2010 Interest Rate Outlook

1. Money does not perform. People do. Press conference: Fixed Income Markets – Outlook 2010 Nicolas Forest, Head of Interest Rate Strategy Koen Van de Maele, CFA, Global Head of Fixed Income 12 January 2010 - Brussels

3. What are the legacies of the crisis ? Illiquidity The end of the global recession… Systemic Risk Housing Crisis Global Recession Return of Liquidity Market Normaliza-tion Rebound of Housing Prices Global Recovery Explosion of Government Debt Source : Bloomberg – IMF – European Commission – Dexia Asset Management Euro Zone US Zone End of 2009 End of 2008 End of 2009 End of 2008 Market Data 5957.00 4900.00 1115.00 898.00 Equity Market 0.71% 2.83% 0.25% 1.43% 3 Months Libor Rate 3.38% 2.94% 3.83% 2.07% 10Y Government Yield 20.16 38.00 21.68 38.87 Implied Volatility -6.35% -2.00% -10.00% -4.70% Budget Deficit End of 2009 End of 2008 End of 2009 End of 2008 Economic Data Euro Zone US Zone 8.00% 1.60% 33.90 9.80% 10.00% 6.80% Unemployment Rate 0.50% 1.80% 0.10% Inflation 51.60 53.60 32.90 Manufacturing PMI

4. What are the legacies of the crisis ? … and the explosion of government debt x 2.25 in 10 years 120% (2014) 40% (2014) Source : Bloomberg – IMF – European Commission – Dexia Asset Management

5. In 2010, the exit timing will be crucial Inflation Risk Inflation risk will increase due to the accommodative monetary policy. But sovereign debt remains credible. Buy inflation linked bonds Exiting too late will increase the inflation & sovereign risks Too Late (Q1 2011) Too Early (Q1 2010) Monetary Budgetary Tightening Too Early (Q1 2010) Too Late (Q1 2011) Double Dip (no sovereign & inflation risk) The tightening will derail the recovery. A double dip scenario could support government debt. Buy core countries Sovereign & Inflation Risks The explosion of deficits is strongly bearish and the inflation risk could support the steepening of the curve Sovereign Risk The restrictive monetary policy could reinforce the sovereign risk with risk of downgrades Sell government bonds Source : Bloomberg – IMF – European Commission – Dexia Asset Management

6. The Federal Reserve could be too late… A schedule for the Fed Q4 2009 : End Treasury Buying February 1 : End Lending Facilities June 30 : End Credit Easing H2 2010 Draining Reserves ? 2010 2009 Source : Bloomberg – IMF – European Commission – Dexia Asset Management

7. The Federal Reserve could be too late… A schedule for the Fed Source : Bloomberg – IMF – European Commission – Dexia Asset Management

8. … but the ECB too early A schedule for the ECB December 16 Last 1y LTRO EONIA = 0.35% March 31 Last 6m LTRO EONIA = 0.35% April 13 End Full Alloc. EONIA = 0.50% July 1 € 442 bln mature EONIA = 1.00% September 30 € 75 bln mature EONIA = 1.05% 2009 2010 Source : Bloomberg – IMF – European Commission – Dexia Asset Management

9. … but the ECB too early A schedule for the ECB Source : Bloomberg – IMF – European Commission – Dexia Asset Management

10. The surge in public debt will create new imbalances… The Debt Conundrum + 105% in 7 years + 111% in 7 years + 76% in 7 years Source : Bloomberg – IMF – European Commission – Dexia Asset Management

11. … and require large fiscal restrictions The Debt Conundrum Source : Bloomberg – IMF – European Commission – Dexia Asset Management

12. The fiscal exit strategy will penalize budgetary excesses… Euro Area - implosion or political test ? Source : Bloomberg – IMF – European Commission – Dexia Asset Management

13. … but will offer opportunities to investors Euro Area - implosion or political test ? Specific risk… Source : Bloomberg – IMF – European Commission – Dexia Asset Management * Composed by debt score (public deficit – debt / GDP) and economy score (GDP – unemployment – inflation) * Composed by spread adjusted to risk and to liquidity

14. Emerging economies have more favorable debt ratio trends… The virtues of the emerging economies In 2010, the debt of emerging economies remains relatively stable against the global public debt… … but over the last 10 years, its share in the global GDP has increased with 12% The public debt per capita ratio of the emerging countries is clearly below average Source : Bloomberg – IMF – European Commission – Dexia Asset Management

17. 2010 Trade recommendations Interest Rate Strategies Bullish Bearish 2s10s Steeper 2s10s Flatter Higher Lower Buy Area Sell Area Source : Bloomberg – IMF – European Commission – Dexia Asset Management

19. 2010 - the end of a disliked USD ? USD recent appreciation is premature… Rebound of the leadings, Rebound of the stock markets, Surge of positive data surprises End of Year positioning reversal Recent risk aversion due to Greek downgrades The market expects the Fed to hike in H2 2010 with a end year target of 1.1% Source : Bloomberg - DataStream – Dexia Asset Management

20. 2010 - the end of a disliked USD ? … but the current USD levels remain cheap in a longer term perspective “ Natural Funders” Low yieds with CA surplus Comeback of the carry trades Expensive EUR The USD follows long term cycles High short rates Sustained growth USD undervalued Restrictive monetary policy New Economy USD undervalued Danger Zone 1.40 Source : DataStream – Dexia Asset Management

21. JPY - still a lagging economy Japanese deflation, high public debt and weak internal demand will weigh on JPY US drastic quantitative easing helped to sustain JPY till now but … Japanese export driven growth will not be enough to bring GDP growth above 2% in 2010 Quantitative easing will persist for a while in Japan due to continuing deflation… 100 Source : DataStream – Dexia Asset Management

22. Norwegian krona benefits from good fundamentals… Potential for more appreciation 7.80 Cheap NOK is not yet back to fair value Comfortable Norway current account surplus Still a positive budget account Unemployment remains low and will sustain internal growth Source : DataStream – Dexia Asset Management

23. Polish zloty will outperform other Eastern European currencies… Poland’s prospects remain good for convergence Poland is not so bad positioned w.r.t. Maastricht criteria Polish growth remains positive Rate hikes will occur in 2010 PLN should recover toward previous crisis level 3.60 Source : DataStream – Dexia Asset Management

25. Don’t exit credit yet…spreads to tighten further in 2010 The rally has just started Source : Datastream – Dexia Asset Management 9 months of rally compared to 40 months of recovery on average since 1970 Credit market is remunerative on the long term… Outperformance generated 1 year after the bottom of the crisis (5.79%) exceeds the cumulative loss (-4.99%) $ Credit over 4 decades and 6 crisis

26. Exiting an economical recession context Source : Dexia Asset Management, Datastream, Moody’s, Federal Reserve, Bankscope Corporate activity is set to pick up 2-3 % growth has been an ideal environment for credit Ideal for investment grade credit Non performing loans cycle to peak at the end of Q2 2010 R² : 46%

27. Exiting an economical recession context Source : Dexia Asset Management, Datastream Monetary policy is not a risk Fed policy rate over the last 40 years Cumulated Spread changes before & after first rate hike

29. Balance sheet repairment supports credit in 2010 Source : Dexia Asset Management, Bloomberg, Datastream, Moody’s Focus on revenues generation The cyclical rebound of non-financials Still in deleveraging mode Opportunistic merger & acquisition can surface again Corporate health is improving Aggresive costs cutting & capex reduction Default rate expectation tends to its long term average 4.8%

30. Balance sheet repairment supports credit in 2010 Source : Dexia Asset Management, Datastream US Banks increased liquid assets buffer Aggressive cost cutting & pre-financing increase cash on Non-fin balance sheets Liquidity stays at the central stage Non-financials supply – lower than in 2009 huge redemptions and pre-financing Reopening of the primary market for covered & senior bonds Desintermediation and liquidity focus New regulation will impose a minimum liquidity requirement Gross 260 bn Net -31 bn Gross 209 bn Net -14 bn Gross & Net 276 bn Gross 240 bn Net -94 bn Gross 375 bn Net -13 bn Gross 60 bn Net 38 bn

31. Credit Strategy 2010 Source: Dexia Asset Management, iBoxx, Datastream Spreads imply a default rate of 7.09% over the next 5 years versus 1.71% historically Risk premium accounts for 50% of yield Credit valuation is still attractive… Technicals favour credit bonds over sovereign bonds Credit - Equity premium is narrowing Rising dividend expectations will favour equity, however demand for credit from institutionals will remain strong

32. Credit Strategy 2010 Source: Dexia Asset Management, iBoxx Be long credit …financial sector remains our core strategy Relative attractiveness of the financial sector Switch from Non-financial defensive issuers into more cyclical issuers Telecom Italia - Telecom Pemex – Oil & Gas Veolia – Utilities Sabic – Chemicals Bertelsman – Media BAT – Tobacco Lafarge – Construction CEZ – Utilities Man – Industrials Favour improving fundamentals and better liquidity names within higher beta names Arcelor – Basics

34. Synoptic Table Source : Dexia Asset Management

35. Addresses Luxembourg Dexia Asset Management Luxembourg SA 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgium Dexia Asset Management Belgium Place Rogier 11 B-1210 Bruxelles Tel.: + 32 02 222 11 11 France Dexia Asset Management SA 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 Switzerland Dexia Asset Management Luxembourg SA succursale de Genève 2, rue de Jargonnant 1207 Genève Tel.: + 41 22 707 90 00 The Netherlands Dexia Asset Management Nederlands bijkantoor Lichtenauerlaan 102-120 3062 ME Rotterdam Tel.: + 31 10 204 56 53 Germany Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland An der Welle 4 60422 Frankfurt Tel.: + 49 69 7593 8823 Australia Ausbil Dexia Ltd Veritas House – Level 23 207 Kent Street Sydney NSW 2000 Tel.: + 61 2 925 90 200 Italy Dexia Asset Management Luxembourg SA Succursale Italiana Corso Italia 1 20122 Milano Tel.: + 39 02 31 82 83 62 Spain Dexia Asset Management Luxembourg SA Sucursal en España Calle Ortega y Gasset, 26 28006 Madrid Tel.: + 34 91 360 94 75 Bahrain Dexia Asset Management Luxembourg S.A., Middle East Representative Office Bahrain Financial Harbour, Financial Center, West Harbour Tower, Level 23 King Faisal Highway PO Box 75766 Manama Tel.: + 973 1750 99 00 Canada Dexia Asset Management Luxembourg SA Canadian Representative Office 155, Wellington Street West 6th floor Toronto, Ontario M5V 3L3 Tel.: + 1 416 974 9055 Money does not perform. People do.