The World Economic & Financial
System: Risks & Prospects
.Bank Indonesia 7th Annual International Seminar
“Global Financial Tsunami: What Can We Do?”
Bali, Indonesia, June 13-14, 2009
Dr. Jacob A. Frenkel
Global Financial Markets
•
Deteriorating Equity Markets
•
Widening Credit Spreads
2006
2007
2008
6,000 7,000 8,000 9,000 10,000 11,000 12,000 13,000 14,000 600 800 1,000 1,200 1,400 1,600 S&P 500 Dow Jones(close - price) (close - price)
Standard & Poors 500 Composite Index (Right) Dow Jones Industrial Average Index (Left)
Global Equity Markets
Global Equity Markets
Source: Bloomberg, Market Data, Last Update Jun 09 2009
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
40 60 80 100 120 140 160 180
Asia
Europe Latin America
(US$ returns, 12/31/2008 = 100)
U.S. Credit Market Spreads
Source: Barclay's Capital, weekly averages, last observation Jun 10 2009
May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
0 2 4 6 8 10 12 14 16 18 20
©FactSet Research Systems
(percentage points) (percentage points)
BarCap High Yield Spreads vs. Treasuries BarCap High Grade Spreads vs. Treasuries
High Yield 9.4
Spread between 3 Month LIBOR & T-Bills
7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09
0 50 100 150 200 250 300 350 400 450 500 Countrywide Financial "Risks Bankruptcy" Foreclosures accelerate from 5.5% to 6.9% First Federal Reserve Auction, $20bn Bear Stearns Collapses IndyMac seized by US Regulators Lehman Brothers files for Bankruptcy Wave of redemptions in Money Market Funds (basis points)
“Subprime Crisis”
“Liquidity Crisis”
Emerging Market Credit Spreads
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
0 200 400 600 800 1,000
Latin America
Europe
Asia
(Basis points, index 1/1/2007=100)
Subprime Crisis, Housing, and
Banks
•
Size of the Subprime Market
•
Housing Prices and Household Wealth
•
Delinquencies and Foreclosures
FHA/VA, 5.6% Prime, 78.8% Alt-A, 2.2% Subprime, 7.9%
U.S. Mortgage Market: 2003-2005
Source: Inside Mortgage Finance, Last update February 8, 2008
Prime, 58.9% Subprime, 18.2% FHA/VA, 4.5% Alt-A, 6.3% Prime, 53.2% Subprime, 20.0% Alt-A, 12.2% FHA/VA, 2.9%
U.S. Mortgage Market: 2006-2007
Source: Inside Mortgage Finance, Last update February 8, 2008
FHA/VA, 2.7% Alt-A, 13.4%
Subprime, 20.1%
Prime,
49.3% Prime,
62.1% FHA/VA,
4.2% Alt-A,
11.3%
Subprime, 7.9%
Changes in U.S. Home Prices
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
-20 -15 -10 -5 0 5 10 15
20 (% change from a year ago)
Apr 2009 -15.4%
U.S. Household Real Estate Wealth
2000 2002 2004 2006 2008
70 75 80 85 90 95 100 105 110 115 120 125 130 135
140 (percent)
Source: Federal Reserve, last observation Q4/2008
U.S. Delinquencies
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
10 15 20 25 4 5 6 7 8 9 10 11 12 13
(% of total loans) (% of subprime loans)
Total Delinquencies as a % total Loanas (Right) Subprime Delinquencies as a % Subprime loans (Left)
Q1 2009 25% (left)
Q1 2009 9.1% (Right)
U.S. Foreclosures
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
0 2 4 6 8 10 12 14 16 Prime Subprime Total (% of total loans)
Foreclosures - Prime Foreclosures - subprime Foreclosures - total
Q1 2009 14.3% Q1 2009 3.8% Q1 2009 2.5%
Write-downs & Credit Losses vs. Capital
Raised
: All Financials
(Billions Usd, Quarterly Value)
0 50 100 150 200 250 300 350 400 450 500
Q3/07 Q4/07 Q1/08 Q2/08 Q3/08 Q4/08 Q1/09 Q2/09
Capital Raised Writedowns & Credit Losses
Credit Market Losses: All Financials (bill.
Usd)
Credit Turmoil Losses Since Beginning of 2007
Americas, 975.2
Asia, 38.4
Europe, 458.63
Capital Raised: All Financials (bill. Usd)
Capital Raised Since Beginning of 2007
Americas, 726.1
Asia, 74.9
Europe, 438.3
Europe Asia Americas
Cumulative Write-downs & Credit Losses vs.
Capital Raised: By Region
(Billions Usd, Accumulated value starting Q3/07)
0 100 200 300 400 500 600 700 800 900 1000
Europe Asia Americas
U.S. New Home Sales and Housing Starts
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
0.2
0.4
0.6
0.8
1
1.2
0.4
0.8
1.2
1.6
2
2.4
(Tsd. units) (Tsd. units)
Housing Starts (Right) New Home Sales (Left)
New Home Sales:
.35M
Housing Starts: .46M
The Global Economic System
•
Global Growth Projections
•
The Rise of Developing Countries
•
Unemployment
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-2 -1 0 1 2 3 4 5
6 (% change year ago)
Global GDP Growth (%)
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-6 -4 -2 0 2 4 6
8 (% from a year ago)
US Eurozone Japan Asian NIC
Real GDP Growth (%) Industrial Countries
Asia NICs 0.8%
Japan 0.5%
US 0.0%
Eurozone -0.4%
Real GDP Growth (%) Industrial Countries
Country
2006
2007
2008
2009
2010
US
2.8
2.0
1.1
-2.8
0.0
Eurozone
2.9
2.7
0.9
-4.2
-0.4
UK
2.8
3.0
0.7
-4.1
-0.4
Japan
2.0
2.4
-0.6
-6.2
0.5
Asian NICs
5.6
5.7
1.6
-5.6
0.8
Real GDP Growth (%) Developing Countries
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-6 -4 -2 0 2 4 6 8 10
(% from a year ago)
Russia Developing Asia Africa Central & Eastern Europe Latin America
Developing Asia 6.1% Russia 0.5% Africa 2.0% Latin America -1.5%
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast)
Real GDP Growth (%) Developing Countries
Country
2006
2007
2008
2009
2010
Developing Asia
9.8
10.6
7.7
4.8
6.1
China
11.6
13.0
9.0
6.5
7.5
India
9.8
9.3
7.3
4.5
5.6
Latin America
5.7
5.7
4.2
-1.5
1.6
Eastern Europe
6.6
5.4
2.9
-3.7
0.8
Russia
7.7
8.1
5.6
-6.0
0.5
Africa
6.1
6.2
5.2
2.0
3.9
Source: IMF, Last Update May 2009
Global GDP Shares
Global Growth Contributions (%)
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
30 40 50 60 70
Industrial Developing (% contribution to GDP growth, based on PPP)
Industrial World Developing World
2000 2001 2002 2003 2004 2005 2006 2007 2008
4 5 6 7 8 9
(%)
U.S. Eurozone Japan
Unemployment Rate (%)
Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09
Eurozone 9.2% U.S. 9.4%
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
Unemployment Rate (%)
World Trade Volume
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
-10 -5 0 5 10
(annual percentage change)
Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast)
Global Payments Imbalances
•
Current Accounts Imbalances
•
Foreign Exchange Reserves
•
Who Holds US Treasuries?
Current Account of Balance of Payments
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-800 -600 -400 -200 0 200 400 600
800 ($B) Asia
$622B
ME Oil Exp. plus Russia $75B Eurozone -$135B U.S. - $397B
Asia & Oil Exporters Save
Europe Balances
US Spends
Current Account of Balance of Payments
-$77
-$4
$643
-$393
-$134
-$73
-500 -200 100 400 700
US Eurozone Africa Latin America Middle East + Russia
Asia
US$ billions, 2009
Of which: China $497 Japan $76
$28 $71 $265 $168 $1,344 -150 100 350 600 850 1,100 1,350
China Japan Russia Taiwan South Korea ($B) $226 $313 $386 $992 $1,954 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200
China Japan Russia Taiwan South Korea
($B)
Stock
Flow
(2005 –2009)
Accumulation of Foreign Exchange Reserves ($B)
Source: Nat'l Statistical Institutes 05/2009 (China 03/2009), Foreign-Exchange Reserves ex. Gold
Source: US Treasury, Last Observation February, 2009
Global Treasury Holdings
(Levels, bill. Usd)
$768
$687
$128
$214
$192
$127 $138
$0 $100 $200 $300 $400 $500 $600 $700 $800 $900
Global Treasury Holdings
(% of Total)
24%
21%
4%
7%
6%
4% 4%
0% 5% 10% 15% 20% 25%
China Japan UK Caribbean OPEC Brazil Russia
51.2
32.3
28.7
26.2 25.8
9.5
0 10 20 30 40 50 60
CHINA INDIA KOREA, REP.
OF
JAPAN GERMANY UNITED
STATES
Source: EIU estimates, annual average rates, Last update 5/2009
National Savings Rate Comparison
Inflation
•
Headline Inflation
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-2 0 2 4 6
(%)
Eurozone U.S. Japan
Headline CPI Inflation (%)
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation Eurozone 05/09, U.S & Japan 04/09
Eurozone -0.02%
Japan -0.1%
2000 2001 2002 2003 2004 2005 2006 2007 2008
0 2 4 6 8 10
Developing Countries
Industrial Countries
World
(Cpi % Change - Percent Per Annum)
Developing Countries Industrial Countries World
Global Headline Inflation (%)
Industrial 0.0% Developing
6.7%
World 3.%
Oil Price per Barrel
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
20
40
60
80
100
120
140
160
Q2 2008 $140 2006 av. $65 2005 av. $59 2001 av. $24 2007 av. $95 2004 av. $39Source: Reuters, Gold, USD/troy oz, Last observation Jun 10 2009
Reuters/CRB Commodities Index
2000 2002 2004 2006 2008
80 100 120 140 160 180 200
220 (Index, 100 = Q1 2000)
Reuters/CRB RJ/CRB Index
Source: Commodity Research Bureau, Quarterly Averages, last observation: 10 Jun 2009
2000 2001 2002 2003 2004 2005 2006 2007 2008
-1 0 1 2 3
United States
Japan Eurozone
(%)
United States Japan Euro Zone
Core CPI Inflation (%)
Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation 04/09
Eurozone 1.8% U.S. 1.9%
Monetary Policy Response
•
Global Interest Rate Cuts
•
Central Banks’ Balance Sheets
Coordinated Global Rate Cuts
2005 2006 2007 2008 2009
0 1 2 3 4 5 6 (%)
Canada United Kingdom United States Euro Zone Japan
UK 0.5% Eurozone
1.0%
Canada 0.25%
US 0.25%
Japan 0.1%
2004 2005 2006 2007 2008 2009
500 1,000 1,500 2,000
©FactSet Research Systems
(in $Bil.)
Federal Reserve, U.S. Treasury Holdings Federal Reserve, Total Assets
U.S. Federal Reserve Balance Sheet Assets
Total Assets of Key Central Banks
Source: ECB, BoE, Federal Reserve last observation Jun 5, 2009
Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09
100 150 200 250 300 350 400
BoE 277
ECB 144
Fed 239
(indexed July 2007=100)
Fed Liquidity Measures
Source: Federal Reserve, Last Update June 5, 2009
0 500 1000 1500 2000 2500
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 (Liquidity Measures, in $bil.)
Treasuries Traditional Liquidity Measures
New Bank Liquidity Facilities Direct Lending Activity
Interest Rates (%)
Source: Bloomberg Market Rates, end of period values of govt bonds and T-bills, Spread in bps, last update 06/10/2009
Country
2001
2003
2006
10-Jun-09
US
3mo
1.73
0.92
5.01
0.18
10yr
5.05
4.25
4.70
3.94
Spread
333
332
-31
376
Eurozone
3mo
3.29
2.02
3.48
0.81
10yr
5.00
4.29
3.95
3.69
Spread
171
228
47
288
Japan
3mo
0.01
0.00
0.45
0.18
10yr
1.37
1.37
1.69
1.55
Spread
136
137
124
137
Fiscal Policy Response
•
Budget Deficits and Debt
U.S. Government Deficit as % of GDP
Source: Federal Reserve, US Department of Commerce, last observation Q1/2009
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
-8 -6 -4 -2 0 2
Fiscal Positions
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
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
Budget Balance (% of GDP)
Public Debt (% of GDP)
Fiscal Positions
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-16 -14 -12 -10 -8 -6 -4 -2 0 2 (%)
United States Japan Eurozone
Eurozone -6.1%
U.S. -9.7%
Japan -9.8%
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
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
•
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.
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
Risks and Policy Challenges(5)
•
Protectionism