Jacques de Larosière
Advisor to the Chairman
BNP Paribas
3, rue d'Antin
75002 Paris - France
33 (0)1 42 98 24 28
jacques.delarosiere@bnpparibas.com

MAY 0 4 2007

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Jacques de Larosière

April 2007

AIG

# ECONOMIC AND GEOPOLITICAL ASPECTS OF THE ENERGY ISSUE

There are two ways to look at this vast question :

- the medium term (5 years) horizon,

- the very long term perspective.

## I. The medium term horizon is relatively stable :

1. The present energy issue is less a "crisis" than a market phenomenon :

a) Energy demand has been rising by 3 to 4 % a year over the last decade while production has been slow to pick up ;

b) Two combined factors have constrained oil and gas output :

- low prices : in real terms, oil prices have stayed during the years 1986-2003 at levels substantially lower than the 1979-1980 peak¹;

- lack of investments : therefore the price of oil and gas has not been steadily remunerative enough to encourage sufficient investment in exploration and production. Even when prices were, at times, trending upwards, private companies -which have more and more difficult access to new oil resources- feared that a downfall could happen and undermine their profitability. Their profits were widely used to pay dividends and to buy back their shares. As for nationalised companies (like PEMEX), most of them were used by governments as a source of public revenues and therefore had little cash to invest².

This low investment trend has reduced output capacity margins and, in conjunction with OPEC policies and the increased demand from China and India, it explains the 2004 "crisis" : i.e. prices rose from 27 dollars the barrel in early 2004 to 36 dollars in mid-2004, and to 50 dollars in April 2005. Since then, oil prices have been hovering around 50-60 dollars.

¹ From 1986 to 2003, oil prices in real terms have remained, on average, at 1/3 of the 1980 peak (the peak was 80 dollars per barrel-2004 $)

² It is estimated that PEMEX should invest some 15 billion $ for the development of its reserves.

## 2. Medium term perspectives :

### a) the price outlook is dependent :

- on demand: emerging economies are growing at a fast rate and energy consumption is on a rising trend;

- on output: with a daily production of 83 millions barrels/day (and a margin of 2 million b/day), any disorderly conditions on production (terrorism, deterioration in the political situation in the Middle East, events in Iraq, Iran, Nigeria...) can translate in price volatility. One can add that the move towards the nationalisation of oil companies (especially in certain Latin American countries like Bolivia, Venezuela), will result in lower investment and production.

### b) Therefore, the main consumers of energy (USA, China, India, Europe), are trying to diversify their growing dependency³ on oil imports from the Middle East⁴ and to some degree from Russia⁵.

OPEC -with 77 % of hydrocarbons reserves and 40 % of world oil production- is in a crucially important geopolitical position in this respect. And so is Russia with its huge gas reserves.

This explains :

- the major investments in the Caspian region made over the last decade by private western consortia (production and pipelines south bound avoiding Russian routes);

- the focus on African resources (with 9,4 % of world reserves, Africa produces 11,4 % of total world oil production).⁶

We shall no doubt witness over the coming years an increasing political competition in Central Asian and African States from countries like the US (present in Equatorial Guinea, Congo, Gabon, West Africa...), China (particularly active in oil and gas investments in Africa associated to economic cooperation -notably in Libya, Sudan, Angola, Nigeria, Mali...-) and India (India has increased its oil investments in East Africa). Europe -in spite of it's strong positions through Total- seems relatively absent in terms of an active and coherent strategy at the Union's level.

### c) With renewed investments in Africa, in the Caspian region and a steady supply by Saudi Arabia (which is one of the only producers that still has available capacity), prices could stabilize around 50-70 dollars in the medium term (in real terms).

***

³ The US imports of oil amounted to 20 % of their total consumption in 1970 against 60 % today.

⁴ 22 % of the US imports of oil come from the Middle East, and the US objective is to increase African imports from 15 % to 25 %. See: Report on the National Energy Policy Development Group.

⁵ Russia has the largest natural gas reserves in the world and is the N° 1 producer. In 2030, Europe will import 2/3 of its gas from Russia (against 1/3 now).

⁶ See: François Lafargue: "Kriegspiel pétrolier en Afrique" - Revue Politique Internationale, N° 122, Summer 2006.

2

Oil is a global market. And oil dependency is a common factor for all net importers. For them, the issue is not so much to "reduce their dependency" but to diversify their long term contracts with producers and to avoid excessive reliance on too limited a number of (politically unstable) suppliers. If the US (who absorbs 25 % of the world oil and gas production for 4 % of the world population and 20 % of world GDP) wished to reduce their dependency on imports they would have no other choice but to increase their domestic production and/or reduce their consumption of hydrocarbons (by stepping up nuclear production, energy savings....).

Oil has yet no substitute for road transportation. Thus, a price hike could have immediate macro-economic consequences, since demand elasticity for oil is rather low.

But it is to be underlined that the world economy has absorbed remarkably well the so-called "oil shock" over the last three years and that macroeconomic growth (at a yearly rate of 5 %) has reached record highs with very little inflation. This shows that globalization with its low priced imports from emerging markets and the weaker dollar have helped many oil importing industrial countries to keep inflation under control. But, more fundamentally, the energy intensity of GDP has, for technological reasons, diminished over the years especially in advanced countries.⁷

## II. The long term outlook is bleak:

But if one takes a long term view, things look very different and the word "crisis" becomes adequate.

### 1. A growing supply-demand disequilibrium:

At a conservative rate of growth of energy consumption of 2 % per year, usable oil reserves would last some 40 years (60 years for natural gas and 230 years for coal)⁸.

But these estimates -established a few years ago- do not sufficiently take into account the rapid economic expansion of countries like China and India. We have to have in mind that 2.4 billion people are potential consumers of oil and gas (1.6 billion among them have presently no access to electricity)⁹.

From now to 2050, the world population is estimated to grow from 6.5 billion to 9 billion people (India would increase by 600 million, other Asian countries (non China) by 400, the "Islamic arch" by 500 and Africa by 1 billion.)

It is therefore obvious that, barring major new oil and gas discoveries which don't seem to be in the offing, hydrocarbon market prices are bound to firm up over the years. Of course, the

⁷ Net oil imports of OECD countries amounted to about 1 % of their GDP in 2005, less than half the amount in the 1970s.

⁸ Oil amounts to 39 % of world energy consumption, coal to 24 %, natural gas to 22 %, nuclear to 6 %.

⁹ Electricity consumption per capita in OECD countries represents seven times that of emerging countries. This gap is bound to reduce.

"depletion scenario" described above will not happen in a linear way in that precise time framework. Prices would go up, presently non profitable resources could be exploited, and coal and substitutes would expand. But the orders of magnitude point to a dire reality: over the very long run hydrocarbon reserves will inescapably be exhausted.

## 2. A daunting worldwide environmental problem¹⁰:

The environment conditions enormously compound the issue.

In 2002, total CO2 emissions amounted to an equivalent of 24 billion tons of carbon (US: 5,8, Europe: 3,7, China: 3,5, Russia: 1,4, Japan: 1,2, India: 1,2,...). But China has already stepped up its emissions to 4.7 billion tons in 2006 (i.e. 14% of total world emissions in 2006) and will probably catch up the US in 2010.

In 2020, the situation would become extremely difficult: extrapolations show that China would emit approximately 2/3 of the CO2 produced today in the world.

The dilemma is simple.

- If nothing is done, and according to the above assumptions, air CO2 concentration could reach 420 ppm (parts per million) before 2020 (the actual figure was 379 in 2004).

According to experts of the Intergovernmental Group on Climate Change (GIEC), at 550 ppm, climatic changes would be severe. But at 1000 ppm, life conditions on our planet would become problematic. The dangerous zone (600 to 1000 ppm) could happen towards the end of the century;

- If one wanted to block CO2 concentration at 550 ppm (tolerable level); emissions would have to be stabilized by 2025. Then, a 30% reduction would have to be operated (let say 80% for industrialized countries and 20% for emerging countries). The Kyoto agreement and the recent European Union objectives are a step in that direction. But it remains to be seen how these orientations will be implemented and whether the US and emerging countries will be ready to contribute to a programme that can only be global if it is to work. This containment of emissions would have to be supported by a systematic development of renewable energies (solar, ethanol...) and nuclear programmes.

Is the world ready to face up to these daunting challenges and to choose between environmental survival and the illusion of power?

¹⁰ See: « Les prochaines guerres seront-elles un combat pour les ressources ? » (« Are the next wars going to be a struggle for resources ? »), by Mr. Yves-Marie Laulan, President of the Institut de Géopolitique des Populations, Revue de la Défense Nationale, Mars-Avril 2007.

4

Jacques de Larosière

November 2007

# Debt market turmoil: impact on Central Europe ?

The dislocation of credit markets in August 2007 originated in the US subprime mortgage market and spread out into industrial countries. The rising defaults on the US subprime were the trigger of the turmoil but not its fundamental cause.

The cause was the combination of abundant liquidity, and therefore low interest rates, the search for risky high yield assets as well as the excesses of securitization of complex financial products. The latter phenomenon contributed over the last years to a deterioration in the quality of credit since financial institutions were more interested in collecting fees than in maximizing credit quality in a system ("originate-distribute") which allowed them not to keep these risks on their balance sheets, but, instead, to sell them to investors worldwide.

Thus, the turmoil emanated from "mature" countries. The emerging markets were not directly concerned: their financial institutions had not engaged in subprime lending nor, on the whole, in securitization of complex products. Most of them were not caught in the turmoil neither on the lending side nor on the investment side.

By contrast with previous crises, this time, emerging markets were not the "culprits". On the contrary, many consider those markets as the engines of world growth.

How does Central Europe fare in this regard ?

I shall divide my remarks in two parts :

* Up to now, the direct impact of market turbulence has been very limited ;

* But there could be negative medium term consequences especially for those Central European countries that appear the most vulnerable.

000

1

I. The immediate impact of the crisis has been, up to now, extremely limited:

East of Central Europe, there has been, in the wake of markets turmoil, a growing differentiation between countries and institutions. For instance, in Russia, a number of banks who appeared to be too dependent on external financing, encountered liquidity problems. Kazakhstan is also a case in point: in that country, many banks saw their external funding dry up because they had engaged in excessive credit growth and over-relied on foreign financing. By contrast, one important Kazakh bank who had avoided these pitfalls, is now attracting deposits and has no funding or rating problems.

But this phenomenon has not affected Central Europe. Four observations can be made in this regard.

1. The widening of spreads has been very limited:

As is shown in Table I (I.C.), Graphs VII and VIII, most of the spreads (three-month interbank vis a vis three month EURIBOR) have shown very small widening (in the order of 50 basis points) during the month of August and until now.

The only notable exception is Latvia which has come under pressure (spreads have increased by 6% from the end of July to end of October). Latvia has, indeed, experienced a very rapid growth, high inflation, major external deficits, strong credit expansion, a housing boom and political uncertainties¹. Besides, its exchange rate (the Lat-, contrary to those of the other Baltic countries, fluctuates in a narrow band which might have encouraged speculation. To a lesser degree, Romania (see Graph VII), has seen a limited increase in its three-month spread which has thus interrupted the gradual convergence that had been taking place between this country and its neighbours in terms of spreads.

If one looks at domestic interest rates (see Graph VI), variations have been very modest except again for Latvia which had to raise its rates by 200 basis points in order to protect its currency.

More generally, one can observe that the index of sovereign bonds in the region (EMBI spreads) has only been modestly impacted moving from about 140 basis points in January 2007 to around 180 in September 2007).

¹ See a more detailed commentary on Graph VIII.

2

## 2. The exchange rates in Central European Countries did not depreciate during and since the turmoil:

Usually, such depreciations appear in emerging countries when foreign lenders or investors start losing confidence.

Of course, four countries in the region have fixed exchange rates (Estonia, Latvia, Lithuania, and Bulgaria) and are committed to defend them. As we noted before, Latvia, under some pressure, depreciated slightly, but within its band (+/- 1%).

As for the other countries, who have flexible exchange rates, Graph II shows how limited have been the fluctuations during the month of August. These variations have been even less marked than during the mini-crisis of May/June 2006.

## 3. Stock markets fared reasonably well:

As is shown in Graph III, stock markets in a number of Central Europe countries had been rising gradually from January 2006 to July 2007. As seen in Graphs IV and V, from July to mid-August 2007, there was a noticeable dip in the middle of August (not more marked that in "mature countries"). However, most markets in the more resilient countries have regained the positions of mid-July. Graph V shows that more "vulnerable" countries have not entirely recovered (although losses remain limited : 2 to 15 %) with the exception of Bulgaria, which has more than recovered.

## 4. What have been the causes of this resilience?

Three basic factors can be noted:

- continued institutional and economic convergence of these countries with the rest of the European Union;

- some progress on macroeconomic management and relatively stable inflation (with the exception of Latvia, Bulgaria and Romania) as shown in Table I (I.E.);

- remarkably favourable growth -between 6 to 9 % in 2006-2007- (with the exception of Hungary which is adjusting significantly its fiscal position), see Table I (I.D.).

000

3

## II. But in the medium-term, the outlook could be bleaker especially for the most vulnerable countries :

### 1. A slowing down - and even more a contraction- of growth in the US could have some impact on the European Union and, therefore, on Central Europe.

As for US growth, in 2008, forecasts vary. The consensus view is still that of a "soft landing" that would produce only a slight moderation in world growth and in capitals flows to emerging countries. But the most pessimistic scenarios (US recession) could have a significant negative impact on Europe -especially if the dollar were to continue its slide- and would therefore affect Central Europe.

### 2. External accounts :

Such an economic slowdown would hurt Central European exports and compound balance of payments problems (see Table I (I.F.)). All these countries have indeed experienced negative current account balances over the last years (in the order to 3 to 5 % of GDP in Poland, Czech Republic, Slovakia, and Hungary in 2006-2007).

But, the Baltic countries, Bulgaria and Romania have much larger current account deficits (from 13 to 20 % of GDP) which is obviously an element of vulnerability. Deficits have been widening in these most vulnerable countries on the back of growing demand-driven imports. External funding could thus become an issue for some of those countries.

More generally, if domestic demand in the region were to become the major engine of growth (in an environment of potentially sluggish exports), balance of payments issues could become significant.

Fortunately, most of Central European countries are financing their current account deficits with foreign direct investment (FDI) (fully in the Czech Republic and Poland, 90 % in Bulgaria and 2/3 in Slovakia and Romania). But some are more dependent on portfolio inflows (Hungary), or on external credit (Baltics). We know that "hot money" inflows and carry-trade transactions are short term by nature and can leave as fast as they come, and thus can generate exchange rate pressures.

More stringent and expensive market conditions (because of less appetite for risk) would tend to increase spreads and make financing more difficult.

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3. The banking systems of the region are generally strong, but loans extended to households are too often denominated in external currencies :

* Banking systems are in general strong, well capitalized and most often owned by international groups. But some remain "national", for example in Slovenia. Large groups will of course support their local subsidiaries but may be more prudent in appraising risks related to new projects;

Table A

<table><thead><tr><th colspan="9">Share of banking assets held by foreign banks (%)</th></tr><tr><th></th><th>Estonia</th><th>Lithuania</th><th>Latvia</th><th>Bulgaria</th><th>Poland</th><th>Czech Republic</th><th>Slovakia</th><th>Hungary</th><th>Romania</th></tr></thead><tbody><tr><th>2006</th><td>99</td><td>86</td><td>60</td><td>71</td><td>67</td><td>92</td><td>88</td><td>60</td><td>89</td></tr></tbody></table>

* Banks generally have not engaged in origination and distribution of complex structured products – thereby avoiding many of the problems seen in more mature markets;

* The share of loans denominated in foreign currencies is often high as is shown in the following table (except for the Czech Republic and Slovakia):

Table B

<table><caption>Share of loans denominated in foreign currency (%) (First six months of 2007)</caption><thead><tr><th></th><th>Estonia</th><th>Lithuania</th><th>Latvia</th><th>Bulgaria</th><th>Poland</th><th>Czech Republic</th><th>Slovakia</th><th>Hungary</th><th>Romania</th></tr></thead><tbody><tr><th>FX loans to the private sector</th><td>78</td><td>56</td><td>74</td><td>50</td><td>27</td><td>13</td><td>20</td><td>52</td><td>47</td></tr><tr><th>Household -Total</th><td>78</td><td>51</td><td>72</td><td>45</td><td>31</td><td>0</td><td>3</td><td>42</td><td>41</td></tr><tr><th>Household- Housing</th><td>-</td><td>-</td><td>-</td><td>78</td><td>64</td><td>0</td><td>3</td><td>34</td><td>85</td></tr><tr><th>Corporate</th><td>-</td><td>-</td><td>-</td><td>52</td><td>22</td><td>19</td><td>32</td><td>46</td><td>52</td></tr></tbody><tfoot><tr><td colspan="10">Sources: Central Banks</td></tr></tfoot></table>

That share is particularly high in the Baltic's, Bulgaria, Poland and Romania (especially for housing).

Such currency mismatches can be dangerous in the case of foreign exchange turmoil which might affect the exchange rates of some of those countries (be they pegged or not).

As for the banks net open currency positions, one can observe the high negative positions of Romania and of the Baltic's.

Table C

<table><caption>Banks' net open currency (position) (fx assets-fx liabilities)/capital (excluding central bank)</caption><thead><tr><th></th><th>Estonia</th><th>Lithuania</th><th>Latvia</th><th>Bulgaria</th><th>Poland</th><th>Czech Republic</th><th>Slovakia</th><th>Hungary</th><th>Romania</th></tr></thead><tbody><tr><th>2006</th><td>- 208</td><td>- 250</td><td>- 395</td><td>45</td><td>63</td><td>93</td><td>-</td><td>30</td><td>- 159</td></tr></tbody></table>

5

More generally, credit expansion to the private sector has been very rapid over the last years. In the 1st quarter of 2007 alone, growth in credit has increased, depending on countries, from 12 to 50 %). Therefore credit problems could arise.

## 4. Structural fiscal issues have yet to be resolved :

There has been a strong improvement in Hungary (from a deficit of 9.2 % of GDP in 2006 to - 6.4 % in 2007 and a projected - 4.5 % in 2008). Most of the other countries have seen their deficits stabilized around 3 % of GDP. There has been some deterioration in 2007 in the case of Romania (see Table I (I.G.)).

These imbalances (which remain way too high given the strong economic growth of the region) compound the external finance issues mentioned above and are clearly not sustainable in the long run.

## 5. But there are also some positive factors at play :

- competitiveness has increased and has played a key role in improving the relative export performance in all the region²;

- external reserves are comfortable and indebtedness is manageable;

Table D

<table><caption>Reserves-to-short term debt ratios (%) are satisfactory:</caption><thead><tr><th></th><th>Estonia</th><th>Lithuania</th><th>Latvia</th><th>Bulgaria</th><th>Poland</th><th>Czech Republic</th><th>Slovakia</th><th>Hungary</th><th>Romania</th></tr></thead><tbody><tr><th></th><td>42 %</td><td>99 %</td><td>133 %</td><td>139 %</td><td>137 %</td><td>192 %</td><td>210 %</td><td>154 %</td><td>339 %</td></tr></tbody></table>

- equity markets are presently favourable ;

- monetary stability is, on balance, sustained. But some countries have allowed too a much of a real estate boom due to excessive credit creation ;

- productivity growth has been a positive factor in the expansion of Central Europe. But there are inflationary risks (overheating, wage increases³, Samuelson-Bellassa effects, skill shortages in some sectors....). Therefore, if competitiveness is to be preserved, productivity should be reinforced by structural measures (training of the labour force...), and by the maintenance of flexible exchange rates. Indeed, countries should not rely too long on appreciating nominal exchange rates to contain inflation. And a more determined policy of fiscal adjustment is called for.

² See World Bank EU 8+2 Report September 2007.

³ In all countries apart from Slovakia and Slovenia, wages are growing faster than labour productivity (see World Bank - EU 8+2, September 2007).

6

000

On the whole, the resilience and the attractiveness shown by Central Europe in the wake of the global market turmoil had been remarkable. According to the latest estimates of the Institute of International Finance (IIF)⁴, foreign investment in Europe's emerging economies (including Russia, Ukraine and Turkey) is set to surge in 2007 to $ 276 billion, putting it for the first time in recent years, ahead of emerging Asian economies (which are poised to receive $ 208 billion).

But time must not be lost in removing remaining stumbling blocks and structural weaknesses. For several years, some of those Central European countries have been large net recipients of external borrowing and this appears to be a lasting trend⁵. If the potential effect of financial turbulence is to be minimized especially in the most vulnerable countries, it is thus essential for those economies to attract more external investment in the form of FDI and to rely less on the more volatile forms of inflows of short term bank borrowing and portfolio investment.

The situation described above may open new opportunities: infrastructure needs remain high and growth potential is favourable. Even if the cost of loans can rise due to the credit crunch, less appetite for credit risk could result in lower asset prices if liquidity is reduced. It is up to investors to find out the projects and the companies that are the most promising in this regard.

Table I. Data Changes

<table><thead><tr><th colspan="10">(I.A.) Exchange rate</th></tr><tr><th></th><th>Crown<br>Estonia</th><th>litas<br>Lithuania</th><th>lats<br>Latvia</th><th>lev<br>Bulgaria</th><th>zlotys<br>Poland</th><th>Crown<br>Czech<br>Republic</th><th>Crown<br>Slovakia</th><th>Forints<br>Hungary</th><th>leu<br>Romania</th></tr></thead><tbody><tr><td>25/08 - 25/07</td><td>0%</td><td>0%</td><td>-0,18%</td><td>0%</td><td>-1%</td><td>1%</td><td>-2%</td><td>-4%</td><td>-4%</td></tr><tr><td>25/10 - 25/07</td><td>0%</td><td>0%</td><td>-0,88%</td><td>0%</td><td>4%</td><td>4%</td><td>0%</td><td>-1%</td><td>-7%</td></tr></tbody><thead><tr><th colspan="10">(I.B.) Stock Exchange</th></tr><tr><th></th><th>Estonia</th><th>Lithuania</th><th>Latvia</th><th>Poland</th><th>Czech<br>Republic</th><th>Slovakia</th><th>Hungary</th><th>Bulgaria</th><th>Romania</th></tr></thead><tbody><tr><td>25/08 - 25/07</td><td>-7,9%</td><td>-4,4%</td><td>-6,1%</td><td>-4,9%</td><td>-1,5%</td><td>1,6%</td><td>-6,4%</td><td>-0,6%</td><td>-2,4%</td></tr><tr><td>25/10 - 25/07</td><td>-14%</td><td>2%</td><td>-10%</td><td>-2%</td><td>2%</td><td>5%</td><td>-7%</td><td>23%</td><td>-4%</td></tr></tbody></table>

⁴ IIF Capital Flows to Emerging Market Economies, October 21, 2007.

⁵ For the « Emerging Europe » region as defined by the IIF (including Russia, Ukraine, Turkey) $ US 213 Billion (out of the total of 276 Billion of net private flows in 2007) are in the form of « private credits » (and only 62 Billion in the form of equity).

7

Graph VIII. Spread (interbank 3-mth versus Euribor)

Source: Reuters

The countries with fixed exchange regimes have experienced the most marked variations in their spreads. The case of Latvia is the most significant : this country has registered a very large increase in its short term interest rates : its spread has widened by 628 basic points between July 23 and October 25, 2007.

The countries of the region most affected by capital fluctuations since end July 2007 are Latvia, and to a lesser extent the other Baltic's, Bulgaria and Hungary.

The anti-inflationary plan set up by Latvia last spring has not yet been successful : current account imbalances are widening and inflation is on the rise. The political crisis experienced by that country may complicate the enforcement of measures by a weak government, even if the political parties still express a consensus on the need for reforms.

The other Baltic's States are also in a delicate position given the fixed nature of their exchange rate and the inflationary pressures they have been experiencing since the end of 2005. They have very large external deficits (current account deficits around 15 to 20 % of GDP), which increase their financial needs.

However the pattern of banks, external financial resources seems stable : most of them come from parent banks to their local subsidiaries. Moreover, contrary to Latvia, prices and economic growth seem to start decelerating since mid-2007 in Estonia and Lithuania. Members of the European Exchange Mechanism II (EERM II), the Baltic's states (including Latvia) can count on the support of the European system of Central banks in case of speculative attacks on their currencies. And lastly, these three countries have sound fiscal positions.

16

This is also the case of Bulgaria which has registered fiscal surpluses over the last years. However, Bulgaria does not belong to the EERM-II. But, its foreign reserves protect its currency board system: they represent 140% of Bulgaria's monetary base (MI) and close to 100% of M2 (monetary base and sight deposits). Moreover, net FDI flows have covered more than half of Bulgaria current deficits over the last year. As for inflation, which has skyrocketed last summer, it appears to be more the result of specific one-off factors (increases in administrated prices and taxes, effects of drought experienced during the summer...) than of underlying pressures on wages. Here again, the favourable fiscal position should serve as a buffer and hopefully mitigate the "second round" effects on inflation, because of the constraint on public sector wages.

The Hungarian current account deficits are also financed in large part by FDI flows. It is notable that the external deficit is reducing as well as the fiscal deficit, because of corrective measure taken mid 2006. These reasons explain in part the weak impact of the financial turmoil on the forint and also on the Hungarian stock exchange.

17

DATE: 12/26/07

CORR. FILE Lasiky Ondres

ACTION:

Paul Stape Dennis Gish

Jessee Ann R. Theresa

Security Suzanne

COMMENTS:

SUBJECT FILE

CROSS REFERENCE

STAFF MEMO BY:

DC OFFICE:
Christie / Jody / Ann J. / Rose

INFORMATION COPY TO:

ROUTE CC COPY TO:

TO BE FILED

HENRY A. KISSINGER

August 28, 2007

Dear Leonard:

Many thanks for your letter in which you inform me
that you turned the Chairmanship of the Aspen
Institute Board to Bill Mayer. I look forward to
getting to know him. Unfortunately, I am unable to
be at the November Board meeting as I am already
scheduled to be in Europe on those dates. However,
I hope to have the opportunity to see you soon.

Warm regards,

Henry A. Kissinger

Mr. Leonard A. Lauder
The Aspen Institute
Chairman, Board of Trustees
One Dupont Circle, NW
Suite 700
Washington, DC 20036

TWENTY-SIXTH FLOOR · 350 PARK AVENUE · NEW YORK, NEW YORK 10022 · (212) 759-7919
FACSIMILE (212) 759-0042

LEONARD A. LAUDER

767 FIFTH AVENUE
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DEC 10 2007

December 7, 2007

Dear Nancy and Henry,

The Aspen Institute is delighted to be collaborating with Hunter College in launching a series of programs which will be called *Aspen at Roosevelt House*. We have a very exciting inaugural discussion entitled "The Presidents at War", with renowned panelists Tom Brokaw, Joan Hoff and David Kennedy.

Since the Roosevelt House itself is under renovation, the first presentation will be held at the Kaye Playhouse, located at Hunter College, 695 Park Avenue, on January 14, 2008. It will begin with a Wine and Cheese reception at 6:00 pm, followed by the inaugural discussion at 6:45.

Please call the Kaye Playhouse at 212-772-4448 to reserve a seat for the first of our series.

Evelyn and I are hosting a dinner immediately following the program for Trustees of The Aspen Institute, Hunter College, and a few friends. We would be delighted if you could join us for dinner at the Union Club, 101 East 69th Street. Please contact Michael Doyle at 212-572-6760 or mdoyle@estee.com to RSVP for the dinner only.

Evelyn and I look forward to seeing you on January 14th. Until then, she joins me in sending you our very warmest personal regards.

LAL/bz

Dr. and Mrs. Henry A. Kissinger
Kissinger Associates Inc.
350 Park Avenue
26th Floor
New York, NY 10022

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Prof. Dr. Kurt J. Lauk

OCT 08 2007

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Via Fax: 001-212-759 0042

Rebecca Jordan
Executive Assistant to
Henry A. Kissinger
350 Park Avenue, 26th Floor
New York, N.Y. 10022
United States of America

October 8th. 2007

Dear Rebecca,

Hope you are doing well and I hope you are still working for Mr. Kissinger.

I want to let you know, that Dr. Kurt J. Lauk will be in Washington in the week of October 15th, 2007 and he would like to ask, whether Mr. Kissinger will be in Washington that week too and if there might be a chance for him to meet Mr. Kissinger.

As I don't have your emailaddress, I will send you this request by Fax.
My Emailaddress is: sissi.heeger@globecapitalpartners.de

Thank you very much for your soonest reply and have a good week.

Geschäftsführer Prof. Dr. Kurt J. Lauk, Registergericht Stuttgart:HRB 21371

NEW YORK

450 Park Ave., Suite 2302
New York, NY 10022
Phone +1.212.980.2613
Fax +1.212.980.2615

STUTTGART

Königstraße 1A,
70173 Stuttgart, Germany
Phone +49 711.284 1691
Fax +49 711.284 1694

Email: Sissi.Heeger@globecapitalpartners.de

Page 1 of 1

Jessee LePorin

From: Sissi Heeger [sissi.heeger@globecapitalpartners.de]

Sent: Wednesday, October 10, 2007 10:11 AM

To: Jessee LePorin

Subject: AW: Meeting with Dr. Lauk

Dear Jessee

Thank you so very much for your email.

In Dr. Lauks schedule for next week, NY is not included at the moment, just Washington - but changes can always happen - if there might come any changes, we would of course like to come back to you. And if this does not work this time, we would be happy to come back to you the next time, when Dr. Lauk will be in New York again.

Thank you very much in advance for your kind help and assistance.

Ciao
Sissi

Von: Jessee LePorin [mailto:jleporin@kissingerinc.com]

Gesendet: Dienstag, 9. Oktober 2007 17:27

An: sissi.heeger@globecapitalpartners.de

Betreff: Meeting with Dr. Lauk

Dear Sissi:

Many thanks for your fax. Unfortunately, Dr. Kissinger is not scheduled to be in DC at all the week of October 15. Will Dr. Lauk be in NY at all next week? If so, please let me know as I will check Dr. Kissinger's availability (he is currently abroad but returns later this week).

Jessica P. LePorin
Office of Henry A. Kissinger
Kissinger Associates, Inc.
350 Park Avenue, 26th Floor
New York, NY 10022
Telephone (212) 759-7919
Fax (212) 759-0042

PLEASE NOTE NEW E-MAIL ADDRESS: jleporin@kissingerinc.com

10/26/2007

Page 1 of 1

Jessee LePorin

**From:** Matthew_Dauphinais@ita.doc.gov
**Sent:** Tuesday, April 24, 2007 6:24 PM
**To:** jleporin@kmaglobal.com
**Subject:** Appointment Request for Under Secretary Frank Lavin

APR 25 2007

Ms. Leporin,

On behalf of Under Secretary of Commerce for International Trade Frank Lavin, I would like to request an
appointment with Dr. Kissinger. The Under Secretary will be traveling to New York City on May 14, but there is a
possibility of arriving on May 13 as well as staying until May 15. We would like to request a 45- to 60-minute
meeting on any of these dates. They met previously on June 23, 2006.

Among other general trade topics and international issues, the Under Secretary would like to discuss Dr. Kissinger's upcoming keynote address at the second meeting of the Strategic Economic Dialogue in mid-May. The Under Secretary has been deeply involved with the SED since its inception and has traveled to China on multiple occasions for SED-related activities and meetings, including its first official meeting last year.

I have attached his biography for your reference. I look forward to hearing from you.

Matthew R. Dauphinais
Office of the Under Secretary
International Trade Administration
U.S. Department of Commerce

T: (202) 482-2867
F: (202) 482-4821

4/25/2007