ProdukHukum BankIndonesia
The World Economic & Financial
System: Risks & Prospects
Dr. Jacob A. Frenkel
Chairman & CEO Group of Thirty (G30)
.Bank Indonesia 7th Annual International Seminar
“Global Financial Tsunami: What Can We Do?”
Bali, Indonesia, June 13-14, 2009
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Global Financial Markets
• Deteriorating Equity Markets
• Widening Credit Spreads
• Is the worse over?
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6/10/2009
Global Equity Markets
(close - price)
(close - price)
14,000
Dow
Jones
13,000
1,600
12,000
1,400
11,000
S&P 500
1,200
10,000
9,000
1,000
8,000
800
7,000
6,000
Standard & Poors 500 Composite Index (Right)
2006
Dow Jones Industrial Average Index (Left)
2007
600
2008
Source: Bloomberg, Market Data, Last Update Jun 09 2009
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6/10/2009
Global Equity Markets
180
(US$ returns, 12/31/2008 = 100)
160
140
Latin
America
120
100
Asia
80
Europe
60
40
EM Asia
Jan-07
Apr-07
EM Europe
Jul-07
EM Latin America
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: Bloomberg, Market Data, Last Update Jun 09 2009
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6/10/2009
U.S. Credit Market Spreads
20
(percentage points)
(percentage points)
18
16
High Yield
9.4
14
12
10
8
High Grade
3.0
6
4
2
0
BarCap High Yield Spreads vs. Treasuries
May
Jun
Jul
Aug
Sep
BarCap High Grade Spreads vs. Treasuries
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
©FactSet Research Systems
Source: Barclay's Capital, weekly averages, last observation Jun 10 2009
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6/10/2009
Spread between 3 Month LIBOR & T-Bills
500
(basis points)
Wave of
redemptions
in Money
Market
Funds
450
400
350
First Federal
Reserve
Auction,
$20bn
Foreclosures
accelerate
300
from 5.5%
to 6.9%
250
Lehman
Brothers
files for
Bankruptcy
Bear
Stearns
Collapses
IndyMac
seized
by US
Regulators
200
Countrywide
Financial
"Risks
150
Bankruptcy"
100
50
“Subprime Crisis”
0
7/07
10/07
1/08
“Liquidity Crisis”
4/08
7/08
10/08
1/09
4/09
Source: Federal Reserve, Reuters, last observation Jun 06 2009
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6/10/2009
Emerging Market Credit Spreads
(Basis points, index 1/1/2007=100)
1,000
Europe
800
600
Asia
400
Latin
America
200
0
Jan-07
Latin America
Apr-07
Europe
Jul-07
Asia
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: JP Morgan, last observation Jun 09 2009
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6/10/2009
Subprime Crisis, Housing, and
Banks
• Size of the Subprime Market
• Housing Prices and Household Wealth
• Delinquencies and Foreclosures
• Write-downs and Capital Raised
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6/10/2009
U.S. Mortgage Market: 2003-2005
2003
Subprime,
7.9%
Alt-A, 2.2%
2004
FHA/VA,
5.6%
Alt-A, 6.3%
2005
FHA/VA,
4.5%
Subprime,
18.2%
Alt-A, 12.2%
FHA/VA,
2.9%
Subprime,
20.0%
Prime,
53.2%
Prime,
58.9%
Prime,
78.8%
Source: Inside Mortgage Finance, Last update February 8, 2008
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6/10/2009
U.S. Mortgage Market: 2006-2007
2006
Alt-A, 13.4%
2007
Alt-A,
11.3%
FHA/VA,
2.7%
FHA/VA,
4.2%
Subprime,
7.9%
Subprime,
20.1%
Prime,
49.3%
Prime,
62.1%
Source: Inside Mortgage Finance, Last update February 8, 2008
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6/10/2009
Changes in U.S. Home Prices
20
(% change from a year ago)
15
10
5
0
-5
Apr 2009
-15.4%
-10
-15
-20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Nat'l Association of Realtors, quarterly averages, last observation 4/2009
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6/10/2009
U.S. Household Real Estate Wealth
140
(percent)
135
130
125
120
115
110
105
100
95
90
85
Q4 2008
73.99%
80
75
70
2000
2002
2004
2006
2008
Source: Federal Reserve, last observation Q4/2008
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6/10/2009
U.S. Delinquencies
(% of total loans)
25
(% of subprime loans)
Total Delinquencies as a % total Loanas (Right)
Subprime Delinquencies as a % Subprime loans (Left)
13
12
Q1 2009
25% (left)
11
20
10
9
15
Q1 2009
9.1%
(Right)
8
7
6
10
5
4
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Mortgage Bankers Association, Last Observation Q1/2009
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6/10/2009
U.S. Foreclosures
16
(% of total loans)
Foreclosures - Prime
Foreclosures - subprime
Foreclosures - total
Q1 2009
14.3%
14
12
10
8
Q1 2009
3.8%
6
Subprime
4
Total
2
Q1 2009
2.5%
Prime
0
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Source: Mortgage Bankers Association, Last Observation Q1/2009
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6/10/2009
Write-downs & Credit Losses vs. Capital
Raised: All Financials
500
(Billions Usd, Quarterly Value)
450
400
Capital Raised
Writedowns & Credit Losses
350
300
250
200
150
100
50
0
Q3/07
Q4/07
Q1/08
Q2/08
Q3/08
Q4/08
Q1/09
Q2/09
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
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6/10/2009
Credit Market Losses: All Financials (bill.
Usd)
Credit Turmoil Losses Since Beginning of 2007
Europe
Europe, 458.63
Asia
Americas
Asia, 38.4
Americas, 975.2
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
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Capital Raised: All Financials (bill. Usd)
Capital Raised Since Beginning of 2007
Europe
Europe, 438.3
Asia
Americas
Americas, 726.1
Asia, 74.9
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
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Cumulative Write-downs & Credit Losses vs.
Capital Raised: By Region
1000
(Billions Usd, Accumulated value starting Q3/07)
900
800
700
Capital Raised
Writedowns & Credit Losses
600
500
400
300
200
100
0
Europe
Asia
Americas
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
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6/10/2009
U.S. New Home Sales and Housing Starts
(Tsd. units)
(Tsd. units)
2.4
1.2
2
1
1.6
0.8
New Home
Sales:
.35M
1.2
0.6
0.8
0.4
Housing
Starts: .46M
0.2
1990
Housing Starts (Right)
New Home Sales (Left)
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: US Dept. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 4/2009
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0.4
The Global Economic System
• Global Growth Projections
• The Rise of Developing Countries
• Unemployment
• Global Trade
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6/10/2009
Global GDP Growth (%)
6
(% change year ago)
5
IMF Forecasts
4
2009: -1.3
2010: +1.9
3
2
1
0
-1
-2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Real GDP Growth (%) World Economy
Country
2006
2007
2008
2009
2010
World
5.1
5.2
3.2
-1.3
1.9
Industrial Countries
3.0
2.7
0.9
-3.8
0.0
Developing Countries
8.0
8.3
6.1
1.6
4.0
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Real GDP Growth (%) Industrial Countries
8
(% from a year ago)
6
Asia NICs
0.8%
4
Japan
0.5%
2
US
0.0%
0
-2
Eurozone
-0.4%
-4
-6
US
2000
Eurozone
2001
Japan
2002
Asian NIC
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Real GDP Growth (%) Industrial Countries
Country
2006
2007
2008
2009
2010
US
Eurozone
UK
Japan
Asian NICs
2.8
2.0
1.1
-2.8
0.0
2.9
2.7
0.9
-4.2
-0.4
2.8
3.0
0.7
-4.1
-0.4
2.0
2.4
-0.6
-6.2
0.5
5.6
5.7
1.6
-5.6
0.8
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Real GDP Growth (%) Developing Countries
(% from a year ago)
10
Developing
Asia 6.1%
8
6
4
Africa
2.0%
Latin America
-1.5%
2
0
-2
Central & East.
Europe 0.8%
-4
Russia
0.5%
-6
Russia
2000
Developing Asia
2001
2002
Africa
2003
Central & Eastern Europe
2004
2005
2006
Latin America
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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6/10/2009
Real GDP Growth (%) Developing Countries
Country
2006
2007
2008
2009
2010
Developing Asia
China
India
9.8
10.6
7.7
4.8
6.1
11.6
13.0
9.0
6.5
7.5
9.8
9.3
7.3
4.5
5.6
5.7
5.7
4.2
-1.5
1.6
6.6
5.4
2.9
-3.7
0.8
7.7
8.1
5.6
-6.0
0.5
6.1
6.2
5.2
2.0
3.9
Latin America
Eastern Europe
Russia
Africa
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Global GDP Shares
2008
1990
Brazil,
3.1%
Brazil,
2.9%
India,
2.8% China,
3.6%
India,
5.0%
EU, 22.1%
EU, 27.4%
China,
11.4%
USA,
22.8%
Japan,
6.4%
Japan,
9.1%
USA,
20.1%
Source: IMF, Last Update May 2009
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Global Growth Contributions (%)
(% contribution to GDP growth, based on PPP)
70
Developing
60
50
40
Industrial
30
Industrial World
1990
1992
1994
Developing World
1996
1998
2000
2002
2004
2006
2008
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Unemployment Rate (%)
(%)
U.S. 9.4%
9
Eurozone
9.2%
8
7
6
5
4
U.S.
2000
Eurozone
2001
2002
Japan
5.0%
Japan
2003
2004
2005
2006
2007
2008
Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09
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6/10/2009
Unemployment Rate (%)
Country
2006
2007
2008
2009
US
4.4
4.9
7.2
9.4
Eurozone
7.9
7.3
8.2
9.2
Japan
4.0
3.7
4.3
5.0
Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09
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6/10/2009
World Trade Volume
(annual percentage change)
10
IMF Forecasts
2009: -11%
5
2010: +0.6%
0
-5
-10
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast)
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Global Payments Imbalances
• Current Accounts Imbalances
•Foreign Exchange Reserves
•Who Holds US Treasuries?
•Savings Imbalances
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Current Account of Balance of Payments
800
($B)
Asia
$622B
Asia & Oil Exporters Save
600
ME Oil Exp.
plus Russia
$75B
400
200
Eurozone
-$135B
0
Europe Balances
-200
U.S.
- $397B
-400
-600
US Spends
-800
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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6/10/2009
Current Account of Balance of Payments
700
US$ billions, 2009
$643
Of which:
400
China $497
Japan $76
100
-$4
-$73
-$77
Africa
Latin America
-$134
-200
-$393
-500
US
Eurozone
Middle East +
Russia
Asia
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast)
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Accumulation of Foreign Exchange Reserves ($B)
($B)
($B)
2,200
$1,344
$1,954
1,350
2,000
Stock
1,800
Flow
1,100
May 2009
1,600
1,400
(2005 – 2009)
850
1,200
$992
600
1,000
800
350
$168
$386
600
$265
$71
$313
$226
400
$28
100
200
-150
0
China
Japan
Russia
Taiwan
China
South Korea
Japan
Russia
Taiwan
Source: Nat'l Statistical Institutes 05/2009 (China 03/2009), Foreign-Exchange Reserves ex. Gold
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South
Korea
Global Treasury Holdings
(Levels, bill. Usd)
$900
$800
$768
$687
$700
$600
$500
$400
$300
$214
$200
$192
$128
$127
$138
Brazil
Russia
$100
$0
China
Japan
UK
Caribbean
OPEC
Source: US Treasury, Last Observation February, 2009
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6/10/2009
Global Treasury Holdings
(% of Total)
25%
24%
21%
20%
15%
10%
7%
5%
6%
4%
4%
4%
0%
China
Japan
UK
Caribbean
OPEC
Brazil
Russia
Source: US Treasury, Last Observation February, 2009
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6/10/2009
National Savings Rate Comparison
Gross Domestic Savings: 2008 (% of GDP)
60
51.2
50
40
32.3
28.7
30
26.2
25.8
20
9.5
10
0
CHINA
INDIA
KOREA, REP.
OF
JAPAN
GERMANY
UNITED
STATES
Source: EIU estimates, annual average rates, Last update 5/2009
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Inflation
• Headline Inflation
• Oil and Commodity Price Inflation
• Core Inflation
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6/10/2009
Headline CPI Inflation (%)
(%)
6
4
Eurozone
-0.02%
2
0
Japan -0.1%
U.S. -0.6%
-2
Eurozone
2000
2001
2002
2003
2004
2005
2006
U.S.
2007
Japan
2008
2009
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation Eurozone 05/09, U.S & Japan 04/09
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6/10/2009
Global Headline Inflation (%)
(Cpi % Change - Percent Per Annum)
10
Developing
Countries
8
Developing
6.7%
6
World
World
3.%
4
Industrial
Countries
2
0
Developing Countries
2000
2001
Industrial Countries
2002
2003
World
2004
2005
2006
2007
2008
Source: IMF, Last Observation 2/2009 (Developing), 3/2009 (World), 4/2009 (Industrial)
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Industrial
0.0%
Oil Price per Barrel
160
Q2 2008
$140
140
120
10 Jun '09
$70.0
100
2005 av.
$59
80
2004 av.
$39
60
2006 av.
$65
40
2007 av.
$95
20
2001 av.
$24
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Reuters, Gold, USD/troy oz, Last observation Jun 10 2009
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Reuters/CRB Commodities Index
220
(Index, 100 = Q1 2000)
200
180
160
140
120
100
80
2000
Reuters/CRB RJ/CRB Index
2002
2004
2006
2008
10 Jun '09
114.4
Source: Commodity Research Bureau, Quarterly Averages, last observation: 10 Jun 2009
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Core CPI Inflation (%)
3
(%)
United
States
U.S. 1.9%
2
Eurozone
1.8%
Eurozone
1
0
-1
Japan -0.4%
Japan
United States
2000
2001
2002
2003
2004
2005
Japan
2006
Euro Zone
2007
2008
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation 04/09
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Monetary Policy Response
• Global Interest Rate Cuts
• Central Banks’ Balance Sheets
• Fed’s Liquidity Measures
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Coordinated Global Rate Cuts
6
(%)
5
4
Eurozone
1.0%
3
UK 0.5%
2
Canada
0.25%
1
US 0.25%
0
Canada
2005
United Kingdom
United States
2006
Euro Zone
2007
Japan
2008
2009
Source: Bloomberg, Market Data, Last Update Jun 09 2009
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6/10/2009
Japan
0.1%
U.S. Federal Reserve Balance Sheet Assets
(in $Bil.)
2,000
1,500
1,000
500
Federal Reserve, U.S. Treasury Holdings
2004
2005
Federal Reserve, Total Assets
2006
2007
2008
2009
©FactSet Research Systems
Source: Federal Reserve, Last Update Jun 5, 2009
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6/10/2009
Total Assets of Key Central Banks
400
(indexed July 2007=100)
350
BoE
277
300
Fed
239
250
200
ECB
144
150
100
BoE
Jul-07
ECB
Oct-07
Federal Reserve
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: ECB, BoE, Federal Reserve last observation Jun 5, 2009
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6/10/2009
Fed Liquidity Measures
2500
(Liquidity Measures, in $bil.)
2000
Treasuries
New Bank Liquidity Facilities
Money Market Facilities
Traditional Liquidity Measures
Direct Lending Activity
1500
1000
500
0
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Source: Federal Reserve, Last Update June 5, 2009
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6/10/2009
Interest Rates (%)
Interest Rates
Country
US
Eurozone
Japan
2001
2003
2006
10-Jun-09
3mo
1.73
0.92
5.01
0.18
10yr
5.05
4.25
4.70
3.94
Spread
333
332
-31
376
3mo
3.29
2.02
3.48
0.81
10yr
5.00
4.29
3.95
3.69
Spread
171
228
47
288
3mo
0.01
0.00
0.45
0.18
10yr
1.37
1.37
1.69
1.55
Spread
136
137
124
137
Source: Bloomberg Market Rates, end of period values of govt bonds and T-bills, Spread in bps, last update 06/10/2009
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Fiscal Policy Response
• Budget Deficits and Debt
• Global Fiscal Positions
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U.S. Government Deficit as % of GDP
(% of GDP)
2
0
-2
-4
-6
-8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Federal Reserve, US Department of Commerce, last observation Q1/2009
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6/10/2009
Fiscal Positions
Budget Balance (% of GDP)
Country
2000
2008
2009
2010
US
1.6
-6.1
-13.6
-9.7
Eurozone
-1.0
-1.8
-5.4
-6.1
Japan
-7.6
-5.6
-9.9
-9.8
Public Debt (% of GDP)
Country
2000
2008
2009
2010
US
36.2
49.9
61.7
70.4
Eurozone
68.9
68.2
68.9
68.1
Japan
60.4
87.8
103.6
114.8
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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6/10/2009
Fiscal Positions
2
(%)
0
-2
Eurozone
-6.1%
-4
-6
U.S.
-9.7%
-8
-10
-12
Japan
-9.8%
-14
-16
United States
2000
2001
Japan
2002
Eurozone
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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Risks and Policy Challenges:
Exit Strategy (1)
• It is essential that the Governments and the
Monetary Authorities specify and clarify
promptly their commitment to adopt and
implement an effective “exit strategy” from the
policy detours that have resulted in an
extremely rapid and non-sustainable rates of
monetary and fiscal expansions. A Failure to
do so, will deepen the markets’ loss of
confidence and trust in policy makers and in
their policy strategy and will delay the
improvement of the functioning of the
economic and financial systems.
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Risks and Policy Challenges(2)
• A Failure to drain and absorb in a timely
manner the huge amounts of liquidity that were
injected by Central Banks, will result in
Inflation, will erode the credibility of Central
Banks, and might bring rise to political
attempts to restrict the independence of
Central Banks.
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Risks and Policy Challenges(3)
• The huge increase in budget deficits induce a
rapid increase in the size of the public debt. A
Failure to restore budgetary discipline will
worsen this undesirable trend. It will
necessitate the imposition of higher taxes, as
well as a greater reliance on government
borrowing which, in turn, is likely to result in
higher real rates of interest. Such
developments are typically associated with a
heightened degree of uncertainty and are
likely to have adverse consequences for
investment and growth.
AIG
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6/10/2009
Risks and Policy Challenges(4)
• The increased Government ownership of
financial institutions poses significant
challenges to the appropriate Governance of
these institutions. It also sends confusing
signals as to the the government intentions
about their own role in the economic/financial
systems.
AIG
59
6/10/2009
Risks and Policy Challenges(5)
• Protectionism
• Slow Regulatory Reform
AIG
60
6/10/2009
System: Risks & Prospects
Dr. Jacob A. Frenkel
Chairman & CEO Group of Thirty (G30)
.Bank Indonesia 7th Annual International Seminar
“Global Financial Tsunami: What Can We Do?”
Bali, Indonesia, June 13-14, 2009
AIG
1
Global Financial Markets
• Deteriorating Equity Markets
• Widening Credit Spreads
• Is the worse over?
AIG
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6/10/2009
Global Equity Markets
(close - price)
(close - price)
14,000
Dow
Jones
13,000
1,600
12,000
1,400
11,000
S&P 500
1,200
10,000
9,000
1,000
8,000
800
7,000
6,000
Standard & Poors 500 Composite Index (Right)
2006
Dow Jones Industrial Average Index (Left)
2007
600
2008
Source: Bloomberg, Market Data, Last Update Jun 09 2009
AIG
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6/10/2009
Global Equity Markets
180
(US$ returns, 12/31/2008 = 100)
160
140
Latin
America
120
100
Asia
80
Europe
60
40
EM Asia
Jan-07
Apr-07
EM Europe
Jul-07
EM Latin America
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: Bloomberg, Market Data, Last Update Jun 09 2009
AIG
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6/10/2009
U.S. Credit Market Spreads
20
(percentage points)
(percentage points)
18
16
High Yield
9.4
14
12
10
8
High Grade
3.0
6
4
2
0
BarCap High Yield Spreads vs. Treasuries
May
Jun
Jul
Aug
Sep
BarCap High Grade Spreads vs. Treasuries
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
©FactSet Research Systems
Source: Barclay's Capital, weekly averages, last observation Jun 10 2009
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6/10/2009
Spread between 3 Month LIBOR & T-Bills
500
(basis points)
Wave of
redemptions
in Money
Market
Funds
450
400
350
First Federal
Reserve
Auction,
$20bn
Foreclosures
accelerate
300
from 5.5%
to 6.9%
250
Lehman
Brothers
files for
Bankruptcy
Bear
Stearns
Collapses
IndyMac
seized
by US
Regulators
200
Countrywide
Financial
"Risks
150
Bankruptcy"
100
50
“Subprime Crisis”
0
7/07
10/07
1/08
“Liquidity Crisis”
4/08
7/08
10/08
1/09
4/09
Source: Federal Reserve, Reuters, last observation Jun 06 2009
AIG
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6/10/2009
Emerging Market Credit Spreads
(Basis points, index 1/1/2007=100)
1,000
Europe
800
600
Asia
400
Latin
America
200
0
Jan-07
Latin America
Apr-07
Europe
Jul-07
Asia
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: JP Morgan, last observation Jun 09 2009
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6/10/2009
Subprime Crisis, Housing, and
Banks
• Size of the Subprime Market
• Housing Prices and Household Wealth
• Delinquencies and Foreclosures
• Write-downs and Capital Raised
AIG
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6/10/2009
U.S. Mortgage Market: 2003-2005
2003
Subprime,
7.9%
Alt-A, 2.2%
2004
FHA/VA,
5.6%
Alt-A, 6.3%
2005
FHA/VA,
4.5%
Subprime,
18.2%
Alt-A, 12.2%
FHA/VA,
2.9%
Subprime,
20.0%
Prime,
53.2%
Prime,
58.9%
Prime,
78.8%
Source: Inside Mortgage Finance, Last update February 8, 2008
AIG
9
6/10/2009
U.S. Mortgage Market: 2006-2007
2006
Alt-A, 13.4%
2007
Alt-A,
11.3%
FHA/VA,
2.7%
FHA/VA,
4.2%
Subprime,
7.9%
Subprime,
20.1%
Prime,
49.3%
Prime,
62.1%
Source: Inside Mortgage Finance, Last update February 8, 2008
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6/10/2009
Changes in U.S. Home Prices
20
(% change from a year ago)
15
10
5
0
-5
Apr 2009
-15.4%
-10
-15
-20
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Nat'l Association of Realtors, quarterly averages, last observation 4/2009
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11
6/10/2009
U.S. Household Real Estate Wealth
140
(percent)
135
130
125
120
115
110
105
100
95
90
85
Q4 2008
73.99%
80
75
70
2000
2002
2004
2006
2008
Source: Federal Reserve, last observation Q4/2008
AIG
12
6/10/2009
U.S. Delinquencies
(% of total loans)
25
(% of subprime loans)
Total Delinquencies as a % total Loanas (Right)
Subprime Delinquencies as a % Subprime loans (Left)
13
12
Q1 2009
25% (left)
11
20
10
9
15
Q1 2009
9.1%
(Right)
8
7
6
10
5
4
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Mortgage Bankers Association, Last Observation Q1/2009
AIG
13
6/10/2009
U.S. Foreclosures
16
(% of total loans)
Foreclosures - Prime
Foreclosures - subprime
Foreclosures - total
Q1 2009
14.3%
14
12
10
8
Q1 2009
3.8%
6
Subprime
4
Total
2
Q1 2009
2.5%
Prime
0
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
'09
Source: Mortgage Bankers Association, Last Observation Q1/2009
AIG
14
6/10/2009
Write-downs & Credit Losses vs. Capital
Raised: All Financials
500
(Billions Usd, Quarterly Value)
450
400
Capital Raised
Writedowns & Credit Losses
350
300
250
200
150
100
50
0
Q3/07
Q4/07
Q1/08
Q2/08
Q3/08
Q4/08
Q1/09
Q2/09
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
AIG
15
6/10/2009
Credit Market Losses: All Financials (bill.
Usd)
Credit Turmoil Losses Since Beginning of 2007
Europe
Europe, 458.63
Asia
Americas
Asia, 38.4
Americas, 975.2
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
AIG
16
6/10/2009
Capital Raised: All Financials (bill. Usd)
Capital Raised Since Beginning of 2007
Europe
Europe, 438.3
Asia
Americas
Americas, 726.1
Asia, 74.9
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
AIG
17
6/10/2009
Cumulative Write-downs & Credit Losses vs.
Capital Raised: By Region
1000
(Billions Usd, Accumulated value starting Q3/07)
900
800
700
Capital Raised
Writedowns & Credit Losses
600
500
400
300
200
100
0
Europe
Asia
Americas
Source: Bloomberg, Quarterly, Last update Jun 9, 2009
AIG
18
6/10/2009
U.S. New Home Sales and Housing Starts
(Tsd. units)
(Tsd. units)
2.4
1.2
2
1
1.6
0.8
New Home
Sales:
.35M
1.2
0.6
0.8
0.4
Housing
Starts: .46M
0.2
1990
Housing Starts (Right)
New Home Sales (Left)
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: US Dept. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 4/2009
AIG
19
6/10/2009
0.4
The Global Economic System
• Global Growth Projections
• The Rise of Developing Countries
• Unemployment
• Global Trade
AIG
20
6/10/2009
Global GDP Growth (%)
6
(% change year ago)
5
IMF Forecasts
4
2009: -1.3
2010: +1.9
3
2
1
0
-1
-2
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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21
6/10/2009
Real GDP Growth (%) World Economy
Country
2006
2007
2008
2009
2010
World
5.1
5.2
3.2
-1.3
1.9
Industrial Countries
3.0
2.7
0.9
-3.8
0.0
Developing Countries
8.0
8.3
6.1
1.6
4.0
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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6/10/2009
Real GDP Growth (%) Industrial Countries
8
(% from a year ago)
6
Asia NICs
0.8%
4
Japan
0.5%
2
US
0.0%
0
-2
Eurozone
-0.4%
-4
-6
US
2000
Eurozone
2001
Japan
2002
Asian NIC
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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23
6/10/2009
Real GDP Growth (%) Industrial Countries
Country
2006
2007
2008
2009
2010
US
Eurozone
UK
Japan
Asian NICs
2.8
2.0
1.1
-2.8
0.0
2.9
2.7
0.9
-4.2
-0.4
2.8
3.0
0.7
-4.1
-0.4
2.0
2.4
-0.6
-6.2
0.5
5.6
5.7
1.6
-5.6
0.8
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
24
6/10/2009
Real GDP Growth (%) Developing Countries
(% from a year ago)
10
Developing
Asia 6.1%
8
6
4
Africa
2.0%
Latin America
-1.5%
2
0
-2
Central & East.
Europe 0.8%
-4
Russia
0.5%
-6
Russia
2000
Developing Asia
2001
2002
Africa
2003
Central & Eastern Europe
2004
2005
2006
Latin America
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
25
6/10/2009
Real GDP Growth (%) Developing Countries
Country
2006
2007
2008
2009
2010
Developing Asia
China
India
9.8
10.6
7.7
4.8
6.1
11.6
13.0
9.0
6.5
7.5
9.8
9.3
7.3
4.5
5.6
5.7
5.7
4.2
-1.5
1.6
6.6
5.4
2.9
-3.7
0.8
7.7
8.1
5.6
-6.0
0.5
6.1
6.2
5.2
2.0
3.9
Latin America
Eastern Europe
Russia
Africa
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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26
6/10/2009
Global GDP Shares
2008
1990
Brazil,
3.1%
Brazil,
2.9%
India,
2.8% China,
3.6%
India,
5.0%
EU, 22.1%
EU, 27.4%
China,
11.4%
USA,
22.8%
Japan,
6.4%
Japan,
9.1%
USA,
20.1%
Source: IMF, Last Update May 2009
AIG
27
6/10/2009
Global Growth Contributions (%)
(% contribution to GDP growth, based on PPP)
70
Developing
60
50
40
Industrial
30
Industrial World
1990
1992
1994
Developing World
1996
1998
2000
2002
2004
2006
2008
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
28
6/10/2009
Unemployment Rate (%)
(%)
U.S. 9.4%
9
Eurozone
9.2%
8
7
6
5
4
U.S.
2000
Eurozone
2001
2002
Japan
5.0%
Japan
2003
2004
2005
2006
2007
2008
Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09
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29
6/10/2009
Unemployment Rate (%)
Country
2006
2007
2008
2009
US
4.4
4.9
7.2
9.4
Eurozone
7.9
7.3
8.2
9.2
Japan
4.0
3.7
4.3
5.0
Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09
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30
6/10/2009
World Trade Volume
(annual percentage change)
10
IMF Forecasts
2009: -11%
5
2010: +0.6%
0
-5
-10
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast)
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31
6/10/2009
Global Payments Imbalances
• Current Accounts Imbalances
•Foreign Exchange Reserves
•Who Holds US Treasuries?
•Savings Imbalances
AIG
32
6/10/2009
Current Account of Balance of Payments
800
($B)
Asia
$622B
Asia & Oil Exporters Save
600
ME Oil Exp.
plus Russia
$75B
400
200
Eurozone
-$135B
0
Europe Balances
-200
U.S.
- $397B
-400
-600
US Spends
-800
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
33
6/10/2009
Current Account of Balance of Payments
700
US$ billions, 2009
$643
Of which:
400
China $497
Japan $76
100
-$4
-$73
-$77
Africa
Latin America
-$134
-200
-$393
-500
US
Eurozone
Middle East +
Russia
Asia
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast)
AIG
34
6/10/2009
Accumulation of Foreign Exchange Reserves ($B)
($B)
($B)
2,200
$1,344
$1,954
1,350
2,000
Stock
1,800
Flow
1,100
May 2009
1,600
1,400
(2005 – 2009)
850
1,200
$992
600
1,000
800
350
$168
$386
600
$265
$71
$313
$226
400
$28
100
200
-150
0
China
Japan
Russia
Taiwan
China
South Korea
Japan
Russia
Taiwan
Source: Nat'l Statistical Institutes 05/2009 (China 03/2009), Foreign-Exchange Reserves ex. Gold
AIG
36
6/10/2009
South
Korea
Global Treasury Holdings
(Levels, bill. Usd)
$900
$800
$768
$687
$700
$600
$500
$400
$300
$214
$200
$192
$128
$127
$138
Brazil
Russia
$100
$0
China
Japan
UK
Caribbean
OPEC
Source: US Treasury, Last Observation February, 2009
AIG
37
6/10/2009
Global Treasury Holdings
(% of Total)
25%
24%
21%
20%
15%
10%
7%
5%
6%
4%
4%
4%
0%
China
Japan
UK
Caribbean
OPEC
Brazil
Russia
Source: US Treasury, Last Observation February, 2009
AIG
38
6/10/2009
National Savings Rate Comparison
Gross Domestic Savings: 2008 (% of GDP)
60
51.2
50
40
32.3
28.7
30
26.2
25.8
20
9.5
10
0
CHINA
INDIA
KOREA, REP.
OF
JAPAN
GERMANY
UNITED
STATES
Source: EIU estimates, annual average rates, Last update 5/2009
AIG
39
6/10/2009
Inflation
• Headline Inflation
• Oil and Commodity Price Inflation
• Core Inflation
AIG
40
6/10/2009
Headline CPI Inflation (%)
(%)
6
4
Eurozone
-0.02%
2
0
Japan -0.1%
U.S. -0.6%
-2
Eurozone
2000
2001
2002
2003
2004
2005
2006
U.S.
2007
Japan
2008
2009
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation Eurozone 05/09, U.S & Japan 04/09
AIG
41
6/10/2009
Global Headline Inflation (%)
(Cpi % Change - Percent Per Annum)
10
Developing
Countries
8
Developing
6.7%
6
World
World
3.%
4
Industrial
Countries
2
0
Developing Countries
2000
2001
Industrial Countries
2002
2003
World
2004
2005
2006
2007
2008
Source: IMF, Last Observation 2/2009 (Developing), 3/2009 (World), 4/2009 (Industrial)
AIG
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6/10/2009
Industrial
0.0%
Oil Price per Barrel
160
Q2 2008
$140
140
120
10 Jun '09
$70.0
100
2005 av.
$59
80
2004 av.
$39
60
2006 av.
$65
40
2007 av.
$95
20
2001 av.
$24
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Reuters, Gold, USD/troy oz, Last observation Jun 10 2009
AIG
43
6/10/2009
Reuters/CRB Commodities Index
220
(Index, 100 = Q1 2000)
200
180
160
140
120
100
80
2000
Reuters/CRB RJ/CRB Index
2002
2004
2006
2008
10 Jun '09
114.4
Source: Commodity Research Bureau, Quarterly Averages, last observation: 10 Jun 2009
AIG
44
6/10/2009
Core CPI Inflation (%)
3
(%)
United
States
U.S. 1.9%
2
Eurozone
1.8%
Eurozone
1
0
-1
Japan -0.4%
Japan
United States
2000
2001
2002
2003
2004
2005
Japan
2006
Euro Zone
2007
2008
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation 04/09
AIG
45
6/10/2009
Monetary Policy Response
• Global Interest Rate Cuts
• Central Banks’ Balance Sheets
• Fed’s Liquidity Measures
AIG
46
6/10/2009
Coordinated Global Rate Cuts
6
(%)
5
4
Eurozone
1.0%
3
UK 0.5%
2
Canada
0.25%
1
US 0.25%
0
Canada
2005
United Kingdom
United States
2006
Euro Zone
2007
Japan
2008
2009
Source: Bloomberg, Market Data, Last Update Jun 09 2009
AIG
47
6/10/2009
Japan
0.1%
U.S. Federal Reserve Balance Sheet Assets
(in $Bil.)
2,000
1,500
1,000
500
Federal Reserve, U.S. Treasury Holdings
2004
2005
Federal Reserve, Total Assets
2006
2007
2008
2009
©FactSet Research Systems
Source: Federal Reserve, Last Update Jun 5, 2009
AIG
48
6/10/2009
Total Assets of Key Central Banks
400
(indexed July 2007=100)
350
BoE
277
300
Fed
239
250
200
ECB
144
150
100
BoE
Jul-07
ECB
Oct-07
Federal Reserve
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Source: ECB, BoE, Federal Reserve last observation Jun 5, 2009
AIG
49
6/10/2009
Fed Liquidity Measures
2500
(Liquidity Measures, in $bil.)
2000
Treasuries
New Bank Liquidity Facilities
Money Market Facilities
Traditional Liquidity Measures
Direct Lending Activity
1500
1000
500
0
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
May-09
Source: Federal Reserve, Last Update June 5, 2009
AIG
50
6/10/2009
Interest Rates (%)
Interest Rates
Country
US
Eurozone
Japan
2001
2003
2006
10-Jun-09
3mo
1.73
0.92
5.01
0.18
10yr
5.05
4.25
4.70
3.94
Spread
333
332
-31
376
3mo
3.29
2.02
3.48
0.81
10yr
5.00
4.29
3.95
3.69
Spread
171
228
47
288
3mo
0.01
0.00
0.45
0.18
10yr
1.37
1.37
1.69
1.55
Spread
136
137
124
137
Source: Bloomberg Market Rates, end of period values of govt bonds and T-bills, Spread in bps, last update 06/10/2009
AIG
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6/10/2009
Fiscal Policy Response
• Budget Deficits and Debt
• Global Fiscal Positions
AIG
52
6/10/2009
U.S. Government Deficit as % of GDP
(% of GDP)
2
0
-2
-4
-6
-8
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Federal Reserve, US Department of Commerce, last observation Q1/2009
AIG
53
6/10/2009
Fiscal Positions
Budget Balance (% of GDP)
Country
2000
2008
2009
2010
US
1.6
-6.1
-13.6
-9.7
Eurozone
-1.0
-1.8
-5.4
-6.1
Japan
-7.6
-5.6
-9.9
-9.8
Public Debt (% of GDP)
Country
2000
2008
2009
2010
US
36.2
49.9
61.7
70.4
Eurozone
68.9
68.2
68.9
68.1
Japan
60.4
87.8
103.6
114.8
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
54
6/10/2009
Fiscal Positions
2
(%)
0
-2
Eurozone
-6.1%
-4
-6
U.S.
-9.7%
-8
-10
-12
Japan
-9.8%
-14
-16
United States
2000
2001
Japan
2002
Eurozone
2003
2004
2005
2006
2007
2008
2009
2010
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
AIG
55
6/10/2009
Risks and Policy Challenges:
Exit Strategy (1)
• It is essential that the Governments and the
Monetary Authorities specify and clarify
promptly their commitment to adopt and
implement an effective “exit strategy” from the
policy detours that have resulted in an
extremely rapid and non-sustainable rates of
monetary and fiscal expansions. A Failure to
do so, will deepen the markets’ loss of
confidence and trust in policy makers and in
their policy strategy and will delay the
improvement of the functioning of the
economic and financial systems.
AIG
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6/10/2009
Risks and Policy Challenges(2)
• A Failure to drain and absorb in a timely
manner the huge amounts of liquidity that were
injected by Central Banks, will result in
Inflation, will erode the credibility of Central
Banks, and might bring rise to political
attempts to restrict the independence of
Central Banks.
AIG
57
6/10/2009
Risks and Policy Challenges(3)
• The huge increase in budget deficits induce a
rapid increase in the size of the public debt. A
Failure to restore budgetary discipline will
worsen this undesirable trend. It will
necessitate the imposition of higher taxes, as
well as a greater reliance on government
borrowing which, in turn, is likely to result in
higher real rates of interest. Such
developments are typically associated with a
heightened degree of uncertainty and are
likely to have adverse consequences for
investment and growth.
AIG
58
6/10/2009
Risks and Policy Challenges(4)
• The increased Government ownership of
financial institutions poses significant
challenges to the appropriate Governance of
these institutions. It also sends confusing
signals as to the the government intentions
about their own role in the economic/financial
systems.
AIG
59
6/10/2009
Risks and Policy Challenges(5)
• Protectionism
• Slow Regulatory Reform
AIG
60
6/10/2009