Rescuing the eurozone: the right prescription? March 8,

Rescuing the eurozone: the right prescription? We view as a banking sector and government debt crisis what is really a balance of payments crisis The tools being used to address the crisis are therefore badly-suited for the purpose Only political will, not underlying economics, has so far stood between eurozone survival and collapse but… …the ECB LTRO and official sector bailouts at best by time, at worst exacerbate the problems Only restoring competitiveness in the periphery, not the ‘will of policymakers’ alone can make for lasting crisis solution Source: J.P. Morgan. 1

2 Stresses in larger peripheral bond markets and the eurozone banking system have eased Eurozone government debt spread Basis points over Germany Source: Bloomberg, J.P. Morgan. Data as of March Euribor-OIS spread Basis points Source: Bloomberg, J.P. Morgan. Data as of March 2012.

The balance of payments: how it adds up Current Account (net exports, transfer payments, net factor income) Source: J.P. Morgan. 3 Capital Account (Foreign direct investment, portfolio investment, cross-border lending) Balance of Payments = +

4 Iceland’s economy recovering from near-collapse Source: Bloomberg, Statistics Iceland, J.P. Morgan. Data as of Iceland unemployment rate Share of labor force Iceland 10-year government bond Yield Iceland real GDP growth Year-on-year rate

5 Peripheral eurozone economy continues to collapse Source: Bloomberg, J.P. Morgan. Data as of SIPI is Spain, Italy, Ireland, Portugal. SIPI* unemployment rate Share of labor force SIPI* 10-year government bond Yield SIPI* real GDP growth Year-on-year rate

6 Past balance of payments crises have only been solved with major currency devaluations Source: Bloomberg, J.P. Morgan. Currency devaluations in past BoP crises Peak-to-trough

The eurozone’s design flaws Main Criteria for an ‘Optimal Currency Area’: Free movement of goods, capital and labor (YES/NO) Flexible wages and prices (NO) Cross-border fiscal transfer mechanism (NO) Source: J.P. Morgan. Based on Mundell, R. A. (1961). "A Theory of Optimum Currency Areas". 7

European support measures taken so far have failed to address the underlying problems Eurozone periphery* spread to German 10-year government bond yield* Basis points Source: Bloomberg, J.P. Morgan. Data as of March *Equal-weighted average of Portugal, Ireland, Greece, Spain, Italy. Greece receives €110 billion loan EFSF and ECB bond purchase program announced First set of bank stress test results released ECB extends liquidity provision Pledge of “determined and coordinated action” €78 billion support package for Portugal announced €85 billion support package for Ireland announced Second set of bank stress test results released €159 billion EFSF and private sector support package announced ECB extends bond purchases to Italy and Spain 8 LTRO 1 LTRO 2

Eurozone lending growth still positive, but deteriorating Source: European Central Bank, J.P. Morgan. Data as of November Eurozone lending growth Year-on-year

Main elements of February’s Greek bailout package €130 billion of official sector support over next three years An extra €325m of spending cuts to close past budget gaps 53.5% haircut for private sector creditors with 90% participation Interest rate cut on existing bailout loans Public debt/GDP ratio target of 120.5% by Source: J.P. Morgan. 10

Have we got the maxim gun? Source: J.P. Morgan. 11

J.P. Morgan Asset Management This document is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. Indices do not include fees or operating expenses and are not available for actual investment. The information contained herein employs proprietary projections of expected returns as well as estimates of their future volatility. The relative relationships and forecasts contained herein are based upon proprietary research and are developed through analysis of historical data and capital markets theory. These estimates have certain inherent limitations, and unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees or other costs. References to future net returns are not promises or even estimates of actual returns a client portfolio may achieve. The forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The value of investments and the income from them may fluctuate and your investment is not guaranteed. Past performance is no guarantee of future results. Please note current performance may be higher or lower than the performance data shown. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Exchange rates may cause the value of underlying overseas investments to go down or up. Investments in emerging markets may be more volatile than other markets and the risk to your capital is therefore greater. Also, the economic and political situations may be more volatile than in established economies and these may adversely influence the value of investments made. All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation. They are based on current market conditions that constitute our judgment and are subject to change. Results shown are not meant to be representative of actual investment results. Past performance is not necessarily indicative of the likely future performance of an investment. Any securities mentioned throughout the presentation are shown for illustrative purposes only and should not be interpreted as recommendations to buy or sell. A full list of firm recommendations for the past year is available upon request. J.P. Morgan Asset Management is the marketing name for the asset management business of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. Copyright © 2011 JPMorgan Chase & Co. All rights reserved. 12