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The US subprime crisis and credit insurance Clemens von Weichs, Chairman of the Board – Euler Hermes. European Banking & Financial Forum – Praha, 1st April 2008. Agenda. The Euler Hermes Group The US Subprime Losses and Consequences for the World Economy Euler Hermes’ Economic Outlook

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the us subprime crisis and credit insurance clemens von weichs chairman of the board euler hermes

The US subprime crisis and credit insuranceClemens von Weichs, Chairman of the Board – Euler Hermes

European Banking & Financial Forum – Praha, 1st April 2008

agenda
Agenda
  • The Euler Hermes Group
  • The US Subprime Losses and Consequences for the World Economy
  • Euler Hermes’ Economic Outlook
  • Credit Insurance : Negative and Positive Aspects
euler hermes aim is
Euler Hermes’ aim is:
  • To be the preferred partner
  • for the management of trade receivables
about euler hermes
About Euler Hermes
  • Worldwide leader in credit insurance with 36% global market share
      • Other services
        • Bonding & guarantees
        • Insurance against fraud
        • Export guarantee on behalf of the German government
      • A major player in
        • Financing of trade receivables
        • Trade debt collection services

Listed in Paris and a company of Allianz

key figures 2007
Key Figures 2007
  • Global market leader in credit insurance
      • 2,099 million euros consolidated turnover
      • 56,000 clients worldwide
      • 800 billion euros of business transactions protected worldwide
      • 40 million companies monitored in the risk databases
      • 25,000 credit limit requests per day
      • 83% of credit limit requests processed in less than 48h
      • Presence in over 50 countries
      • 6,000 staff members
      • AA- financial rating by Standard & Poor’s (outlook stable)
agenda7
Agenda
  • The Euler Hermes Group
  • The US Subprime Losses and Consequences for the World Economy
  • Euler Hermes’ Economic Outlook
  • Credit Insurance : Negative and Positive Aspects
from a us subprime crisis
From a US Subprime Crisis…
  • 22 June 2007 : two funds investing in mortgage securities announce having financial difficulties
        • Major financial institutions start to announce major losses, to start with Countrywide in June
        • Major CEOs dismissed (UBS, Merril Lynch, Citigroup…)
        • Mistrust within the financial sector

End of a period based on :

        • Easy credit, stimulated by the development of securitization
        • Low interest rates
        • Dynamic world economic growth
to a financial crisis
… to a Financial Crisis…
  • Impact on the financial institutions
        • Assets depreciation
        • Equities fall down
        • Liquidity harder to find / Increasing credit risk spreads

To respect the latest international regulations (ie IFRS, Basel II…), financial institutions are forced to reconsider their capacity to grant credits and loans, with a direct impact on the property sector

  • Impact on the US $
        • The US $ at its lowest since the 70’s. Its value in Euro has constantly fallen since August 2007, losing 18% of its value within a year (10% in March 2008)
        • Trend accelerated by the difference in interest rates between the US and the Eurozone
with economic consequences
… with Economic Consequences
  • Beginning of a credit crunch period
        • Credit conditions become tighter:
          • Consumers, impacting consumption, one of the main growth drivers both in the USA and in Europe
          • Companies, impacting investments and, probably on a medium term, productivity and profits
  • Prices are under pressure
        • Commodities prices increasing, to start with oil
        • Consumer goods following
        • Pressures on European wages
        • Impact on Exportations from Europe
agenda11
Agenda
  • The Euler Hermes Group
  • The US Subprime Losses and Consequences for the World Economy
  • Euler Hermes’ Economic Outlook
  • Credit Insurance : Negative and Positive Aspects
slide12
A further deceleration of world economy in 2008, with a soft landing, prior to a modest upturn in 2009

Expect world GDP growth of less than 3% in 2008 (3.9% in 2007), the lowest since 2003, and 3.1% in 2009, mainly in response to a small rebound in the US

Soft landing of Eurozone economy, back around its growth potential

Sharp air pocket in the US in H1 2008, driving GDP down to 1.0% for the year despite a small and gradual recovery in H2.

Sources : National accounts, Euler Hermes

slide13
All zones expected to be exposed to the global slowdown in 2008; emerging markets could be better off

US economy hit by high energy prices, the lagged effects of an inverted yield curve and a burst housing market bubble, despite a reactive monetary policy and an economic stimulus package

Japan slowdown to continue due to tighter fiscal policy and evolved consumption fundamentals

Eurozone growth to decline on stronger euro, lower world demand

and credit tightening

Emerging countries expected to slowdown with decelerating world trade

Sources : National accounts, Euler Hermes GDP 2005 weighting at current exchange rates

impact on inflation and unemployment rates
Impact on Inflation and Unemployment Rates

Unemployment Rate

Inflation Rate

Sources : national data, Euler Hermes

the major influential factors for this global scenario
The major influential factors for this global scenario:
  • US reactive monetary and fiscal policy
  • Temporary pick up of inflation
  • Commodities prices to remain high
  • ECB status quo
  • Moderate adjustments in trade balances

A weak US dollar in H1 2008

factors that could pressure this scenario
Factors that could pressure this scenario:
  • Hard-landing scenario in the US
  • World credit crunch
  • Inflationnary pressures
  • Bubbles: housing market (US, UK, Ireland, Spain...) and stock markets (emerging countries)
  • Growing trade tensions (and influence of sovereign wealth funds)
  • Geopolitical events (oil and other commodities)
agenda17
Agenda
  • The Euler Hermes Group
  • The US Subprime Losses and Consequences for the World Economy
  • Euler Hermes’ Economic Outlook
  • Credit Insurance : Negative and Positive Aspects
average trade growth in 2008 and 2009

World trade volume (% change)

14%

forecasts

11.6%

12%

10.2%

10%

8.6%

7.4%

8%

6.4%

6.1%

5.8%

6%

5.1%

5.0%

4.6%

4%

2.6%

2%

0%

-0.3%

-2%

98

99

00

01

02

03

04

05

06

07

08

09

Average Trade Growth in 2008 and 2009

Buoyant in 2004-2007 (yearly average 8.1%), world trade growth should be less than 6% in 2008

But the demand from the emerging countries should remain dynamic for:

  • commodities
  • energy products
  • capital goods

Sources : National accounts, Euler Hermes GDP 2005 weighting at current exchange rates

eh global insolvencies index likely to rise again in 2008
EH Global Insolvencies Index likely to rise again in 2008

European insolvency to rebound by 5% as Eurozone’s GDP to decelerate under 2%

Global Insolvency Index foreseen up again 5% in 2008 (+5% in 2007)

Sources : national data, Euler Hermes. Note: the EH Global Insolvency Index countries account for 85% of world GDP

Strong rebound of US insolvencies expected in 2007 (+50%) because of weaker economy and mainly because of a reverse effect of the large fall seen in 2006 (due to tougher legislation introduced in October 2006)

2008 business insolvencies outlook per country
2008 Business Insolvencies Outlook per Country

Forecasts published in the EH Insolvency outlook 2007#2, based on local EH estimates with the latest official data available in November 2007

(next update May 2008)

Sources : national data, Euler Hermes

credit insurance negative and positive aspects
Credit Insurance : Negative and Positive Aspects
  • Credit tightening means:
    • Credit and loans terms will be more severe
    • higher credit risk spreads on top of the interest rates

 Increase default probability

 Trade credit is an interesting choice for companies

  • Companies do watch out for liquidity
  • Companies more sensitive to risk management

 Increased demand for risk management services