Morning report

Towards a solution to the debt crisis

26-Oct-2011
A new round of uncertainty emerged yesterday and US consumer confidence fell to the third lowest level ever. Today all focus will turn to the EU summit which hopefully will be able to conclude on the details of the final solution to the debt crisis. Expectations are probably high in front of what is expected to be the final solution for the European debt crisis today. Markets have improved over recent days with a stronger euro and higher bond yields in the US and Germany. Yesterday the US stock market fell back again and the euro weakened. This was caused by increased uncertainty as the proposed Ecofin meeting today was postponed. However, this seems to be misplaced fear as all the important meetings will go as planned today. A disappointing US consumer confidence also dampened markets yesterday. Asian stock markets have been fairly stable overnight. Still there is much uncertainty related to the details of the final solution. It remains to be seen whether this really will be a final solution or simply a new, temporary package. However, it seems that at least this will be an important step in the right direction. All details will probably not be available until after the euro zone summit which is scheduled to start at 1730. During the day there will probably be leakages ie. as Angela Merkels is going to speak to the Bundestag. In addition there will be a meeting for all EU leaders due to start at 1500 and earlier in the day the so called Working Group (consisting of central bank leaders and other financial officials) will be meeting. What seems clear is that there will be a substantial Greek haircut of some 50%. According to FT euro leaders have asked the banks to accept a 60% haircut, while the banks have offered 40%. An important task is whether this haircut will be regarded as a credit event, affecting ratings and forcing CDS-contracts to be implemented (which is up to an ISDA committee to decide). Most likely one will, which was the case in the July agreement, try to make the restructuring voluntary, so that this is not regarded as a credit event. According to Reuters two different solutions will be evaluated in order to scale up the size of the EFSF. One will be to let the fund guarantee for (let say 20% of) new government debt in the crisis countries. The other will be to set up a so called SPV (Special Purpose Vehicle), with core capital is used to attract capital from outside investors. Germany has ruled out a solution with the ECB lending to the EFSF. In addition, Germany would not like to urge the ECB to continue buying debt from the crisis countries. The final element is a need for a recapitalization of the private European banks. It seems that there is a consensus of a need for 110 bill euro. but it remains unclear how this solution will be implemented. Yesterday the US consumer confidence fell markedly in October. The index dropped to the third lowest level ever, while it was expected to stay unchanged since September. The level now points at falling consumer demand (of around 1 %), but luckily the correlation between the two has been low during recent months. And consumer data were strong in September. US home prices continue to develop poorly, after the FHFA index has proved somewhat better recently. The Case-Shiller index has now been falling for the last three months. While signal rates will remain low for a long period in industrialized countries, rates in emerging markets are high due to rising inflation. The Reserve Bank of India yesterday hiked the repo rate once more by 25 bp. to 8.5%. The reason for the high level is that headline inflation is close to 10%. However, the central bank now indicates that inflation will start to fall and hence the peak for the repo rate may have been reached. knut.magnussen@dnbnor.no

NOK & 3m NIBOR

8.00 7.80 7.60 7.40 15-Sep 5-Oct 3m ra. 3.20 3.10 3.00 2.90 25-Oct EURNOK

SEK & 3m STIBOR

18.9 16.9 14.9 12.9 10.9 8.9 15-Sep 2.55 2.50 2.45 25-Oct EURSEK

5-Oct

3m ra.
Headquarters 0021 Oslo Stranden 21 Offices Abroad New York London Shanghai Singapore Stockholm Sales Oslo (+47) Equity Fixed Income FX/IR Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund +47 03000

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850 22 94 89 40 22 01 78 20 22 01 76 50 55 75 69 61 52 61 38 22 51 77 73 33 73 21 55 39 05 72 27 07 01 84 62 58 37 84 95 87 41 14 09 32 28 76 04 96 74 13 60 80 60 50 69 06 27 62 50 30 80 89 00 09

Research Regional Sales (+47) Eirik Larsen 22 01 76 55 Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Maren Romstad Camilla Viland Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen 22 22 22 22 22 22 22 22 22 22 22 22 22 01 01 01 01 01 01 01 01 01 01 01 01 01 76 78 78 76 76 77 76 78 77 76 76 77 78 56 03 24 63 64 41 67 37 62 93 77 36 15

Yesterday's key economic events (GMT) 13:00 Canada Interest rate decision 14:00 US Consumer confidence, CB 14:00 US Housing prices (FHFA) Todays key economic events (GMT) 12:30 US Orders durable goods 12:30 US Orders, ex transport 14:00 US New home sales

As of Oct Oct Aug As of Sep Sep Sep

Unit % Index m/m % Unit m/m % m/m % mio

Prior 1.0 45.4 0.8 Prior -0.1 -0.1 0.295

Poll 1.0 46.0 Poll -0.4 0.7 0.300

Actual 1.0 39.8 0.1 DnB NOR

26-Oct-2011

Morning report

Oil spot & NOK TWI

120 115 110 105 100 15-Sep 5-Oct NOK TWI ra. 96 94 25-Oct $/b 100 98

SPOT RATES AND FORECASTS (Source: Reuters and DnB NOR Markets)
FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK Prior 76.08 1.391 0.869 1.221 7.700 7.445 5.537 7.283 0.844 8.862 6.569 8.630 1.188 10.509 Last % 76.02 -0.1% 1.391 0.0% 0.868 -0.2% 1.223 0.1% 7.696 -0.1% 9.115 #VALUE! 7.446 0.0% 5.534 7.281 0.846 8.869 6.555 8.620 1.185 10.508 -0.1% 0.0% 0.2% 0.1% -0.2% -0.1% -0.2% 0.0% In 1 m ...3 m 80 80 1.40 1.35 0.88 0.86 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 5.57 6.96 0.85 8.9 6.57 5.26 1.18 10.45 5.78 7.22 0.86 9.1 6.74 5.39 1.17 10.58 ...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.23 1.25 7.70 7.70 9.00 9.00 7.45 7.45 5.92 7.40 0.86 9.2 6.92 5.54 1.17 10.71 6.16 6.84 0.86 9.4 7.20 6.48 1.17 10.98 FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB USD 1.0375 1.0150 0.8787 17.94 5.3523 1.6037 7.7748 114.52 0.2751 2.4817 0.5067 0.7974 3.1435 1.2675 30.5470 % -0.51% -0.16% 0.00% -0.04% -0.03% 0.22% -0.01% -0.09% -0.11% -0.05% -0.08% 0.06% 0.21% 0.28% -0.04%

EUR vs GBP & CHF

1.25 1.20 1.15 1.10 15-Sep 5-Oct GBP r.a 0.89 0.88 0.87 0.86 0.85 25-Oct CHF

Gov. Bonds, 10y

2.25 2.00 1.75 1.50 15-Sep 3.00 2.80 2.60 2.40 2.20 2.00 25-Oct SEK

5-Oct

NOK, ra.

1m 3m 6m 12m 3y 5y 7y 10y

JPY and DowJones

13 12 11 10 15-Sep 5-Oct USDJPY ra. DowJones, 1000 78 77 77 76 25-Oct

SWAP AN D MON EYMARKET RATES (Source: Reuters) N IBOR STIBOR EURIBOR Prior Last Prior Last Prior Last 2.91 2.92 2.32 2.32 1.31 1.31 3.15 3.16 2.51 2.51 1.52 1.52 3.39 3.41 2.53 2.53 1.73 1.73 3.53 3.55 2.58 2.58 1.89 1.90 3.13 3.14 2.20 2.17 1.68 1.63 3.43 3.43 2.38 2.38 2.03 2.00 3.64 3.65 2.54 2.54 2.31 2.31 3.83 3.84 2.63 2.63 2.59 2.59 GOVERNM ENT BON DS (Source: Reuters) N ORWAY SWEDEN GERMANY Prior 114.16 2.54 0.45 Last 110.11 2.54 0.50

USD LIBOR Prior 0.24 0.42 0.61 0.76 0.77 1.33 1.84 2.29 US

Last 0.24 0.42 0.61 0.76 0.79 1.35 1.86 2.32

10y 10y yield vs bund

N ORWAY In 3m 6m 12m
1.40 1.38 1.36 1.34 1.32

Prior Last Prior Last Prior 114.727 114.74 101.639 101.79 100.09375 1.95 1.95 2.09 2.05 2.11 -0.14 -0.10 0.02 INTEREST RATE FORECASTS SWEDEN GERMANY US

Last 100.02 2.14 0.09

USD and gold

2000 1900 1800 1700 1600 1500 15-Sep 5-Oct EURUSD ra.

3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 3.15 4.25 2.50 3.00 1.50 3.00 3.15 4.50 2.55 3.25 1.50 3.25 3.35 4.50 2.65 3.25 1.50 3.25

3m libor 10y swap 0.45 2.75 0.35 3.00 0.35 3.25

25-Oct Gold

EU RSEK & OMXS

18.8 16.8 14.8 12.8 10.8 8.8 15-Sep 5-Oct OMXS ra. 500 450 400 350 25-Oct EURSEK

FRA NOK DEC MAR J UN SEP FRA SEK DEC MAR J UN SEP

3m 2.99 2.73 2.60 2.60 3m 2.42 2.11 2.01 1.97

Prior 2.97 2.71 2.56 2.56 Prior 2.42 2.10 2.00 1.98

chg 0.02 0.02 0.04 0.04 chg 0.00 0.01 0.01 -0.01

TWI NOK SEK EUR USD GBP Comm. Brent spot Brent 1m Spot gold

Today 96.23 120.23 107.31 76.18 79.70 Today 112.8 111.3 1656.0

% 0.09 0.09 0.07 0.06 Last 112.8 110.9 1656.0

Stock ex. Today Dow Jones 11,706.6 Nasdaq 2,638.4 FTSE100 5,525.5 Eurostoxx50 2,344.0 Dax 6,046.8 Nikkei225 8,759.5 Oslo 381.98 Stockholm 444.70 Copenhagen 466.29

% -1.7% -2.3% -0.4% -1.1% -0.1% 0.0% -0.9% -0.3% 0.3%

Morning report
26-Oct-2011
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