Executive Board Meeting

(1)

Executive Board Meeting

10 August 2011

(2)

Budget deficit, public debt, current debt, banks’

balance sheets and cost level in 2010

In per cent of country’s GDP. 2010

’ ^GDP

Average 2000 – 2010

Budget balance

¹⁾

Government debt

¹⁾

Current account

Banks’

balance sheets

Cost level relative to Germany

²⁾

Greece 2.6 -10.5 142.8 -11.8 224 118.8

Portugal 1.0 -9.1 93.0 -9.8 324 118.3

Spain 2.4 -9.2 60.1 -4.5 327 120.7

Italy 0.6 -4.6 119.0 -4.2 245 119.2

Ireland 3.3 -32.4 96.2 -0.7 992 99.2

Belgium 1.6 -4.1 96.8 2.4 322 119.7

Sources: European Commission, national central banks and ECB 1. Public sector as defined in ESA95 (Maastricht): Central, regional and municipal governments are included

Budget balance is net borrowing in public sector. Government debt equals nominal value of gross debt in public sector at year-end

2. Unit labour costs (ULC), relative to Germany in 2010. Germany = 100. Index. Start year = 2000

(3)

Euro area countries’ latest rescue package

 New loan to Greece (EUR 109bn, IMF participation likely).

 Grace period. Lower interest rates and longer maturities, also on current loans. Portugal and Ireland will be given similar terms.

 The private sector will maintain a significant portion of their loans to Greece, but guaranteed by high-quality securities bought by Greece, financed with EFSF funds

=> Can reduce the Greek debt to 110-120% of GDP in 2020

 Expanded scope of EFSF (and later ESM), enabling them to:

 provide loans to countries on the basis of a precautionary programme

 fund recapitalisation of banks also in countries without a loan programme

 purchase government bonds in the secondary market

(4)

Yield spread over German 10-year government bonds

Percentage points. 1 July 2008 – 9 August 2011

0 2 4 6 8 10 12 14 16

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Portugal Spain Ireland Greece Italy Belgium

Source: Bloomberg

(5)

0 40 80 120 160 200

2000 2007 2014 2021 2028 2035 0 40 80 120 160 200

Extended-Baseline Scenario

Alternative Fiscal Scenario

Sources: Congressional Budget Office (CBO) and Norges Bank

-16 -12 -8 -4 0 4

2000 2007 2014 2021 2028 2035 -16 -12 -8 -4 0 4

Baseline scenario Alternative scenario

1) Debt held by the public

US problem I – financial challenges

Per cent of GDP. Projections based on CBO’s baseline and alternative projection. 2000-2010. Forecasts 2011-2035

Government debt ¹⁾ Budget balance

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US problem II – weak growth

1948 Q1 – 2011 Q2

-7.5 -5 -2.5 0 2.5 5 7.5 10 12.5 15

1948 1955 1962 1969 1976 1983 1990 1997 2004 2011

Recession in the US

Four-quarter growth in GDP

Sources: Thomson Reuters, NBER and Norges Bank

(7)

Market reactions – government bonds

Yield on 10-year bonds. Per cent. 1 July 2008 – 9 August 2011

0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

US

Germany UK

Norway

Source: Thomson Reuters

(8)

Market reactions – expected key rates ¹⁾

Per cent. 1 July 2008 – 31 December 2014

²⁾

0 1 2 3 4 5 6

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

US

Euro area³⁾

UK

MPR 2/11 9 August 2011

Sources: Bloomberg and Norges Bank 1) Expected interest rates are based on Overnight Indexed Swap (OIS) rates

2) Daily figures from 1 July 2008 and quarterly figures as at 9 August 2011 3) EONIA in euro area

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Market reactions – equities

Index, 1 July 2008 = 100. 1 July 2008 – 9 August 2011

40 50 60 70 80 90 100 110 120 130

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

US Europe Norway

MSCI EM (Emerging markets) Japan

Source: Thomson Reuters

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Market reactions – price of oil, metals, food and non-food agriculturals

Weekly figures

¹⁾

. SDR Index. 1 July 2008 = 100

0 50 100 150 200 250

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Non-food agriculturals Metals

Oil Food

Source: Thomson Reuters 1) Daily figures for oil

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Market reactions – risk indicators in the financial market

0 0.2 0.4 0.6 0.8 1

Jul-08 Jul-09 Jul-10 Jul-11

Citigroup Risk Index

0 50 100 150 200 250 300 350

Itraxx-sovereign Itraxx-corporate Itraxx-financial

10 15 20 25 30 35

GRI

Source: Bloomberg 0

10 20 30 40 50 60 70 80 90

0 10 20 30 40 50 60 70 80 90

VIX

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Source: Norges Bank

Market reactions – import-weighted exchange rate (1-44) ¹⁾

Daily (historical) and quarterly figures (projected)

²⁾

. January – December 2011

85 86 87 88 89 90 91 92 85

86 87 88 89 90 91 92

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Q3:87.5 Q4:87.5 Forecast from MPR 2/11

1) A rising curve denotes a stronger krone exchange rate 2) Projections for 2011 Q3 and Q4

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Market reactions – expected key policy rate in Norway

Per cent. 2011 Q4 – 2014 Q3

0 1 2 3 4 5

Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14

The Market 9 August The market 22 June MPR 2/11

Sources: Bloomberg, Thomson Reuters and Norges Bank

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Market reactions – Premiums on Norwegian bonds

Spread over five-year swap rates. Per cent. Week of 2 July 2007 – week of 1 August 2011

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Smaller banks with high rating DnB NOR Bank

Covered bonds (OMF) Corporate

Source: DnB NOR Markets

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Credit growth and property prices

12-month change. Per cent. January 2002 – June 2011 Households

-15 -10 -5 0 5 10 15 20 25

2002 2005 2008 2011

Credit growth¹ ⁾ House prices²⁾

Non-financial corporations

-30 -20 -10 0 10 20 30 40 50

2002 2005 2008 2011

Credit growth¹⁾

Selling prices commercial real estate³⁾

1) Households; C2, Enterprises; C3 Mainland Norway 2) House prices to July. Credit growth to June.

3) Semi-annual figures to end-2010. Credit growth to April

Sources: Statistics Norway, OPAK, real estate sector

(NEF, EFF, FINN.no og ECON Pöyry), OBOS and Norges Bank

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Index of commodity consumption with projections from MPR 2/11

Volume. Seasonally adjusted . January 2007 – May 2011

140 145 150 155 160 165 170 175

2007 2008 2009 2010 2011

Sources: Statistics Norway and Norges Bank

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Housing starts

Number. Seasonally adjusted and trended . January 2003 – June 2011

1000 1500 2000 2500 3000 3500 4000 4500

2003 2004 2005 2006 2007 2008 2009 2010 2011

Source : Statistics Norway

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Exports and imports of traditional goods

Volume index. Seasonally adjusted. 2000 = 100. 2000 Q1 – 2011 Q2

90 100 110 120 130 140 150 160 170

2000 2002 2004 2006 2008 2010

Exports excluding ships and oil platforms, crude oil and natural gas

Imports excluding ships and oil platforms

Source: Statistics Norway

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Consumer prices

Projections from MPR 2/11 (broken lines). 12-month change. Per cent.

January 2008 – March 2012

0 1 2 3 4 5 6

2008 2009 2010 2011 2012

CPI

CPI-ATE ¹⁾

CPIXE ² ⁾

1) CPI adjusted for tax changes and excluding energy products

2) CPI adjusted for tax changes and excluding temporary changes in energy prices. Real time figures. See Norges Bank Staff memo 7/2008 and 3/2009 Source: Statistics Norway and Norges Bank

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CPI-ATE by supplier sector

Projections from MPR 2/11 (broken lines). Per cent. January 2008 – March 2012

-4 -2 0 2 4 6

2008 2009 2010 2011 2012

Domestically produced goods and services

Imported consumer goods CPI-ATE

Sources: Statistics Norway and Norges Bank

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-30 -20 -10 0 10 20 30 40 50 60

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Source: Statistics Norway

Monthly growth in airline fares in the CPI

Per cent. January 2008 – July 2011

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CPI-ATE og CPIM

12-month change. Per cent. January 2007 – June 2011

0 1 2 3 4 5

2007 2008 2009 2010 2011

CPI-ATE

CPIM

Source: Statistics Norway and Norges Bank

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Norges Bank’s key policy rate in the baseline scenario and in the alternative scenarios

Per cent. 2008 Q1 –2014 Q4

0 1 2 3 4 5 6 7 8 9

2008 2009 2010 2011 2012 2013 2014

Baseline scenario

Increased price and cost inflation Weaker growth abroad

Source: Norges Bank

90% 70% 50% 30%

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Executive Board Meeting