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The Global Financial Crisis:
What’s Next?
Bank Guarantee Fund Conference
Warsaw, May 21, 2010
Mark Allen
Senior IMF Resident Representative for Central
and Eastern Europe
1
Outline of presentation
 Forecasts
of the recovery
 Factors that might hold back recovery
 Situation of the financial sector
 Fiscal worries
 Summary
2
Good News: the world economy is
recovering …
Change in GDP
(Year on year)
3
Emerging
Source: World Economic Outlook, April 2010
20
11
20
10
20
09
20
08
World
20
07
Developed
20
06
20
05
10
8
6
4
2
0
-2
-4
-6
… and the recovery in 2010 is
faster than we expected.
4
3
2
1
0
-1
-2
-3
Apr 2010
Jan 2010
Oct 2009
2009
2010
UK
4
2009
2010
2011
2009
2010
2011
China
15
2
10
0
Apr 2009
2
1
0
-1
-2
-3
-4
-5
2011
4
Jun 2009
Eurozone
-2
5
-4
-6
2009
2010
2011
0
Source: World Economic Outlook
Real GDP growth forecasts
USA
Recover is driven by the rebound in
world trade ...
Merchandise exports
(Three month moving average, year on year)
World
Emerging
Developed
Ja
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Ju
l-0
5
Ja
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Ju
l-0
6
Ja
n07
Ju
l-0
7
Ja
n08
Ju
l-0
8
Ja
n09
Ju
l-0
9
Ja
n10
80
60
40
20
0
-20
-40
-60
-80
5
Source: Directions of Trade, April 2010
…and restocking.
Industrial Production
(Annualized percent change of 3mma over previous 3mma)
6
65
60
55
50
45
40
35
30
25
20
Global IP
Source: World Economic Outlook, April 2010
20
10
20
09
20
08
20
07
Global Manf. PMI
(sa, 50+=Expansion; rhs)
20
06
20
05
15
10
5
0
-5
-10
-15
-20
-25
-30
And financial markets are back from
the brink too.
Global Stocks
(Morgan Stanley MSCI Stock Price Indices
in USD, MER Weighted; 2007 = 100)
Sovereign and Corporate Bond Spreads
(basis points)
120
1200
Advanced
economies:
corporate1
110
1000
100
800
90
600
80
EMBI
Global
70
400
40
7
1 Averages
MSCI Global
2007
2008
2009
Mar-10
50
Mar-10
60
2007
of BB-B US, BB-B Euro, and BBB Japan corporate bond spreads.
2008
2009
200
0
Source: Bloomberg
Factors that might hamper growth
 US
8
savings rates
Brakes on Growth: 1. U.S. Saving Rate?
U.S. Household Saving Ratio
(in percent of disposable income)
9
Household Saving Ratio
VAR Projection
Macroeconomic Advisers Forecast
October 2009 WEO
Current WEO
8
7
6
5
4
3
2
1
0
1990
9
1994
1998
2002
2006
2010
2014
Factors that might hamper growth
 US
savings rates
 Global imbalances
10
Brakes on Growth: 2. Global imbalances?
Current account balances
(billion dollars)
China
Japan
Other Emerging Economies
Other Developed Economies
2000
Germany
United States
Other Euro Area
World
1500
1000
500
0
-500
-1000
11
Source: World Economic Outlook, April 2010
20
14
20
13
20
12
20
11
20
10
20
09
20
08
20
07
20
06
20
05
20
04
-1500
Factors that might hamper growth
 US
savings rates
 Global imbalances
 High unemployment
12
Brakes on Growth: (3) High unemployment?
Unemployment
(percent)
20
17
14
11
Euro Area
United States
Japan
Ireland
Portugal
Spain
United Kingdom
8
5
13
Source: World Economic Outlook, April 2010
Se
p11
1
ar1
M
Se
p10
0
ar1
M
Se
p09
9
ar0
M
Se
p08
8
ar0
M
Se
p07
M
ar0
7
2
Factors that might hamper growth
 US
savings rates
 Global imbalances
 High unemployment
 Bubbles in emerging markets
14
Brakes on Growth: 4. Overheating in
some emerging markets?
Real Domestic Credit Growth and Equity Valuation
(Standard deviations from long-term average)
Real credit growth
High Credit Growth
High Valuation
Local equity valuation
15
Source: Global Financial Stability Report, April 2010
Factors that might hamper growth
 US
savings rates
 Global imbalances
 High unemployment
 Bubbles in emerging markets
 Commodity supplies
16
Brakes on Growth: 5. Commodity prices?
Principal commodities prices
(Jan-09 = 100)
240
220
200
180
Metals
Food
Raw Materials
Crude Oil (APSP)
160
140
120
100
17
Source: Bloomberg; staff estimates
-1
0
Ap
r
n10
Ja
O
ct09
9
Ju
l-0
-0
9
Ap
r
Ja
n09
80
Factors that might hamper growth
 US
savings rates
 Global imbalances
 High unemployment
 Bubbles in emerging markets
 Commodity supplies
 Availability of credit
18
Brakes on Growth: 6. Credit supply?
Nonfinancial Private Sector Credit
(Annual percent growth)
United States
15
12
9
6
3
0
-3
-6
0
0
20
19
United Kingdom
Euro Area
2
0
20
4
0
20
6
0
20
Source: Global Financial Stability Report, April 2010
8
0
20
0
1
20
Stronger growth has helped banks …
Average global growth
2007-2010
(percent, right scale)
3
2.8
2.8
6
2.3
2.2
2
4
1.3
1
1.4
3
0.9
2
1
Bank writedowns
(US$ trillions, left scale)
0
Mar-08
20
5
Sep-08
Oct-08
Jan-09
Source: Global Financial Stability Report, April 2010
Apr-09
Oct-09
0
Apr-10
… which have written down losses and raised
capital.
(billions of US$)
percent
21
Expected additional writedowns/loss provisions (left scale)
Realized writedowns/loss provisions (left scale)
But funding maturities have shortened.
Mature Market Bank Bond Maturities
(Percentage of initial stock)
18
16
14
12
10
8
6
4
2
0
6/30/2007
1
2
3
4
5
6
7
Years
22
Source: Global Financial Stability Report, April 2010
8
9
1/1/2010
10
11
12
13
Nonbank credit only partly offsets weak
bank credit.
Contributions to nonfinancial private sector credit growth
(Percent)
10
8
USA
Euro Area
UK
6
4
2
0
-2
23
Source: Global Financial Stability Report, April 2010
Total
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8
Ja
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Ju
l-0
9
Nonbank
Ja
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Ju
l-0
8
Ja
n09
Ju
l-0
9
Ja
n08
Ju
l-0
8
Ja
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l-0
9
-4
Bank
Sovereign risk now threatens to
take the crisis to a new stage.
The Four Phases of the Crisis
(10-yr sovereign swap spreads, percent)
250
I.
Financial crisis
Buildup
II.
Systemic
outbreak
III.
Systemic
response
IV.
Sovereign
Crisis?
200
150
USA
100
Germany
Italy
50
UK
Japan
24
Source: Bloomberg
Ja
n10
Ju
l-0
9
Ja
n09
Ju
l-0
8
Ja
n08
Ju
l-0
7
0
Debt levels in advanced economies
are increasing sharply …
Public Debt
(Percentage of GDP)
120
Advanced
economies
100
80
60
40
Emerging and
20 Developing economies
0
1995
25
2000
Source: World Economic Outlook, April 2010
2005
2010
2015
… and structural deficits are set to worsen.
Increase in aging-Related Spending in G20 Advanced Economies
(Percentage of GDP over 2010 aging-related spending)
10
8
Health care expenditure
6
Pension expenditure
4
2
26
Source: World Economic Outlook, April 2010
20
50
20
45
20
40
20
35
20
30
20
25
20
20
20
15
0
The increase in debt is due to recession…
2008-2009
Interest-growth
dynamics
2010-2015
7.5
Interest-growth
dynamics
0.7
Lending
operations
4.0
27
Financial sector
support
3.2
Fiscal stimulus
4.5
Revenue loss
19.2
Source: World Economic Outlook, April 2010; Staff estimates
G-20 Advanced Economies: Increase in Public Debt, 2008-15
(Total increase: 39.1 percentage points of GDP; 2009 PPP weighted GDP)
… which has undermined revenue expectations.
Real GDP
(2000=100)
USA
Euro area
140
140
140
130
130
130
120
Oct. 2007
WEO
120
Current
WEO
110
28
Japan
120
100
100
100
20
00
20
04
20
08
20
12
Current
WEO
20
00
20
04
20
08
20
12
Current 110
WEO
Oct. 2007
WEO
20
00
20
04
20
08
20
12
110
Oct. 2007
WEO
Source: World Economic Outlook
Sovereign borrowing is increasing sharply.
Net Borrowing Needs
(percentage of GDP)
16
14
12
10
8
6
4
2
0
2003-08 average
United States
29
2009
2010 (est)
Euro Area
Source: Global Financial Stability Report, April 2010
2011 (est)
United Kingdom
Risk premia reflect fiscal challenges and
external financing risks …
Contributions to Five-Year Sovereign CDS Spreads
(basis points)
300
270
240
210
180
150
120
90
60
30
0
-30
Foreign bank claims
Current account
Required fiscal adjustment
Actual spreads
Germany U.S.
30
France
Japan
U.K.
Italy
Spain
Ireland Portugal Greece
… and sensitivity to fundamentals is growing
CDS Spreads (year average)
-3%
-16
800
2007
2008
= 60%
debt to GDP
2009
600
2010
400
200
Greece-12
0
-8
-4
0
-200
General Government Balance (as a percent of GDP)
31
Source: World Economic Outlook April 2010, Bloomberg
4
Problems in peripheral Europe may
haunt banks in the core …
Source: BIS
USD 100 bln
32
… while the sovereign’s creditworthiness
affects that of its banks
Average percent change in local senior
financial CDS
200
Greece
150
100
Italy
Ireland
50
Denmark
France
Netherlands
Belgium
Sweden
0
33
Spain
Norway
Germany
Austria
United Kingdom
Switzerland
0
-50
Portugal
50
100
150
Percent change in sovereign CDS
October 2009 to March 2010
Source: Global Financial Stability Report, April 2010
200
250
300
Conclusions
Recovery stronger than expected
 But could easily be derailed
 The banking system cannot provide much
credit
 The crisis has worsened fiscal positions
 Fiscal problems may feed back to banking
systems
 But growth in emerging markets and trade
may continue to surprise

34
Thank you
35