0.00 0.00 0.00 9.74 0.00 0.00 0.00 3.50 0.00 15.68 0.00 Oct 13 0.00 0.00 0.00 0.00 0.00 0.00 16.19 0.00 0.00 0.00 0.00 0.00 Nov 13 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 17.82 0.00 0.00 0.00 Dec 13 1.86 0.00 0.00 0.00 0.00 0.00 0.00 0.00 20.01 0.00 0.21 0.00

Source: Bloomberg and HSBC Fixed Income Strategy

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Household and Corporate sector debt

Private Sector Debt Components (% GDP)

_______________ Households_________________ _________ Non-Financial Businesses___________

1995 2000 2008 2009 1995 2000 2008 2009

Austria 42 47 55 57 61 79 85 91 Belgium 37 40 49 54 81 129 169 163 Denmark 82 93 135 147 62 71 104 105 Finland 36 33 55 62 73 97 114 118 France 35 36 51 54 70 81 103 109 Germany 62 73 61 63 51 66 70 71 Greece 6 13 51 53 32 45 68 71 Ireland na na 111 121 na na 168 204 Italy 18 22 40 44 54 56 81 84 Netherlands 59 87 119 128 86 103 92 94 Portugal 26 60 93 97 57 114 152 163 UK 66 69 101 104 62 79 121 122 Spain 32 46 84 86 46 76 136 140 Avg. 45 56 82 87 64 87 119 125

Source: Italy Stability Programme, European Commission April 2011

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Summary of Economic Forecasts

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GDP & Inflation – Americas and Europe (%)

Source: HSBC

Key forecasts

2009 2010 2011f 2012f 2009 2010 2011f 2012fWorld (nominal GDP weights) -2.6 3.9 2.5 2.6 1.0 2.4 3.4 2.7World (PPP weights) -0.7 5.1 3.6 3.6 2.0 3.3 4.2 3.3Developed -4.1 2.6 1.3 1.4 0.0 1.4 2.6 1.7Emerging 2.0 7.6 6.0 5.9 4.9 5.6 6.3 5.8North America -3.4 3.0 1.7 1.7 -0.3 1.7 3.2 2.1US -3.5 3.0 1.6 1.7 -0.3 1.6 3.2 2.1Canada -2.8 3.2 2.1 1.9 0.3 1.8 2.9 2.0Latin America -3.0 6.6 4.3 4.1 6.1 7.0 7.9 8.0Mexico -6.1 5.4 3.7 3.9 5.3 4.2 3.5 3.6Brazil -0.6 7.5 3.5 4.0 4.9 5.0 6.6 5.8Argentina 0.9 9.2 8.0 5.0 14.5 23.2 23.8 23.4Chile -1.7 5.2 6.4 4.5 0.3 1.4 3.2 2.9Western Europe -4.2 1.7 1.6 0.8 0.6 1.8 2.8 1.9Eurozone -4.1 1.7 1.6 0.6 0.3 1.6 2.7 1.8Germany -5.1 3.6 2.8 1.0 0.2 1.2 2.4 1.7France -2.6 1.4 1.6 1.2 0.1 1.7 2.2 2.0Italy -5.2 1.2 0.5 -0.2 0.8 1.6 2.8 2.4Spain -3.7 -0.1 0.6 0.3 -0.2 2.0 2.7 1.2Other Western Europe -4.3 1.9 1.5 1.3 1.5 2.5 3.3 2.0UK -4.9 1.4 1.1 1.3 2.2 3.3 4.4 2.4Norway -1.6 2.1 2.5 3.1 2.2 2.4 1.5 2.2Sweden -5.1 5.4 3.8 0.9 -0.5 1.2 3.0 2.4Switzerland -1.9 2.7 1.9 1.4 -0.5 0.7 0.4 0.6

GDP Inflation

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GDP & Inflation – EMEA and Asia/Pacific (%)

Source: HSBC

Key forecasts

2009 2010 2011f 2012f 2009 2010 2011f 2012fWorld (nominal GDP weights) -2.6 3.9 2.5 2.6 1.0 2.4 3.4 2.7World (PPP weights) -0.7 5.1 3.6 3.6 2.0 3.3 4.2 3.3Developed -4.1 2.6 1.3 1.4 0.0 1.4 2.6 1.7Emerging 2.0 7.6 6.0 5.9 4.9 5.6 6.3 5.8EMEA -3.4 4.3 4.0 3.1 7.6 6.0 6.3 6.2Czech Republic -4.1 2.2 1.9 1.7 1.0 1.5 1.9 2.4Hungary -6.7 1.2 1.8 1.5 4.2 4.9 3.7 3.5Poland 1.6 3.8 3.7 3.0 3.5 2.6 4.1 3.1Russia -7.8 4.0 4.2 3.0 11.7 6.9 8.6 7.6Turkey -4.8 8.9 5.1 3.0 6.3 8.6 5.9 7.4Ukraine -14.8 4.2 4.0 5.1 16.0 9.4 8.6 8.0Romania -7.1 -1.3 1.5 2.5 5.6 6.9 6.3 4.0Egypt* 4.7 5.1 1.8 2.7 15.5 11.7 11.0 8.9Israel 0.8 4.7 4.3 3.2 3.3 2.7 3.6 2.4Saudi Arabia 0.1 4.1 5.9 4.3 5.1 5.3 4.8 6.1UAE -2.9 1.7 3.9 4.2 -0.4 1.8 2.0 2.8South Africa -1.7 2.8 3.0 2.5 7.2 4.3 5.1 5.9Asia-Pacific 0.4 6.6 3.9 5.2 0.9 2.2 2.9 2.4Japan -6.3 4.0 -0.6 1.9 -1.3 -0.7 -0.5 -0.3Australia 1.4 2.7 1.8 3.9 1.8 2.8 3.6 3.1New Zealand -2.0 1.7 2.0 3.8 2.1 2.3 4.4 3.0Asia ex Japan 5.9 9.1 7.3 7.4 2.9 4.8 5.6 4.6China 9.2 10.4 8.9 8.6 -0.7 3.3 4.8 2.9Asia ex Japan & China 2.5 7.8 5.5 6.0 5.6 5.8 6.1 5.7Hong Kong -2.7 7.0 5.0 4.5 0.6 2.3 5.0 5.3India 7.0 9.0 7.4 8.0 12.4 10.4 8.0 7.7Indonesia 4.6 6.1 6.4 6.7 4.8 5.1 5.6 6.2Malaysia -1.6 7.2 4.8 5.0 0.6 1.7 3.2 3.0Philippines 1.1 7.6 4.3 4.8 3.3 3.8 4.4 4.5Singapore -0.8 14.5 5.0 5.1 0.6 2.8 4.7 3.0South Korea 0.3 6.2 3.4 4.1 2.8 3.0 4.4 3.6Taiwan -1.9 10.9 4.0 1.7 -0.9 1.0 1.5 2.0Thailand -2.3 7.8 3.9 5.0 -0.8 3.3 4.0 3.6Vietnam 5.3 6.8 5.8 7.0 7.0 9.2 18.4 11.2

GDP Inflation

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Policy rates (%)

Source: HSBC

Monetary policy

Q1 2011 Q2 2011 Q3 2011f Q4 2011f Q1 2012f Q2 2012f Q3 2012f Q4 2012f

US Targeted Fed funds 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 0.00 to 0.25 Japan Overnight call rate 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 Eurozone Repo rate 1.00 1.25 1.50 1.25 1.00 1.00 1.00 1.00 UK Bank rate 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 Canada Overnight rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

Source: Thomson Reuters Datastream, HSBC estimates

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Short rates (%)

Note: *= 1-month moneySource: HSBC

3 month money

End period 2007 2008 2009 2010 _____ 2011_______ _______________ 2012________________ Q4 Q4 Q4 Q4 Q3f Q4f Q1f Q2f Q3f Q4f

North America US (USD) 4.7 1.4 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 Canada (CAD) 4.5 1.9 0.5 1.2 1.2 1.3 1.3 1.3 1.3 1.5 Latin America Mexico (MXN) 7.3 8.2 4.6 4.4 4.3 4.3 4.3 4.4 4.8 5.0 Brazil (BRL) 11.2 13.0 8.7 11.1 12.1 11.0 10.0 10.0 10.0 10.0 Chile (CLP) 6.2 7.9 0.5 3.3 5.3 5.1 4.6 4.6 4.6 4.6 Western Europe Eurozone 4.6 2.9 0.7 0.9 1.5 1.5 1.3 1.3 1.3 1.3 Other Western Europe UK (GBP) 5.9 2.8 0.6 0.8 1.0 0.9 0.8 0.8 0.8 0.9 Norway (NOK) 5.9 4.0 2.2 2.6 3.0 2.7 3.0 3.2 3.6 4.0 Sweden (SEK) 4.7 2.5 0.5 1.8 2.5 2.3 2.5 2.7 2.9 3.1

Switzerland (CHF) 2.6 0.6 0.3 0.2 0.0 0.3 0.3 0.5 0.7 0.8 EMEA Hungary (HUF) 7.6 10.0 6.0 5.7 5.9 5.8 5.8 5.8 5.7 5.6 Poland (PLN) 5.1 5.8 4.2 4.0 4.6 4.6 4.6 4.6 4.8 4.8 Russia (RUB)* 6.3 20.6 6.6 3.8 4.8 5.5 5.5 5.7 6.3 6.5 Turkey (TRY) 16.0 15.5 7.5 6.7 6.0 6.0 6.3 6.5 6.8 7.0 Ukraine (UAH) 6.6 20.0 16.1 7.5 7.0 9.0 7.0 7.0 9.0 9.0 South Africa (ZAR) 11.3 11.4 7.1 5.6 5.6 5.5 5.2 5.4 5.5 5.8 Asia-Pacific Japan (JPY) 0.6 0.6 0.3 0.2 0.2 0.3 0.3 0.3 0.3 0.3 Australia (AUD) 7.3 4.1 4.0 4.9 4.8 5.3 5.5 5.6 5.7 5.8 New Zealand (NZD) 8.9 6.0 2.8 3.3 2.8 3.4 3.9 4.2 4.5 4.6 Asia ex Japan China (CNY) 3.3 1.7 1.7 5.0 6.8 4.9 4.6 4.4 4.7 4.3 Asia ex Japan & China India (INR) 8.3 9.2 3.7 7.2 8.3 7.7 7.7 7.7 7.7 7.7 Hong Kong (HKD) 3.5 1.0 0.1 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Indonesia (IDR) 7.8 12.0 6.6 6.4 6.8 6.8 6.8 7.3 7.6 7.6 Malaysia (MYR) 3.6 3.4 2.3 3.0 3.1 3.1 3.4 3.6 3.6 3.6 Philippines (PHP) 3.7 6.1 3.9 0.8 4.5 4.5 5.2 5.5 5.7 5.7 Singapore (SGD) 2.5 1.4 0.7 0.4 0.4 0.7 0.7 0.9 0.9 1.0 South Korea (KRW) 5.7 4.7 2.8 2.8 4.1 4.1 4.3 4.6 4.6 4.6 Taiwan (TWD) 2.2 1.0 0.5 0.7 1.1 1.1 1.1 1.2 1.4 1.5 Thailand (THB) 3.7 3.6 1.4 2.2 3.8 4.1 4.1 4.1 4.1 4.1

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Long rates (%)

Source: HSBC

10-year bond yields

End period 2007 2008 2009 2010 ______ 2011 _______ ________________ 2012_________________ Q4 Q4 Q4 Q4 Q3f Q4f Q1f Q2f Q3f Q4f

Americas US 3.5 3.3 3.8 3.3 1.9 1.5 1.7 1.7 1.8 1.8 Canada 3.4 3.3 3.6 3.2 2.1 2.0 2.1 2.3 2.3 2.3 Chile 6.3 7.4 5.9 6.1 6.3 5.1 7.0 7.0 7.0 7.0

Western Europe Eurozone 3.8 3.5 3.6 3.8 3.3 3.1 3.1 3.1 3.2 3.2 Germany 3.4 3.2 3.4 3.0 1.9 1.5 1.6 1.7 1.7 1.7 France 3.7 3.5 3.6 3.4 2.6 2.4 2.3 2.4 2.4 2.4 Italy 4.3 4.0 4.0 4.5 5.5 5.6 5.4 5.4 5.5 5.5 Spain 4.0 3.7 3.9 5.5 5.1 5.1 4.9 4.9 5.0 5.0

Other Western Europe UK 3.7 3.7 4.1 3.7 2.4 2.0 2.1 2.2 2.2 2.2 Norway 4.2 4.1 4.4 3.7 2.4 2.1 2.2 2.3 2.4 2.4 Sweden 3.5 3.3 3.3 3.3 1.7 1.5 1.6 1.8 1.9 2.0 Switzerland 2.3 2.0 1.9 1.8 1.0 0.8 0.9 0.9 1.0 1.0 EMEA Hungary 7.6 10.0 7.7 7.9 7.5 7.6 7.5 7.5 7.4 7.3 Poland 5.7 5.4 6.3 6.0 6.2 6.0 6.2 6.3 6.3 6.3 Russia 6.3 11.3 8.7 7.7 8.0 8.6 8.1 7.8 7.9 7.9 South Africa 8.4 7.3 9.0 8.4 8.4 8.2 8.0 8.1 8.3 8.5

Asia-Pacific Japan 1.4 1.3 1.3 1.2 1.0 1.0 0.9 1.0 1.1 1.2 Australia 5.5 5.4 5.7 5.6 4.2 4.0 3.9 4.1 4.2 4.4 New Zealand 6.0 5.6 6.0 5.8 4.4 4.4 4.3 4.4 4.5 4.5 Asia ex Japan India 7.8 5.3 7.7 8.0 8.5 8.3 8.1 7.8 8.0 7.8 Hong Kong 2.9 2.4 2.6 2.9 1.5 1.4 1.5 1.6 1.6 1.9 Indonesia 9.2 11.8 10.1 8.3 6.9 7.0 7.4 8.0 7.8 7.6 Philippines 6.4 7.3 7.9 5.9 5.6 5.4 8.0 8.0 8.0 8.0 Singapore 2.3 1.4 2.7 1.8 1.5 1.4 1.4 1.5 1.5 1.7

Source: HSBC

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Exchange Rates vs USD – Americas, Europe & EMEA

Source: HSBC

End period 2007 2008 2009 2010 2011 2012Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f

AmericasCanada (CAD) 0.99 1.23 1.05 1.03 0.99 0.97 0.97 1.04 0.97 1.00 1.00 1.00 1.00Mexico (MXN) 10.92 13.81 13.08 12.62 12.36 11.89 11.71 13.88 12.00 12.25 12.50 12.50 12.50Brazil (BRL) 1.77 2.31 1.74 1.69 1.67 1.63 1.56 1.85 1.65 1.65 1.65 1.65 1.65

Argentina (ARS) 3.15 3.45 3.80 3.96 3.97 4.06 4.11 4.21 4.28 4.40 4.53 4.66 4.80

Chile (CLP) 498 637 507 484 468 478 467 521 455 455 460 465 470

Western EuropeEurozone (EUR) 1.46 1.39 1.43 1.37 1.34 1.42 1.45 1.34 1.38 1.40 1.42 1.44 1.44

Other Western EuropeUK (GBP) 1.99 1.44 1.61 1.58 1.57 1.60 1.61 1.56 1.59 1.61 1.63 1.66 1.66Sweden (SEK) 6.46 7.91 7.14 6.73 6.72 6.31 6.31 6.87 6.52 6.36 6.20 6.04 6.04Norway (NOK) 5.43 7.00 5.78 5.86 5.81 5.53 5.37 5.87 5.43 5.32 5.21 5.14 5.14Switzerland (CHF) 1.13 1.06 1.03 0.98 0.93 0.91 0.84 0.91 0.87 0.86 0.85 0.83 0.83

EMEA

Czech Republic (CZK) 18.19 19.31 18.40 18.00 18.70 17.31 16.78 18.42 17.97 17.29 16.90 16.67 16.67Hungary (HUF) 172.9 191.3 188.3 202.6 207.5 187.2 183.1 218.7 206.5 200.0 193.7 187.5 184.0Poland (PLN) 2.46 2.96 2.86 2.91 2.95 2.84 2.75 3.29 3.15 3.00 2.96 2.85 2.78Russia (RUB) 24.5 29.4 30.2 30.4 30.5 28.4 28.1 31.9 31.5 28.8 31.1 32.2 32.6

Turkey (TRY) 1.17 1.54 1.50 1.45 1.54 1.55 1.62 1.86 1.75 1.70 1.65 1.60 1.60Ukraine (UAH) 5.05 8.05 8.00 7.93 7.97 7.96 7.97 8.00 8.05 8.50 8.70 9.00 9.50Israel (ILS) 3.95 3.78 3.75 3.75 3.57 3.56 3.50 3.70 3.80 3.75 3.70 3.60 3.50Egypt (EGP) 5.52 5.52 5.48 5.71 5.70 5.90 6.00 6.00 6.00 6.10 6.25 6.40 6.50

South Africa (ZAR) 6.83 9.25 7.36 6.97 6.62 6.76 6.78 8.04 7.60 7.30 7.10 7.00 7.00

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Exchange Rates vs USD – Asia/Pacific

Source: HSBC

End period 2007 2008 2009 2010 2011 2012Q4 Q4 Q4 Q3 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f

Asia/PacificJapan (JPY) 112 91 93 84 81 83 81 77 74 73 73 72 72Australia (AUD) 0.88 0.70 0.90 0.97 1.03 1.03 1.07 0.97 0.95 0.94 0.94 0.93 0.93New Zealand (NZD) 0.77 0.58 0.73 0.74 0.78 0.76 0.83 0.76 0.76 0.76 0.75 0.74 0.74China (CNY) 7.31 6.82 6.83 6.69 6.59 6.55 6.46 6.38 6.35 6.30 6.25 6.20 6.15Hong Kong (HKD) 7.80 7.75 7.75 7.76 7.77 7.78 7.78 7.78 7.80 7.80 7.80 7.80 7.80India (INR) 39.4 48.6 46.4 44.6 44.7 44.5 44.7 49.0 49.0 48.2 47.4 46.6 45.5Indonesia (IDR) 9393 11027 9425 8925 9010 8708 8577 8790 8800 8700 8550 8400 8300Malaysia (MYR) 3.31 3.46 3.42 3.09 3.08 3.03 3.02 3.19 3.10 3.05 3.00 2.95 2.88Philippines (PHP) 41.28 47.47 46.50 43.90 43.65 43.46 43.34 43.73 43.50 43.00 42.50 42.00 41.00Singapore (SGD) 1.44 1.43 1.41 1.31 1.28 1.26 1.23 1.31 1.27 1.25 1.23 1.21 1.19South Korea (KRW) 936 1263 1166 1140 1121 1097 1067 1181 1150 1130 1110 1090 1070Taiwan (TWD) 32.4 32.9 32.1 31.2 30.4 29.4 28.7 30.5 30.0 29.5 29.0 28.5 28.0Thailand (THB) 33.72 34.90 33.33 30.37 30.10 30.25 30.70 31.12 30.70 30.20 29.70 29.20 28.80Vietnam (VND) 16217 16900 18200 19475 19498 20895 20515 20830 21500 21500 21500 21500 21500

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ResearchResearch

Research WebsiteAccessed at: http://www.hsbcnet.com/researchClick “HSBCnet Research” on left-hand menuTo register: Select ‘register’ option

BloombergHSBE - EconomicsHSBV - Global Fixed Income StrategyHSBO - Currency StrategyHSTG - Equity StrategyFor access: Go to the relevant page and key 97 <GO>

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Disclosure appendix

Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Janet Henry

Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

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Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

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Additional disclosures 1 This report is dated as at 17 October 2011. 2 All market data included in this report are dated as at close 14 October 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other

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Disclaimer

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