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The Global Economy
and
Financial Markets:
Where Next?
John Lipsky,
First Deputy Managing Director,
International Monetary Fund.
The Favorable Global Backdrop
The Global Expansion Has Been Strong...
World GDP Growth
Rest of the world
(Annual percent change)
India
China
Other advanced economies
Japan
Euro area
United States
8
7
6
5
40
Global
inflation 1/
(yoy, rhs)
35
30
25
4
20
3
15
2
10
1
5
0
0
-1
-5
1970
75
80
85
90
95
1/ Country CPI inflation rates aggregated using PPP weights.
2000
05
Global Risk Factors Tilted to the Downside
(Percentage points of global GDP growth over next 12 months)
WEO
0.04
0.03
0.02
0.01
0.00
-0.01
-0.02
-0.03
-0.04
-0.05
Global
inflation/
supply
constraints
Oil market
Emerging
markets
Domestic
demand in
U.S.
Financial
stability
Domestic Protectionism/
demand in
global
Europe and imbalances
Japan
Hallmarks of Financial Innovation
Securitization
New Risk Transfer Instruments
New Asset Management Institutions
The Effects – Record Cross-Border Flows
16
Global Cross-Border Flows By Type in
Percent of World GDP
14
12
10
8
6
4
2
0
1980
1985
FDI
Portfolio De bt
1990
1995
2000
Portfolio Equity
Ba nking a nd othe r
2005
The Effects - Reduced “Home-Bias”
Pension Fund International Asset Allocation: Equities
(In percent of pension fund portfolios)
45
40
35
30
25
20
15
10
5
0
United
States
Japan
United
Netherlands
Kingdom
1994
2005
Australia
Canada
Spain
The Latest ChallengeThe Re-Pricing of Credit Risk
U.S. Sub-Prime Market Credit Quality
Deterioration
Subprime 60-Day Delinquencies by Mortgage Vintage Year
(adjustable rate mortgages, in percent of payments due)
12%
2006
10%
2000
2001
8%
2005
6%
4%
2004
2%
2003
2002
0%
0
5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80
Months after Origination
Sub-Prime Mortgages: Long-Tailed Impact
Loans with Payment Shock
(in billions of U.S. dollars)
Discipline Weakening in Corporate Credit Markets
Flex and Reverse Flex Deals
(in percentage of deals)
25
20
15
Terms flexed in favor of lender
Net percent of deals
(4 quarter moving average)
10
5
0
-5
-10
-15
Terms flexed in favor of borrower
-20
2000 2001 2002 2003 2004 2005 2006 2007
Collateralized Debt Obligations
US CDOs: Outstanding Volumes
($900 billion total)
Mezzanine
CDO (BBB
rated,
$159 bn,
17%)
Other CDO
($265 bn,
29%)
High
Grade CDO
($189 bn,
21%)
CDOSquared
($28 bn,
3%)
CLO ($270
bn, 30%)
Riskiest Positions Held by a Wide Variety of Investors
CDO Holders: Riskiest Portions (Not delta adjusted)
Asset
Managers
22%
Pension
funds
18%
Insurance
19%
Banks
31%
Hedge
Funds
10%
CDO Spreads Widened, Post Bear-Stearns
Hedge Fund Troubles ...
Primary Market Spreads of Mezzanine CDO Tranches over LIBOR
(in basis points, CDOs with collateral of BBB average quality)
2000
June 15
1600
1200
AAA
800
400
BBB
A
AA
0
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
IMPLICATIONS
Markets
Fundamentals
Policies