PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

26 July 2010

1 Seven EU Banks Failed The Stress Tests, But Not All

Are Convinced

2 Low US Treasury Yield Suggests Growth Matters

More Than Deficit

3 Japan Is Worried About Yen’s Gains

4 Singapore’s Inflation Rate Moderated In June

Tracking The World Economy...

Today’s Highlight

Seven EU Banks Failed The Stress Tests, But Not All Are Convinced

Only seven out of 91 European Union banks that have subjected to stress tests failed with a combined capital shortfall
of €3.5bn (US$4.5bn). These are Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings
banks that have insufficient reserves to maintain a Tier 1 capital ratio of at least 6% in the event of a recession and
sovereign-debt crisis. The tests took into account potential losses only on government bonds the banks trade, rather
than those that they are holding to maturity, according to the Committee of European Banking Supervisors (CEBS). This
implies that the tests ignored the majority of banks’ holdings of sovereign debt. The tests also assessed the impact of
a four-step credit rating downgrade on securitised debt products, a 20% slump in European equities in both 2010 and
2011 and 50 other macroeconomic parameters, including a drop in the EU’s GDP over two years. At the same time,
regulators tested portfolios of sovereign five-year bonds, assuming a loss of 23.1% on Greek debt, 12.3% on Spanish
bonds, 14% on Portuguese bonds and 4.7% on German state debt.

However, not all are convinced with the results of the stress tests, as they argued that it was not stringent enough. In
some of the 20 countries that conducted the tests, regulators figured that property prices would keep rising or hold steady
in a worst-case economic scenario. In other cases, unemployment rates in a double-dip recession crept up by as little
as 0.1 percentage point from the tests’ so-called benchmark scenario, which is based on current economic conditions.

EU regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a
recession and a decline in the value of their government bond holdings. They are hoping that the tests will do as much
as what the US did before to dispel fears about the solvency of systemically important banks and encouraging banks
to lend to each other. The European banks have been relying on the European Central Bank (ECB) to fill the gap when
global banks reduced their lending to banks in Portugal, Ireland, Greece and Spain by US$110bn in 1Q 2010. The ECB’s
lending to the banking systems in these countries, on the other hand, rose by €126bn in 1H 2010, accounting for almost
all of an overall increase of €141bn.

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 26 July 2010

The US Economy

Low US Treasury Yield Suggests Growth Matters More Than Deficit

♦ For all the criticism of record budget deficits, the US can probably take comfort that for the first time in
half a century, government bond yields are declining during an economic expansion and the country
is selling two-year notes with the lowest interest rates ever. The combination of record-low yields on two-year
notes, 10-year rates below 3% and a deficit projected to surpass US$1.4 trn for a second consecutive year is
a signal that the bond market is less concerned with government spending than with getting the economy back
on track. Yields on two-year notes fell to 0.5516% on 23 July, the lowest since regular sales of the securities
began in 1975, on signs the expansion that began in the third quarter of 2009 is losing steam. Similarly, 10-year
yields dropped to a 15-month low of 2.85% on 21 July, as the Federal Reserve said the economic outlook is
unusually uncertain and the central bank is prepared to take more policy actions. While investors forced European
governments to cut spending and grapple with their sovereign debt crisis and pushed yields on two-year Greek
debt to 18%, demand at Treasury auctions is the highest on record. By keeping borrowing costs near record lows,
investors are providing the US with the opportunity to pursue additional stimulus measures before demanding a
reduction in the deficit.

Asian Economies

Japan Is Worried About Yen’s Gains

♦ Japanese policymakers for a third straight day signaled that a stronger yen may pose a danger to the
country’s economic growth, spurring speculation that they will take steps to counter that risk. The yen has
probably strengthened to a point where government officials can no longer ignore it. “An abrupt drop in stock
prices or an appreciation in the yen could hurt the economy because Japan relies on overseas demand”, said the
National Strategy Minister. Similarly, Cabinet Office official commented that the yen, which has risen 9% since
early May, has been a bit too high. Separately, executives of companies from Sony Corp., one of the world’s
three biggest consumer electronics firms, to Nippon Yusen K.K., the nation’s No. 1 shipping line, said that the yen
should not appreciate further. Japan’s authorities have not intervened to sell yen in the currency market since
2004, and the Group of Seven members has refrained from coordinated intervention for almost a decade, since
an effort in 2000 to buttress the euro.

Singapore’s Inflation Rate Moderated In June

♦ Singapore’s consumer prices moderated to 2.7% yoy in June, after remaining stable at +3.2% in April-
May, suggesting that price pressure has eased somewhat. This was due to a moderation in prices of food, which
eased to 1.2% yoy in June, from +1.3% in May. Slower increases in prices of clothing & footwear and the costs
of transport and recreation services also helped. Indeed, the costs of transport slowed down to 10.3% yoy in
June, after reaching a high of +15.0% in May and compared with +13.4% in April. These were, however, offset
partially by a pick-up in the costs of housing, education and healthcare prices as well as a smaller decline in the
costs of communication. Mom, inflation rate contracted by 1.0% in June, after moderating to 0.6% in May and
from +0.9% in April. The moderation in inflation will provide more room for Singapore to gradually move up its
currency. Earlier, in responding to a pick-up in inflation and rising property prices on the back of stronger
economic growth, the Monetary Authority of Singapore has allowed a one-off appreciation of Singapore dollar
and shifted its monetary policy stance from zero appreciation to a gradual and modest appreciation of
the country’s currency in April.

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 26 July 2010

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