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economic-research.bnpparibas.com

/// 10 February 2012 /// 12-06

The OAT-Bund spread is below 100bp.

The equity market index is driven bycyclicals (automotive and commoditystocks) and up nearly 8% since thestart of the year. The euro is strongerand volatility and premiums attached toItalian and Spanish debt have abated...Financial markets want to believe that itis the beginning of the end for the eurozone crisis.One of the conditions for exiting thecrisis, which we have long insisted onin these columns, has finally arrived:

the ECB has fully played its role asbanking lender of last resort. It haseffectively intervened in the moneymarkets (3-year loans, easing ofeligibility criteria for collateral, releaseof part of mandatory reserves, etc.).Lending conditions improved on theinter-bank market (the BOR-OISspread has narrowed) and CDSpremiums on banks debt havedeclined. It was about time. Over thelast three months of 2011, moneysupply contracted in the euro zone forthe first time since Lehman Brotherscollapsed. Credit is flowing very slowly,notably in southern Europe where,unlike Germany, the economic situationis deteriorating.

Summary

A weaker euro could helpAt USD 1.30 or so, the euro is still relativelyexpensive against the dollar. However, its fallsince Aug. 11 is welcome, at least for certaincountries

Overview, page 2The week in the US Page 3The week in the Eurozone Page 4Greece, last chance agreementAgreement seems to have been reached withthe private sector on terms for the debt swap.This included a 50% haircut a 70% NPV loss.Uncertainties remain about the participation

rate, the ECBs role and approval of themeasures as counterparts. Focus 1, page 5Finland turns more favourableto euroSauli Niinist, the candidate of theconservative National Coalition Party (KOK)and former finance minister favourable to theeuro, was elected in the second round of thepresidential election. Focus 2, page 7

Economic indicators Page 9Market overview Page 10

Also in

Markets turn more confident about EMU

The ECB helps to calm down financial tensions Equities,euro, up Loud talks about the Greek debt

NARROWING SPREADOAT-Bund spread, 10year (Bps)

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2009 2010 2011 2012

Source : Thomson Datastream

THE WEEK ON THE MARKETS

Week 6-2 12 > 9-2-12

CAC 40 3 428 3 425 -0.1 %

S&P 500 1 345 1 352 +0.5 %

Volatility (VIX) 17.1 18.6 +1.5 %

Euribor 3M (%) 1.10 1.07 -3.2 %

Libor $ 3M (%) 0.53 0.51 -1.7 %

OAT 10y (%) 2.90 2.90 +0.2 % Bund 10y (%) 1.89 2.01 +11.3 %

US Tr. 10y (%) 1.95 2.01 +6.0 %

Euro vs dollar 1.31 1.33 +1.4 %

Gold (ounce, $) 1 743 1 749 +0.3 %

Oil (Brent, $) 112.9 118.2 +4.7 %

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Alexandra Estiot 10 February 2012 12-06

2 economic-research.bnpparibas.com

Overview

A weaker euro could helpSince the beginning of the European sovereign debt crisis, theDantes inferno law as been applied: as they sinned so are theypunished. Liquidity (turning into solvency) problems have to betreated with austerity, since profligacy caused the problems. It isgetting more and more obvious that austerity cannot doeverything. Even strong supporters of austerity in the past arenow calling for less of it, like the IMF, the World Bank, and eventhe OECD. The results of of A. Alesina et R. Perotti (1995), whocame up with the expansionary austerity idea, have beenquestioned in several recent papers.

For austerity to be expansionary, the domestic economy needs astrong support from exports. In the euro zone, austerity iswidespread, with countries under drip from the Troka (Greece,Ireland, Portugal), countries suffering from liquidity stresses (Italy,Spain), and countries that could be next in line (Austria, Belgium,France) if the crisis were to worsen once more. Those countriessuffer from austerity at home, depressing their domestic demand,and from austerity abroad, depressing their external demand.This leads to a very vicious circle, since dropping fiscal revenues(coming from the decline in national income) call for additionalausterity, which further depresses demand. We estimate thatbetween end-2009 and end-2012, the Greek GDP will have

contracted by 15%, without solving its government deficit: thefiscal deficit should be as high as 7.1% of GDP in 2012...

As for now, softening austerity does not look like being an option,as illustrated by the last (to date) Greek drama. For the secondbail-out to be approved by the Troka, all Greek political partieshad to commit to further cuts in government spending, what theyare reluctant to do, few weeks before general elections Whatcan be the solution, then? Some quantitative easing from theECB could not hurt. Prospects for inflation are quite reassuring inthe eurozone, leaving rooms for manoeuvre. Large acquisitions ofgovernment bonds by the ECB are however unlikely, due tostrong opposition among members of the Governing Council. We

will have to be content with LTROs (providing extra cheap liquidityto the European banking system for as long as three years),which can be viewed as QE la ECB.

For some, if distressed countries were allowed to devalue, thatwould help them. The trick can indeed be helpful. First, it gives acompetitive boost to exports, which prices are lowered thanks tothe devaluation. Second, import prices are increased, whiledomestic producer prices are left unchanged: all other thingsbeing equal, it could lead consumers to buy fewer imported goodsand more domestically-produced goods. Third, it will probablydrive inflation up, even if temporarily, which is a painless way tolower real wages.

However, devaluation is not an option within the euro zone, isntit? Well, there could be ways. Inflation is among them. Faster

inflation in healthy countries (than in distressed ones) would resultin relative depreciation in the latter. But this kind of adjustment

takes time. The gains from a falling euro would materialise faster.They could be even more marked that the potential for rapidgrowth is outside the eurozone: mainly the BRICs, with promisingprospects in the US. The benefits would be, at first, probablycaptured by Germany. But it could spread to other countriesthanks to a boom in German domestic demand.

Two questions arise, then: how can we drive the euro down, andwhat would be the adverse effects. Lets begin with the latter.Higher inflation would probably be the price to pay, because ofhigher import prices. But if it were successful in changingEuropean consumers habits away from imported goods, it wouldnot necessarily be a long-lasting problem. Germany, with anunemployment rate already at all-time lows, could end-up over-heating. But this would not be before long. Its very large currentaccount surplus illustrates an unbalanced economy, with hugeamounts of excess savings.

As for how to drive the euro down. There is just one option:have the eurozone yields lowered. The parity between the euroand the dollar is rather well correlated with the 2-year spreadbetween German and US government bonds. The FedsOperation Twist, in pushing up the 2-year Treasury yield, helpeddrive down the spread, a development that could gain momentumwith the US economy accelerating. To keep German rates down,

and why not drive them even lower, a Fed-like pledge from theECB to keep monetary policy accommodative in the foreseeablefuture would help.

How to drive the euro down 2-year spread, German vs US (r.h.s.) ; EUR/USD

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Chart 1 Source : DataInsight

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Alexandra Estiot 10 February 2012 12-06


The week in the US

Primary colors

On the data front, it was a very quiet week in the US, with nomain data released. Next week will be busier, with retail sales,industrial production and price indices for January, as well asregional manufacturing surveys (New York and PhiladelphiaFeds districts) for February. On Monday, President Obama willalso release his FY 2013 Budget. With the current inability for bi-partisan talks in Washington, D.C., this budget has the sameprobability as last year to be passed: zero. It does not make ituninteresting, though, since it will sum up the economic programof President Obama for re-election.

Politics is to be the main focus in the US this year. TheRepublican party is currently in the process of choosing itscandidate for the November presidential election. As for now,eight states already voted, and Mitt Romney, who was always thenatural candidate, won three contests (New Hampshire, Floridaand Nevada), Newt Gingrich one (South Carolina), with RickSantorum making a surprise come back (Colorado, Minnesota,Missouri), while the Iowa winner remains uncertain (the winner iseither Romney or Rick Santorum). During the week-end, resultsof the caucuses in Maine, held during the week, will be released.Then, there will be a two-week break, followed by the Arizona andMichigan primaries, on February 28th, right before Super

Tuesday. On March 6th, 10 states will vote for a fifth of thedelegates to the sent to the Republican convention.

The candidate will be officially designated during the Republicanconvention, to be held at the end of August in Tampa, Florida. Tomake it short, states hold primaries (run by state and localgovernments) and caucuses (private events directly run by theRepublican party) to select the delegates who will then make it tothe Convention and vote for the Republican candidate. The nameof the candidate is usually known way before the convention,which is then just a gathering with high media coverage. In 2008,John Mc Cain became the unquestioned candidate right afterSuper Tuesday. However, this time could prove different. First,Super Tuesday slimmed down, with only 10 states voting, against21 four years ago. Second, Newt Gingrich does not look likethrowing the towel in so easily, repeating, after his defeat inNevada, that he would campaign until the party convention. Additionally, the recent victories of Rick Santorum revived hiscampaign, even if his chances of winning the Republicannomination are rather thin.

However, the longest the Republican primaries, the harsher thedebate, the greater the boost to the Democrat candidate. Indeed,the two main Republican candidates look like providing PresidentObama with arguments, about Mitt Romney being a super-rich

fellow escaping federal taxes and Newt Gingrich having earned aliving by lobbying for Freddie Mac. President Obama wouldcertainly benefit from a long lasting debate of this kind, at a time

the labour market is kicking of, and provides support to theincumbent President.

The benefit for the US is less of a clear-cut. The never-endingRepublican primaries are likely to exacerbate the hyper-partisanship, which is, currently, the main illness of the US.Because of the inability for bi-partisan talks, the federal

government came close to a shut-down several times last year. Itwas also the reason behind the summer drama over raising thedebt ceiling, which ultimately cost the US one of its A.

CalendarJanuary 3 IowaJanuary 10 New HampshireJanuary 21 South CarolinaJanuary 31 FloridaFebruary 4 NevadaFebruary 411 MaineFebruary 7 Colorado, Minnesota, MissouriFebruary 28 Arizona

Michigan

March 3 WashingtonMarch 6 Super Tuesday

Alaska, Georgia, Idaho, Massachussetts,North Dakota, Ohio, Oklahoma, Tenessee,Vermont, Virginia

March 6-10 WyomingMarch 10 Kansas, Virgin IslandsMarch 13 Alabama, Hawaii, MississippiMarch 17 MissouriMarch 20 IllinoisMarch 24 Louisiana

April 3 District of Columbia, Maryland,Wisconsin, Texas

April 24 Connecticut, Delaware, New York,Pennsylvania, Rhode Island

May 8 Indiana, North Carolina, West VirginiaMay 15 Nebraska, OregonMay 22 Arkansas, KentuckyJune 5 California, Montana, New Jersey,

New Mexico, South DakotaJune 26 Utah

August 27-30 Republican Convention

September 3-6 Democrat Convention

October 3, 11, 16 & 22 Presidential Debates

November 6 Election Day

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Clemente De Lucia 10 February 2012 12-06


The week in the Eurozone

ECB: taking its t imeKey policy rates unchanged

Yesterday the ECBs Governing Council meeting decided to leavekey policy rates unchanged. The refi rate was held at an all timelow of 1%, after two 25bp rate cuts in the last two months of 2011.

Economic condi tions point to another rate cut

As usual, the ECB neither opened nor closed the doors to furtherkey rate cuts. Yet persistently poor economic conditions suggestthat the refi rate might be cut further. Mr Draghi again stressedthat there is downside risk to activity, and that uncertainty wasstill unusually high. Admittedly, recently released survey datawere surprisingly upbeat, signalling the early stages of recovery.Yet the recovery seems to be highly unbalanced. According tosurvey data, output probably rebounded strongly in Germany,which unlike its peers, can count on buoyant domestic demand. Inthe peripheral countries, in contrast, activity is likely to continue tocontract.On the inflation front, there is nothing to prevent the ECB fromlowering its policy rates. Although at 2.7%, inflation is still highand well above the ECB's ceiling target for medium-term pricestability, it has entered an easing trend, pulled down byfavourable base effects and a moderate decline in core inflation.

Wage growth, one of the main driving forces of core inflation, isunlikely to pick up in the months ahead. Wages, costs and pricingpressures will remain moderate over the forecast horizon.

Alarming financial and monetary conditionsExtremely tight financial and monetary conditions could justifyfurther interest rate cuts. The ECB is still worried about financialand money market tensions, which are hampering thetransmission of monetary policy and driving up funding costs forthe banking sector. The latest Bank Lending Survey suggests thatbanks significantly tightened their credit standards in Q4 2011and expect conditions to tighten further in Q1 2012, albeit at a

slower pace. The ECB took concrete actions to reduce fundingcosts for banks, and consequently, for the economy as a whole,given the importance of the banking sector as a source ofexternal funding for non-financial companies. After the first of two3-year LTROs was launched at the end of December, conditionshave started to ease. Given its lagging impact, however, the fulleffects probably have not passed on to the economy yet. TheECB will conduct a second 3-year LTRO at the end of February.The Governing Council agreed on the expansion of the list of thecollaterals that might temporary be used to obtain liquidity fromthe ECB. These measures can increase largely the number ofbanks participating in the second 3-year LTRO. President Draghistressed that by enlarging the list of collaterals many small andmedium banks, which largely finance the private sector, couldobtain liquidity and reduce their funding costs. The ECB wants to

evaluate the impact of the actions taken so far before adoptingfurther measures.

Participation in the Greece bailoutDuring the Q&A session, President Draghi was asked aboutGreece and whether the ECB intends to participate in the bailout.He preferred not to answer the question before the decisions thatthe Eurogroup will adopt on Greece. There was some speculationduring the week that the ECB might forgo profit on about 40bnin Greek bonds (with a payout of about 55bn if held to maturity)purchased under the Securities and Market Program. Yet Mr.Draghi was very clear on this point, saying that making losses onits bond holdings would be a kind of government financing inviolation of the Treaty, and would be equivalent to passing moneydirectly to a government. Nonetheless, he left the door open to

other solutions, saying that sharing profits with ECB memberswas not a form of government financing.

All in all, the ECB remains in a wait-and-see mood. It has takensignificant actions to guarantee the smooth functioning of thepayment system by launching refinancing operations with maturityof up to 3 years. These actions have significantly reducedtensions since the beginning of the year. The ECB will probablywait for the second LTRO before deciding on further measures.However, economic conditions are far from normal and there isstill a big risk of falling back into a negative spiral of risingfinancial tensions, slowing growth and eroding confidence. As aresult, we cannot rule out the possibility of an interest rate cut in

March, when the ECB presents its new inflation and growthforecasts.

Another interest rate cut? Refi rate changes;Composite PMI : activity;

9 8 0 0 0 1 0 2 0 3 0 4 0 5 06 0 7 08 09 10 1 1 1 2

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Graph.1 Sources: ECB, Market Economics

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Thibault Mercier 10 February 2012 12-06


Focus 1

Greece: Last chance agreement

Agreement seems to have been reached with theprivate sector on terms fo r the debt swap. This included a50% haircut a 70% NPV loss.

Uncertainties remain about the participation rate, theECBs role and approval of the measures as conditi ons

With a bond repayment deadline approaching, a wayout of the impasse has to be found quickly

At the 26 October 2011 summit, European leaders agreed toprovide a second rescue package for Greece worth 130bn. Atthe same time, the private sector accepted a voluntary debt swapin principle. While not triggering payment on CDS, this wouldenable Greece to reduce its debt by 100bn (out of a total ofabout 360bn). This means that the private and public sectorshave agreed on 230bn in financial assistance, to which must beadded the 37bn in the first rescue package (in May 2010), whichhave not yet been paid out. A total of 267bn is thereforesupposed to cover the Greek governments financingrequirements over the next three years.

For the time being, implementation of the second rescue plan hasstill not been finalised, raising fears that Greece will default on therepayment of 14.5bn of bonds due on 20 March. Whileagreement seems to have been reached with the private sectoron terms for the debt swap (which would cause the March bondredemption to disappear), completion of the process and releaseof the second rescue package have been suspended pendingapproval by the main Greek political parties of the austeritymeasures demanded as conditions by official creditors (theEuropean Union and IMF). The ECBs participation in the debtswap is also subject to many speculations.

Debt swapWhile Greeces private sector creditors may have accepted theconcept of a debt swap at a discount (called PSI or Private SectorInvolvement), the interest rate and maturity of the new bonds arestill to be determined. These are essential factors in calculatingthe loss realised on the transaction in net present value (NPV)terms.

Unlike the 21 July 2011 summit, which set an NPV loss target of21%, which was later deemed insufficient, the 26 October summitonly targeted the size of the discount (50%), which could lead todiffering NPV losses depending on the interest rate and maturityof the new bonds. An agreement finally seems to have beenreached on the basis of the new bonds being discounted by 50%and bearing a coupon of 3.70% for 30 years.

This would give an NPV loss of 70% using a discount rate of 12%and collateral of 30bn (see table 1).

Greek debt sustainability

In addition to easing the Greek governments liquidityrequirements in the short term, the private sector involvement is

intended as a response to the diagnosis that the Greekgovernment is insolvent. According to the IMFs latest simulation,the cancellation of 100bn of private sector debt should lead to apublic debt ratio of 120% of GDP in 2020 (compared with 166%now).

However, this estimate comes up against a problem of size.Reducing debt by 100bn assumes that the participation rate inthe forthcoming debt swap is close to 100%, which is far fromguaranteed. In fact, since the PSI is voluntary, it leaves the dooropen to so-called free rider behaviour: some creditors might notparticipate in the debt swap, while still wanting it to take place, totake advantage of the easing of rates which is likely to follow itand/or be repaid at par from the funds released by euro zonecountries. Other creditors who hold CDS may also have an

Who holds Greek debt?Greek bonds by holder

Other non tradable

36 Private creditors

EU, IMF 200

73

ECB

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* We assume that the ECB bought Greek bonds at an average discount of

20%, i.e EUR40bn for a facial value of EUR50bnGraph.1 Source: BNPP

70% NPV lossScenarios #1 #2 #3 #4

Haircut (%) 50 50 50 50

Discount rate (%) 9 9 12 12

Coupon (%) 4.5 3.7 4.5 3.7

Maturity 30 30 30 30

Coupon NPV (%) 23.3 19.8 18.2 15.4Collateral NPV (%) 14.6 14.6 14.6 14.6

NPV loss (%) 62.1 65.6 67.2 70.0

Table 1 Source: BNPP

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Thibault Mercier 10 February 2012 12-06


interest in blocking a swap to cause the country to default,thereby triggering payment of the CDS.

To mitigate this drawback, Greece could retroactively introducecollective action clauses (CAC) on bonds in circulation. CACwould make it possible to impose a restructuring on all creditorswhen a predetermined proportion of them1 approved such anoption. Introducing CAC on the bonds does not in itself constitutea credit event that would trigger payment of CDS, but it would bea form of pressure to increase the participation rate. On the otherhand, actually activating the CAC would run the risk of triggeringpayment of the CDS.

ECBs role

Activating the CAC also presents the problem of ECBinvolvement in the debt swap. The Bank has bought at a discountin the secondary market Greek bonds with a face value of about50bn under its sovereign debt purchase programme (SMP). Sofar, the ECB has refused to take part in the negotiations, basedon its status as an official creditor. However, if the CAC wereactually to be introduced, the bonds which the ECB holds wouldbe subject to restructuring in the same way as those held by theprivate sector2 which would imply losses of around EUR 15-20bn.

There is little chance of this outcome materialising, since lossessuffered by the ECB would be in conflict with EU Treaties that bangovernments financing. However the Bank could give up thebonds it holds without losses before any CAC were introduced.

Having bought Greek bonds at an estimated discount of 20%,swapping 50bn of the bonds it owns for bonds worth 40bnwould amount to neutral transaction for the central bank.

Several unofficial sources are therefore hinting at the ECBswapping Greek bonds it holds for European Financial StabilityFacility (EFSF) bonds to the same value as the purchase price ofthe Greek bonds. At least two scenarios are then conceivable:either the EFSF subscribes the Greek bonds to the debt swapand suffers losses (unlikely), or the EFSF returns the Greekbonds to the Greek government, which cancels them but will havea 40bn debt to the EFSF. The latter will then use the redemptionflows from Greece to repay the ECB (likely). If this latter solutionwere adopted, the ECB would not suffer any loss (or any potentialgain) and Greeces debt would be reduced by 10bn.

Conditions: austerity measures

Since the beginning of November, Greece has been led by aninterim government consisting of ministers from the countrysthree main parties (the centre right New Democracy, the socialistparty, PASOK, and the extreme right party, LAOS).

1 Traditionally 66.6% or 75% of creditors.2 Unlike the ECB, the other official creditors, the euro zone countries and theIMF, have no Greek bonds. They have provided loans to the Greekgovernment.

It is a condition for the second official loan to Greece to bereleased that the leaders of these three main political partiescommit themselves to applying the measures demanded by the

creditors. Among these are in particular a 20% cut in theminimum wage, which is considered too high given theproductivity of Greek workers, cuts in public spending amountingto 1.5% of GDP (3bn) and a reduction in supplementarypensions.

With general elections scheduled for April, the negotiations aremaking slow progress since the political leaders are reluctant tostate publicly that they are in favour of such unpopular measures.Discussions have already twice run on past the dates set asdeadlines. Nonetheless, progress is being made and anagreement is likely in a short while. At the time of writing, three

obstacles still have to be lifted: an agreement over EUR 350madditional cuts, an approval vote in the Greek parliament and aclear commitment from all members of the coalition governmentthat they will stick to the plan after general elections.

What comes next

Assuming that the new austerity measures are accepted andapproved in the Greek parliament (the three parties in the interimgovernment have 252 of the 300 seats), PSI should apply and theGreek government should receive the first tranche of the secondloan. This sequence of events is obviously necessary for the

economy to recover and offer a real breath of air to the Greekgovernment. This debt swap will mean that the bulk of the debtredemptions will be pushed back to 30 years from now, giving theGreek government more time and room for manoeuvre. However,it does not spare Greece the effort it will have to make to continuewith its fiscal consolidation. We estimate that at the end of 2011the Greek government had a primary deficit (before interest costs)of about 5bn. Transforming this deficit into a surplus (in 2012, or2013 at the latest) is essential for Greece to take on its interestburden in a more independent manner, and return to solvency. Areturn to economic growth is also necessary if the country is torebuild a virtuous dynamic of recovering economic activity andimproving cyclical budget deficit. Finally, the whole process would

be made considerably easier if the measures for combating taxfraud helped to free up extra sources of revenue, which is cruellylacking today.

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Caroline Newhouse 10 February 2012 12-06


Focus 2

Finland turns more favourable to euro

Sauli Niinist, the candidate of the conservativeNational Coalition Party, was elected president of Finlandon Sunday, 5 February.

His pro-Europe stance in the campaign should pavethe way for the Finnish government to be lessintransigent in the negotiations with Brussels.

With its own economy wide open to foreign trade,Finland has every interest in a swift resolution being found

for the sovereign debt crisis.

After thirty years of Social Democrats occupying the president'soffice, Sauli Niinist, the candidate of the conservative NationalCoalition Party (KOK) the party of prime minister Jyrki Katainen was elected in the second round of the presidential election. Aformer finance minister favourable to the euro,1 he will take officeon 1 March for a six-year term. He succeeds Tarja Halonen, aSocial Democrat who has held the post for the past twelve years.

Low turn-out

For the first time in the country's history, voter participation was

lower in the presidential election2 than in the parliamentaryelection, reversing the usual pattern (more than 70% of Finnishvoters cast ballots in the April 2011 legislative election). The lowerturn-out can be attributed to the fact that the two candidatescompeting in the second round were not that far apart: there wasno real right-left divide.

The fewer than 7% of the vote won by Paavo Lipponenrepresents a serious reverse for the Social Democratic Party,which had already failed to surpass the 20% threshold in the lastlegislative election on 17 April 2011 (it garnered 19.1% of thevote). The outcome for the Finns Party is also a surprise. Thisnationalist party had made a notable breakthrough in the 2011

election, by capitalising on the Greek crisis and euroscepticism.The Finns won 34 additional seats with 19.1% of the vote as biga share as the Social Democrats, who now hold three fewer seatsin the Assembly than the Finns Party.

The low turn-out can also be attributed to the recently imposedlimits on the duties and powers of the president, which meant thatless was at stake in this election. For one thing, the Finnishpresident has no power to decide in matters of internal affairs,

1 A proponent of budgetary rigour, Mr Niinist led Finland's adoption of theeuro when he was serving as finance minister (1996-2003). He has alsoworked at the European Investment Bank.2 The participation rate was 68.8%, the lowest figure since 1950. Usually it isaround 80%.

although he does appoint certain high-level officials such as thegovernor of the central bank. For another, effective from the

beginning of this year, he has lost the initiative role in Europeanpolicy to the government. The country's representative to theEuropean Union is now the prime minister. Furthermore, any

An export-driven economyExports, yoy %, 3mos mov. avg. (LH scale); Monthly GDP index,

oy, 3mos mov. avg.;

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Graph.1 Source: Statistics Finland

The KOK puts an end to 30 years of SocialDemocratic presidency

Results of the presidential elections of 22 January and 5 FebruaryVote casts Vote casts

in the 1st round in the 2nd round

Candidates Total % Total %

Sauli Niinist (KOK) 1 131 127 37,0% 1 802 400 62,6%

National coalition party

Pekka Haavisto (VIHR) 573 872 18,8% 1 076 957 37,4%

Greens

Paavo Vyrynen (KESK) 536 731 17,5%

Center party

Timo Soini (PS) 287 405 9,4%

Fins party

Paavo Lipponen (PSD) 205 020 6,7%Social democratic party

Paavo Arhinmki (VAS) 167 359 5,5%

Leftist alliance

Eva Biaudet (SFP) 82 581 2,7%

Swedish People's party

Sari Essayah (SKL) 75 755 2,5%

Christian democrats Table 1 Source: Finnish Ministry of Justice

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Caroline Newhouse 10 February 2012 12-06


conflicts between the head of state and the head of governmentare henceforth to be resolved by parliament. Even thoughEuropean issues are no longer part of the Finnish president's

brief, the presidential elections have given the Finnish people anopportunity to demonstrate their attachment to the euro (56% ofthe vote in the first round, adding together votes for the KOK andGreen Party candidates). The government may consequentlyadopt a less intransigent position on the debt crisis question. As itwas, Europe, the euro zone crisis and the Greek debt crisis werecentral issues in the electoral campaign. Mr Niinist defended theEuropean Union and insisted on maintaining strong ties toEurope, since Finland's economy is so dependent on exports. Inthis regard, at the beginning of February the Finnish parliamentgave the go-ahead for Finland to participate in the EU'sstabilisation mechanism. This green light is a strong signal,

inasmuch as Finland was the only country that did not support thechange in the decision-making process at the EMS fromunanimity to an 85% majority. The parliament deemed that thenew "Treaty on stability, coordination and governance in theEconomic and Monetary Union" provided sufficient assurance ofstronger fiscal discipline.

Finland: a triple-A that hangs on the future of the euro zone

Mr Niinist begins his term as president at a moment ofconsiderable economic uncertainty for his country. Thepersistence of the sovereign debt crisis in the euro zone is havinga marked adverse effect on Finland's growth owing to its small

size and high degree of openness to foreign trade. This is thereason that Standard & Poor's put Finland's AAA rating on'CreditWatch Negative' on 13 January 2012. This means that adecision on S&P's rating of the country will be taken by the end ofMarch.

Heavily dependent on its export sector, primarily in capital goodsand luxury goods, Finland may be going through a brief recessionsince the end of last year. Exports decelerated continuouslyduring 2011, sliding from 34.8% yoy between January and March2011 (their fastest growth since 1977) to 8.6% yoy betweenSeptember and November (see fig. 1 above). The recessionstands to be mild, however, to the extent that Finland's main

trading partner in the euro zone, Germany, succeeds in avoidinga similar episode of contraction in economic activity3.

3 We have revised our forecasts of German GDP growth: after a contractionof just 0.2% qoq in Q4 2011 (the initial estimate of GDP for the fourth quarterwill be released Wednesday, 15 February), as against 0.6% expectedpreviously, GDP is projected to resume growing in Q1 2012, with a rise of0.3%, and to accelerate further in the following quarters. For full-year 2012,we are projecting GDP growth of 1.2%.

Following GDP growth of 0.9% qoq in third quarter 2011, activityin Finland probably contracted in the fourth quarter, and thelongest of the leading indicators point to no improvement in the

short term.A marked rebound in domestic demand is unlikely in the next fewmonths. Household consumption grew by 0.5% qoq in the thirdquarter. It probably kept growing in the fourth quarter on the backof ordinary consumer spending and outlays for durable goods asthe year-end holidays drew near. In the near term, the gradualdecline in inflation should continue to buoy up householdpurchasing power in the early part of 2012. So should theindustry-wide wage agreement for the next two years (whichcovers 94% of employees), if it is ratified by the unions. Butconsumer confidence has fallen off sharply in the past fewmonths, from 18.7 in January 2011 to 1.8 in December, the

lowest level of the index since April 2009. Strained conditions inthe labour market are sapping consumers' morale. On average for2011, the unemployment rate came in at 7.8%, down from 8.4%the year before. It has still not returned to its level before the crisisof 2007 (6.9% average for the year). Given our growthassumptions for 2012 (growth of less than 1%), the foreseeabledecline in the labour force due to ageing of the population will not,by itself, be enough for Finland to make significant progress onreducing the jobless rate.

Private investment continued to advance in 2011, in line with therise in foreign demand. Over the year as a whole it is likely tohave increased by approximately 3% yoy. The outlook for 2012 is

less favourable, owing to the slowdown in exports and industrialproduction. On the bright side, though, Finland has no need forfiscal consolidation, which means public investment can continueto contribute positively to GDP growth. Unlike a good manycountries in the euro zone, Finland's public finances are so solidthat it has not had to implement a belt-tightening policy in itsbudgeting. The budget deficit in 2011 is likely to be less than 2%of GDP, whereas public debt stands at about 50% of GDP.

All in all, given its highly open economy, Finland has everyinterest in seeing the sovereign debt crisis resolved quickly. Itsown economic health depends on recovery in the euro zone.

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OECD Team 10 February 2012 12-06


To watch from 13 au 17 February 2012

Monday 13 February 2012 JAPAN: GDP (Q4 2011)

GDP is expected to have contracted by 0.4% in Q4, due to falls in exports and public investment. The latter should gain momentum in Q1,preventing the economy from falling into recession.

Tuesday 14 February 2012

UNITED STATES: Retail sales (January)Retail sales are expected to gain 0.9% m/m, with positive contributions across the board: core retail sales as well as gasoline sales shouldrebound, with cars' sales to remain strong. This will confirm that the US recovery is gaining momentum.

UNITED KINGDOM: Consumer prices (January)

Inflation fell back markedly in December, from 4.8% in November to 4.2%. In January, the fall is likely to continue, with 3.5%, as temporaryfactors are progressively fading away in a context of slow economic activity.

EURO ZONE: Industri al Product ion (December)Industrial production was rather stable in November 2011. Available data suggest, however, that output might have contracted sharply inDecember. Over the quarter, industrial output might probably fall by more than 1% compared by +0.5% in Q3 2011.

Wednesday 15 February 2012

UNITED STATES: Industri al production (January)We expect further good news from the US manufacturing sector, which will be lessened by soft data for utility production. The overall indexis expected at +0.3% m/m. Prospects are for a continuous strengthening, as indicated by the ISM manufacturing survey

UNITED KINGDOM: Claimant coun t (January)Hiring intentions have increased in January. Consequently, the Claimant Count could be flat and the jobless rate could remain at 5%.

EURO ZONE: Q4 11 GDP (Flash est imate)The intensification of financial tensions in the second half of last year weighed significantly on the real economy, particularly in Q4 2011.After rising by a mere 0.1% q/q in Q3 2011, GDP probably fell by as much as 0.4% q/q in the last quarter of 2011.

GERMANY: GDP (Q4 2011)GDP rose by 3% in 2011 (price and calendar-adjusted figures) after increasing by 3.6% in 2010. It probably decreased by around 0.3% q/qin Q4 2011 (after +0.5% q/q in Q3 2011).

FRANCE: GDP (Q4 2011)GDP is expected to decline by 0.1% in Q4 2011. Confidence surveys signal a more negative figure but the relative resilience of hard datauntil November (consumption, production, new orders, exports) argues in favour of a limited contraction.

Friday 17 February 2012

UNITED STATES: Consumer prices (January)We expect the headline index to record its first monthly increase since September (+0.3% m/m), mainly because of a 1% rise in retailgasoline prices. On a year-on-year basis, the CPI will be up by 2.8%, the lowest increase since last March.

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OECD Team 10 February 2012 12-06


Markets overview

The essentials 10y bond yield, OAT vs Bund Euro-dollar CAC 40

1.501.75

2.002.25

2.50

2.75

3.003.253.50

3.75

4.00

2.90

2.01

2010 2011 201209 Feb

1.16

1.20

1.24

1.28

1.32

1.36

1.401.44

1.48

1.52

1.33

2010 2011 201209 Feb

2 600

2 800

3 000

3 200

3 400

3 600

3 800

4 000

4 200

3 425

2010 2011 201209 Feb

Week 6-2 12 > 9-2-12

CAC 40 3 428 3 425 -0.1 %

S&P 500 1 345 1 352 +0.5 %

Volatility (VIX) 17.1 18.6 +1.5 %

Euribor 3M (%) 1.10 1.07 -3.2 %

Libor $ 3M (%) 0.53 0.51 -1.7 %

OAT 10y (%) 2.90 2.90 +0.2 %

Bund 10y (%) 1.89 2.01 +11.3 %

US Tr. 10y (%) 1.95 2.01 +6.0 %

Euro vs dollar 1.31 1.33 +1.4 %

Gold (ounce, $) 1 743 1 749 +0.3 %

Oil (Brent, $) 112.9 118.2 +4.7 % Bunds OAT

Money & Bond Markets10y bond yield & spreadsInterest Rates

ECB 1.00 1.00 le 02/01 1.00 le 02/01

Eonia 0.37 0.40 le 03/01 0.36 le 06/01

Euribor 3M 1.07 1.34 le 02/01 1.07 le 09/02

Euribor 12M 1.70 1.94 le 02/01 1.70 le 09/02

$ FED 0.25 0.25 le 02/01 0.25 le 02/01

Libor 3M 0.51 0.58 le 03/01 0.51 le 09/02

Libor 12M 1.07 1.13 le 04/01 1.07 le 09/02

BoA 0.50 0.50 le 02/01 0.50 le 02/01

Libor 3M 1.08 1.09 le 12/01 1.08 le 06/02

Libor 12M 1.89 1.90 le 25/01 1.87 le 02/01At 9-2-12

highest 12 lowest 12

Yield (%)

AVG 5-7y 3.08 3.67 09/01 3.03 01/02

Bund 2y 0.26 0.26 09/02 0.15 11/01

Bund 10y 2.01 2.01 09/02 1.77 16/01

OAT 10y 2.90 3.37 06/01 2.89 06/02

Corp. BBB 5.19 6.25 02/01 5.15 08/02

$ Treas. 2y 0.27 0.27 09/02 0.21 26/01

Treas. 10y 2.01 2.07 23/01 1.80 31/01

Corp. BBB 3.97 4.30 03/01 3.96 06/02

Treas. 2y 0.44 0.46 07/02 0.35 31/01

Treas. 10y 2.23 2.23 09/02 1.97 18/01At 9-2-12


37.64% Greece 3563 pb

13.12% Portugal 1111 pb

7.00% Ireland 499 pb

5.50% Italy 349 pb

5.21% Spain 320 pb

3.54% Belgium 153 pb

2.90% France 89 pb

2.84% Austria 83 pb

2.45% Finland 44 pb2.33% Netherland 32 pb

2.01% GermanyCommodities

Oil (Brent, $) Gold (Once, $) CRB Foods ($)Spot price in dollars 2012()

Oil, Brent 118 108 le 02/01 +6.5%

Gold (ounce) 1 749 1 575 le 02/01 +8.4%

Metals, LMEX 3 820 3 297 le 05/01 +12.8%

Copper (ton) 8 738 7 488 le 09/01 +12.3%

CRB Foods 437 421 le 13/01 -2.2%

wheat (ton) 249 223 le 18/01 +4.5%

Corn (ton) 263 231 le 18/01 +0.7%

At 9-2-12 Variations

lowest 12

6472

80

88

96

104

112120128

118

2010 2011 201209 Feb

1 000

1 100

1 200

1 300

1 400

1 5001 6001 7001 8001 900

1 749

2010 2011 201209 Feb

330

360

390

420

450

480

510

540

437

2010 2011 201209 Feb

Interest Rates Equity indices1 =

USD 1.33 1.33 le 09/02 1.27 le 13/01 +2.5%

GBP 0.84 0.84 le 09/02 0.82 le 09/01 +0.5%

CHF 1.21 1.22 le 04/01 1.20 le 31/01 -0.3%

JPY 102.86 102.86 le 09/02 97.21 le 16/01 +3.0%

AUD 1.23 1.27 le 02/01 1.22 le 03/02 -2.8%

CNY 8.38 8.38 le 09/02 7.99 le 13/01 +2.5%

BRL 2.29 2.42 le 02/01 2.24 le 06/02 -5.6%

RUB 39.50 41.70 le 02/01 39.39 le 06/02 -5.3%INR 65.86 69.46 le 03/01 63.89 le 03/02 -4.5%



Index 2012 2012()

CAC 40 3 425 3 428 le 03/02 3 128 le 09/01 +8.4% +8.4%

S&P500 1 352 1 352 le 09/02 1 258 le 02/01 +7.5% +4.9%

DAX 6 789 6 789 le 09/02 6 017 le 09/01 +15.1% +15.1%

Nikkei 9 002 9 016 le 08/02 8 378 le 16/01 +6.5% +3.4%

China* 61 61 le 09/02 53 le 02/01 +15.3% +12.7%

India* 437 437 le 09/02 348 le 02/01 +17.4% +22.9%

Brazil* 3 411 3 421 le 08/02 2 853 le 02/01 +11.1% +17.8%Russia* 879 885 le 08/02 737 le 02/01 +11.5% +16.4%


High 12 Low 12

* MSCI Indices

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10 February 2012 12-06


Most recent articlesFEBRUARY

3 February12-05

Overview

Focus

Eurozone debt crisis: what mattersThe week in the USThe week in the EurozoneFortnight in FranceThe competitiveness gap widens between France and Germany

JANUARY 27 January 12-04 Overview The wizard of DCThe week in the USThe week in the EurozoneA social VAT in France : Why not ?Eurozone inflation dynamics

20 January 12-03 Overview

Focus

Collective sanctionThe week in the USFortnight in FranceSpain : Banking sector overhauled from top to bottom

13 January 12-02 Overview

Focus 1Focus 2

The Greek debt crisis and private sector involvementThe week in the USThe week in the EurozoneGermany : surpluses remain substantialHungary : a new bout of fever

6 January 2012 12-01 Overview

Focus

Germany leaps ahead while the others are held back by deficit reductionThe week in the USThe week in the EurozoneJapan, Flow of Funds Accounts shaken by earthquake/tsunami

DECEMBER 22 December 11-46 Overview

Focus

2012. Cant be worse than 2011, can it ?The week in the US

The week in the EurozoneThe other side of public deficits

16 December 11-45 Overview

Focus

Too pessimistic?The week in the USThe week in the EurozoneUS: a profitable debtor


Focus 1Focus 2

Drastic measuresThe week in the USThe week in the EurozoneEU summit close to a complete success?Netherlands : Thrift to fend off crisis


Focus

Go West

The week in the USThe week in the EurozoneUnited Kingdom : Pragmatism and rigour

NOVEMBER 25 November 11-42 Overview

Focus

Teamwork requiredThe week in the USThe week in the EurozoneSpain : Austerity rules

18 November 11-41 Overview

Focus

We cant waitThe week in the USThe week in the EurozoneGermany : Low unemployment but cautious

10 November 11-40 Overview

Focus

France : the other deficitThe week in the USThe week in the EurozoneFrance : more austerity on the road to zero deficit

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Economic Research Department

Philippe d'ARVISENET 33.1.43.16.95.58 [email protected] Economist

OECD COUNTRIESJean-Luc PROUTAT 33.1.58.16.73.32 [email protected]

France, Belgium, LuxembourgHlene BAUDCHON 33.1.58.16.03.63 [email protected]

Public finance European institutionsFrdrique CERISIER 33.1.43.16.95.52 [email protected]

Euro Zone, Italy - Monetary issues - Economic modellingClemente De LUCIA 33.1.42.98.27.62 [email protected]

United States, Canada - Globalisation

Alexandra ESTIOT 33.1.58.16.81.69 [email protected], Portugal, GreeceThibault MERCIER 331.57.43.02.91 [email protected]

United Kingdom, Ireland, Nordic Countries - Supervision of publicationsCaroline NEWHOUSE 33.1.43.16.95.50 [email protected]

Germany, Austria, SwitzerlandCatherine STEPHAN 33.1.55.77.71.89 [email protected]

Japan, Australia, Nederlands - Environnement - PensionsRaymond VAN DER PUTTEN 33.1.42.98.53.99 [email protected]

BANKING ECONOMICSLaurent QUIGNON 33.1.42.98.56.54 [email protected]

Delphine CAVALIER 33.1.43.16.95.41 [email protected]

Cline CHOULET 33.1.43.16.95.54 [email protected]

Laurent NAHMIAS 33.1.42.98.44.24 [email protected]

COUNTRY RISKFranois FAURE 33.1 42 98 79 82 [email protected]

Christine PELTIER 33.1.42.98.56.27 [email protected] Head - Methodology, China, Vietnam

Africa, French-speaking countriesStphane ALB Y 33.1.42.98.02.04 [email protected]

Latin America, Turkey - MethodologySylvain BELLEFONTAINE 33.1.42.98.26.77 [email protected]

Middle East Scoring (CRISTAL)Pascal DEVAUX 33.1.43.16.95.51 [email protected]

Russia and other CIS countries Commodities

Anna DORBEC 33.1.42.98.48.45 [email protected] DROUOT 33.1.42.98.33.00 [email protected]

Africa, English and Portuguese speaking countriesJean-Loc GUIEZE 33.1.42.98.43.86 [email protected]

Asia Capital FlowsJohanna MELKA 33.1.58.16.05.84 [email protected]

Latin AmericaValrie PERRACINO-GUERIN 33.1.42.98.74.26 [email protected]

Central and Eastern EuropeAlexandre VINCENT 33.1.43.16.95.44 [email protected]

CONSULTANTGuy LONGUEVILLE 33.1.43.16.95.40 [email protected]

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