J.P.Morgan Chase S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Crisis Response: Crisis Response: Different Aspects Different Aspects Dr.

J.P.Morgan Chase

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Crisis Response:Crisis Response: Different Aspects Different Aspects

Dr. Jacob A. FrenkelDr. Jacob A. FrenkelChairman, JPMorgan Chase InternationalChairman, JPMorgan Chase International

Chairman, Group of Thirty (G30)Chairman, Group of Thirty (G30)Former Governor, Bank of IsraelFormer Governor, Bank of Israel

Panel Discussion IIPanel Discussion IIThe Seventeenth Dubrovnik Economic ConferenceThe Seventeenth Dubrovnik Economic ConferenceCroatian National BankCroatian National BankDubrovnik, June 29-July 2. 2011Dubrovnik, June 29-July 2. 2011

6/20/20112

Global ImbalancesGlobal Imbalances

• Imbalances in International PaymentsImbalances in International Payments

• Imbalances in Macro Policies Imbalances in Macro Policies

• Imbalances in the Euro-SystemImbalances in the Euro-System

6/20/20113

International Payments ImbalancesInternational Payments Imbalances

• Current Accounts ImbalancesCurrent Accounts Imbalances

• Who Holds US Treasuries?Who Holds US Treasuries?

• International Reserves International Reserves

• Savings ImbalancesSavings Imbalances

4 J.P.Morgan Chase 6/20/2011

Current Account of Balance of PaymentsCurrent Account of Balance of Payments

-$494

-$79-$37

$462

$630

-600

-300

0

300

600

United States Latin America and the Caribbean

European Union Middle East, N. Africa, & Russia

Asia

(U.S. dollars, bill.)

US$ billions, 2011US$ billions, 2011

China $372Japan $134

Of Which:

Source: IMF, last update Apr 03 2011, WEO (2011 Forecast)


Current Account of Balance of PaymentsCurrent Account of Balance of Payments

-900

-700

-500

-300

-100

100

300

500

700

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(U.S. dollars, bill.)

IMF ForecastsEuropean UnionUnited StatesMiddle East, N. Africa, & RussiaAsia

Middle East, N. Africa, &

Russia, 2011: $462B

Asia, 2011: $630B

EU, 2011: -$37B

US, 2011: -$494B

US Spends

Europe Balances

Asia & Oil Exporters Save

Source: IMF, last update Apr 03 2011, WEO (2010 & 2011 Forecast)


Global Treasury HoldingsGlobal Treasury Holdings

26%

20%

7%

5% 5%3% 3%

0

0.05

0.1

0.15

0.2

0.25

China Japan United Kingdom OPEC Brazil Caribbean Russia

(% of total foreign holdings)

Source: US Treasury, Last Observation: March 2011


Accumulation of Foreign Exchange Accumulation of Foreign Exchange Reserves (Bill. Usd)Reserves (Bill. Usd)

$2,421

$241$364

$156 $105

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

China Japan Russia Taiwan Korea

($B)

Flow, 2005 - 2011

$3,045

$1,062

$468 $399$305

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

3,250

3,500

China Japan Russia Taiwan Korea

($B)

Stock, May 2011

Source: Nat'l Statistical Institutes, Foreign-Exchange Reserves ex. Gold, Last Observation: May 2011; China (3/11)


Gross National Savings as a % of GDP, Gross National Savings as a % of GDP, 20102010

52

34

24

20

12

0

10

20

30

40

50

China* India Japan Euro Area United States

(% of GDP)

Source: US Treasury, Last Observation: March 2011*For China, 2009 national savings rate; for all others, 2010.

6/20/20119

• Global Interest Rate CutsGlobal Interest Rate Cuts

• Nominal and Real Interest RatesNominal and Real Interest Rates

• Central Bank’s Balance SheetsCentral Bank’s Balance Sheets

• Fiscal Deficits and Public DebtFiscal Deficits and Public Debt

Imbalances in Macro PoliciesImbalances in Macro Policies


Coordinated Global Rate CutsCoordinated Global Rate Cuts

-1

0

1

2

3

4

5

6

2005 2006 2007 2008 2009 2010 2011

(%)

United Kingdom Japan Eurozone Canada United States

EUR, 1.25%

Canada, 1.0%

Japan 0.1%

US 0.25%

UK 0.5%

Source: Bloomberg Market Data, Last observation: 20 Jun, 2011


Global Policy Rates: Developed MarketsGlobal Policy Rates: Developed Markets

-5

-2.5

0

2.5

5

7.5

10

12.5

15

1975 1980 1985 1990 1995 2000 2005 2010

(%, 12mo moving avg.)

Real avg. Policy Rate Nominal avg. Policy Rate

Nominal

Real

Source: JPMorgan Chase, National Statistical Institutest, Last Observation: Nominal - April 2011; Real - March 2011


Global Policy Rates: Main Rate & Real Global Policy Rates: Main Rate & Real RatesRates

2000 2002 2004 2006 2008 2010-2

-1

0

1

2

3

4

5

6(%)

ECB Refinancing RateReal Policy Rate (Headline CPI-deflated)

Bank Rate

Real Rate

2000 2002 2004 2006 2008 2010-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7(%)

Real Policy Rate (Headline CPI-deflated)

Federal Reserve Target Fed Funds Rate

Bank Rate

Real Rate

Source: ECB, Fed; Last Observation: Main Policy Rate - 20 Jun, 2011; Real Rate - May 2011 (Fed), May 2011 (ECB)


Global Policy Rates: Main Rate & Real Global Policy Rates: Main Rate & Real RatesRates

2000 2002 2004 2006 2008 2010-2

-1

0

1

2

3(%)


BoJ Overnight Call Rate

Real Rate

Bank Rate

Source: BoE, BoJ; Last Observation: Main Policy Rate - 20 Jun, 2011; Real Rate - May 2011 (BoE), May 2011 (BoJ)

2000 2002 2004 2006 2008 2010-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8(%)

BoE Base Rate


Bank Rate

Real Rate


Total Assets of Key Central Banks Total Assets of Key Central Banks (indexed levels)(indexed levels)

50

100

150

200

250

300

350

400

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

(indexed, end of June 2007 = 100)

BoE ECB Federal Reserve

BoE: 300

Fed: 326

ECB: 157

Source: NSI's, Last Observation: Fed, BoE (Jun 15, 2011); ECB (Jun 10, 2011)

Current assetsBillions of $

Total 5,934Of Which: Fed 2,832 BoE 387 ECB 2,715


Federal Reserve Balance Sheet Assets: Federal Reserve Balance Sheet Assets: Total Assets & Security HoldingsTotal Assets & Security Holdings

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

2,500

2,750

3,000

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

(Bill Usd)

Total Assets

Treasury Securities Held

Federal Agency Securities

Mortgage Backed Securities

Assets: $2,832 bill.

Treasury Securities: $1,576 bill.

Agencies: $118 bill.

MBS: $915 bill.

Source: Federal Reserve, Last Observation: 15 Jun, 2011


Fiscal Positions: General Government Fiscal Positions: General Government BalanceBalance

-14

-12

-10

-8

-6

-4

-2

0

2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Percent of GDP)

IMF Forecasts United States Euro Area Japan

Japan, 2011: -10.0%

Euro Area, 2011: -4.4%

US, 2011: -10.8%

Source: IMF, WEO Database, last update Jun 17 2011, WEO (2010 Estimate, 2011 Forecast)


Fiscal Positions: Net DebtFiscal Positions: Net Debt

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Percent of GDP)

IMF Forecasts United StatesEuro Area Japan

Euro Area, 2011: 66.9%

Japan, 2011:

127.8%

US, 2011: 72.4%


6/20/201118

• Unemployment & ProductivityUnemployment & Productivity

• Budget Deficits and Public Debt Budget Deficits and Public Debt

• Savings and Payments Imbalances Savings and Payments Imbalances

• Spreads, CDS, and BanksSpreads, CDS, and Banks

• “ “Bad Zones” and the CrisisBad Zones” and the Crisis

Imbalances in the Euro-System Imbalances in the Euro-System


Unemployment Rate (%): Selected Euro Unemployment Rate (%): Selected Euro Area CountriesArea Countries

2

4

6

8

10

12

14

16

18

20

22

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(% of Labor Force)

Germany Greece IrelandSpain Portugal

Spain: 20.7%

Portugal: 12.6%

Greece: 16.2%

Ireland: 14.8%

Germany: 7.0%

Source: Eurostat, Last Observation: Ireland, Germany (5/11); Spain (4/11); Greece (3/11)


Relative Unit Labor Costs, Relative Unit Labor Costs, Manufacturing SectorManufacturing Sector

Source: OECD December 2010, Last observation: Q4/2010


Relative Unit Labor Costs, Relative Unit Labor Costs, Manufacturing SectorManufacturing Sector

50

60

70

80

90

100

110

120

130

140

150

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(index, Q1 2001 = 100)

Germany Greece Italy Spain United States Euro Area

Italy: 133

Greece: 112

Spain: 123

Euro Area: 121

Germany: 98

US: 59

Stage 2 EMU

Euro adoption

Source: OECD December 2010, Last observation: Q4/2010


Fiscal Position: General Government Balance Fiscal Position: General Government Balance – Select Euro Area Economies– Select Euro Area Economies


-36

-26

-16

-6

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Percent of GDP)

IMF Forecast Germany Greece Ireland Spain Portugal

Germany, 2011: -2.3%

Greece, 2011: -7.4%

Spain, 2011: -6.2%

Portugal, 2011: -5.6%

Ireland, 2011: -10.8%


Fiscal Positions: Net Debt – Select Euro Fiscal Positions: Net Debt – Select Euro Area EconomiesArea Economies

0

20

40

60

80

100

120

140

160

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Percent of GDP)

IMF Forecast Germany GreeceIreland Spain Portugal

Greece, 2011: 152.3%

Spain, 2011: 52.6%

Ireland, 2011: 95.2%

Portugal, 2011: 86.3%

Germany, 2011: 54.7%



Change in Gross National Saving Rate: Change in Gross National Saving Rate: Select European Counties (2000 – 2010)Select European Counties (2000 – 2010)

2.4

-2.9

-4.6

-5.7

-8.5-9.1 -8.6

-13.1-14

-12

-10

-8

-6

-4

-2

0

2

4

Germany UK Italy Spain France Ireland Greece Portugal

(Difference, in % between 2000 & 2010 in Saving Rate)

Source: Eurostat, Last Update: March 11, 2011


Change in Gross National Saving Rate: Change in Gross National Saving Rate: Select European Counties (2000 – 2010)Select European Counties (2000 – 2010)

5.8

0.6

-0.5-1.3 -1.6 -2

-5 -5.1-6

-4

-2

0

2

4

6

8

Ger

man

y

UK

Ital

y

Sp

ain

Fra

nce

Irel

and

Gre

ece

Po

rtu

gal


-3.4 -3.5-4.1

-7.8

-4.1

-11.1

-3.5 -3.5

-12

-10

-8

-6

-4

-2

0

Ger

man

y

UK

Ital

y

Sp

ain

Fra

nce

Irel

and

Gre

ece

Po

rtu

gal


Change between

2000-2007

Change between

2007-2010

Source: Eurostat, Last Update: March 11, 2011


Euro Area Current Account Euro Area Current Account Balance (% of GDP)Balance (% of GDP)

-12

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(Percent of GDP)

IMF Forecast Germany Ireland, Spain, Greece, & Portugal

Germany, 2011: 5.1%

GIPS, 2011: -5.2%



Greece, Portugal, Ireland and Spain: Greece, Portugal, Ireland and Spain: Gross Financing NeedsGross Financing Needs

2010 2011 2012 20132010 - 2013

Financing Needsbill. Eur bill. Eur bill. Eur bill. Eur bill. Eur

Deficit 22.0 16.8 14.3 10.8Maturing Debt 0.4 38.9 31.7 27.8




Ireland 115.3

Spain 564.7

Government Financing Needs, 2010 - 2013

Greece 162.7

Portugal 88.7

Source: IMF, Bloomberg Market Data, last update: BBG - Jun 19 2011/ WEO - October 2010 database


10yr Government Bond Yield Spread10yr Government Bond Yield Spread

0

200

400

600

800

1,000

1,200

1,400

Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11

(spread over German Bunds, bps)

Greece Spain Portugal Ireland

Spain: 262bp

Portugal: 819bp

Ireland: 849bp

Greece: 1438bp

Source: Bloomberg Market Data, Last Observation: Jun 20, 2011


European Sovereign CDS PremiaEuropean Sovereign CDS Premia

0100200300400500600700800900

1,0001,1001,2001,3001,4001,5001,6001,7001,8001,9002,0002,1002,2002,300

Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11

(spread in basis points)

Greece 5yr CDS Spain 5yr CDS Portugal 5yr CDSGermany 5yr CDS Ireland 5yr CDS Greece:

2149bp

Ireland: 796bp

Portugal: 810bp

Spain: 287bp

Germany: 40bp

Source: Bloomberg Market Data, CMAN, last observation: June 17, 2011


European Sovereign and Corporate CDS European Sovereign and Corporate CDS SpreadsSpreads

Source: Markiit iTraxx data, Last Observation: Jun 17, 2011

30

50

70

90

110

130

150

170

190

210

230

Oct-2009 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011

(CDS, spread in basis points)

iTraxx Western Europe SovX (sovereign), generic 5y

iTraxx Europe HG Corporate, generic 5y

iTraxx Europe Senior Financial, generic 5y

Financial: 165bp

Corporate: 111bp

Sovereign: 221bp


Bank Holdings of Domestic Government Bank Holdings of Domestic Government Securities (% of total bank assets)Securities (% of total bank assets)

Source: Federal Reserve (Flow of Funds), ECB (end-of-quarter value), Last observation: Q2/ 2010 (US), Q3/ 2010 (Euro Area)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1999 2001 2003 2005 2007 2009

(% share of bank assets)

United States, Commercial Banks Euro Area, MFIs

Euro Area:4.9%

US: 1.7%


Gross Government Debt and Budget Gross Government Debt and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)



Gross Government Debt and Budget Gross Government Debt and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)

Austria

Belgium

Euro Area

France

Germany

Greece

IrelandItaly

Netherlands

Portugal

Spain

UK US

Japan

10

30

50

70

90

110

130

150

170

-12-10-8-6-4-20

Gro

ss G

ener

al G

ove

rnm

ent

Deb

t (%

of

GD

P),

201

1

General Government Balance (% of GDP), 2011

"Bad" - Zone"

Source: IMF, last update Jun 17 2011, WEO (2010 Forecast)


Current Account Balance and Budget Current Account Balance and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)



Current Account Balance and Budget Current Account Balance and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)

Austria

Belgium

Bulgaria

Czech

Euro Area

France

Germany

Greece

Ireland

Italy

Netherlands

Portugal

Spain

Sweden

UKUS

Japan

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

-12-10-8-6-4-202

Cu

rren

t A

cco

un

t B

alan

ce (

% o

f G

DP

), 2

011


"Bad" - Zone"

Source: IMF, last update Jun 17 2011, WEO (2010 Forecast)


Gross National Saving Rate and Budget Gross National Saving Rate and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)

Source: IMF, last update Apr 03 2011, WEO (2010 Forecast); Eurostat (2010 forecast, EA13)


Gross National Saving Rate and Budget Gross National Saving Rate and Budget Deficit (% of GDP 2010)Deficit (% of GDP 2010)

Austria

Belgium

Bulgaria

Czech

Euro Area

France

Germany

Greece

Ireland

Italy

Portugal

Slovak Republic

Spain

Sweden

UKUS

Japan

0

5

10

15

20

25

30

-12-10-8-6-4-202

Gro

ss N

atio

nal

Sav

ing

Rat

e (%

of

GD

P),

201

1


"Bad" - Zone"

Source: IMF, last update Jun 17 2011, WEO (2010 Forecast); Eurostat (2010 forecast, EA13)

J.P.Morgan Chase S T R I C T L Y P R I V A T E A N D C O N F I D E N T I A L Crisis Response: Crisis Response: Different Aspects Different Aspects Dr.

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