Description
Global Financial Crisis and Developing Countries
1.
What is happening on global financial markets? What does it mean for developing countries? What can be done from a human development perspective?
2.
3.
What is happening on global financial markets?
?
After1990s deregulation of financial markets: risk pricing replaces prudential supervision. Rise of derivative “assets” with opaque markets and few players. Bank loans replaced by bonds etc. Huge US fiscal deficit, monetary expansion (“Greenspan put”), low savings led to a US mortgage boom/bust (non traded sector) and a huge current account deficit (traded sector). Mortgage bubbles are familiar with obvious political costs; join recurrent bubbles in past decade (dotcoms, LTCM, Tequila etc);
?
?
?
But this is by far the most serious systemically because it threatens the global banking system itself as creditor, and whole US electorate as debtor.
?
Sub-prime lending had spread from inner-city areas right across the US in 2007 end. By then, one in five mortgages were sub-prime, and they were particularly popular among recent immigrants trying to buy a home for the first time, and the poor. House prices were high, and it was difficult to become an owner-occupier. But these mortgages had a much higher rate of repossession than conventional mortgages (and thus much riskier) because they were adjustable rate mortgages (ARMs). Payments were fixed for two years, and then became higher and linked to Fed interest rates, which also rose substantially.
?
?
A wave of repossessions is sweeping America as many of these mortgages reset to higher rates. By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting for of bondholders, was the largest property owner in the city. As many as two million families will be evicted from their homes as their cases make their way through the courts. The Bush administration is pushing the industry to renegotiate, but mortgage companies are being overwhelmed by a tidal wave of cases.
?
? Collapse
of the government backed mortgage system in the USA (Fannie and Freddie) followed by meltdown of major investment banks (Lehman, Bear, Merrill) exposed to mortgage market
? Mark-to-market
asset pricing effects on balance sheets and cumulative liquidity retraction due to rising risk aversion; ? Now affecting Insurance (AIG) ; and pensions funds next?
? “…
bank boards and bank executives have failed to understand complex mortgagebacked banking products, as have central bankers, regulators and credit rating agencies.” ? “…a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….” ? “Almost as absurd has been the degree of leverage racked up by investment banks.”
?
“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues…(NYT 21.09.08)
?
Freddie Mae and Freddie Mac (re)nationalised; Merrill sold to BankAmerica; Lehman to Barclays; Goldman and Morgan become banks again; US Govt. $700bn purchase of bad debt; G3 central banks support world banking.
Expansionary monetary policy (to avoid recession like 1930s) and scale of US Govt. (and G3) bailouts will have large repercussions, yet to be evaluated [lessons of Mexico etc?]
?
What does it mean for developing countries?
? World
GDP growth by IMF to reduced by 2 % (from 5 to 3 for 2008 and 09). So with 2% world growth; global GDP per capita falls.
? Asia
probably most resilient (though exports to US will fall).
Pries & Volume has reduced. Natural resource exporters are hit but food and oil importers have been benefitted.
? Commodity
• World Growth • Reducing Trade Expansion
?
International Investment (bonds, FDI) will slow down; as will emerging market stocks; as global confidence declines.
Global Confidence Reduced Emerging Market Stock International Investment Slowdown
?
Sovereign spreads has risen due to rising risk premium (default probability x risk aversion): which was already up to 4% in 2008. Aid flows already under pressure; will be hurt by fiscal overload in G3.
? ?
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges; the NYSE Euro next and the NASDAQ OMX.
What can be done from a human development perspective?
?
Countercyclical Monetary Policy & Real Exchange Rate Management (inc. capital controls) necessary:
• MICs with forex reserves already do this; • but LICs constrained by IMF.
?
Support domestic banks (esp. for agriculture), underwrite long-term investment lending Keep real interest rates low.
?
?
Raise tax pressure to maintain fiscal balance and reduce public borrowing.
? Evidence
(UNICEF) that for children employment stability more important than wages; implications for e.g. inflation policy
to ringfence budgets (in real terms) for education and health; extend schemes for (simple) universal benefits. on inequality (especially horizontal) rather than just poverty; to reduce conflict and increase social cohesion.
? Essential
? Focus
? Essential
to moderate G8 policy shifts (e.g. bank regulation, interest rates, exchange rates) from viewpoint of impact on world poor.
? Need
for UN to speak in a clear, timely and credible fashion on these issues. arrangements for mutual currency support etc are vital.
? Regional
doc_567261463.pptx
Global Financial Crisis and Developing Countries
1.
What is happening on global financial markets? What does it mean for developing countries? What can be done from a human development perspective?
2.
3.
What is happening on global financial markets?
?
After1990s deregulation of financial markets: risk pricing replaces prudential supervision. Rise of derivative “assets” with opaque markets and few players. Bank loans replaced by bonds etc. Huge US fiscal deficit, monetary expansion (“Greenspan put”), low savings led to a US mortgage boom/bust (non traded sector) and a huge current account deficit (traded sector). Mortgage bubbles are familiar with obvious political costs; join recurrent bubbles in past decade (dotcoms, LTCM, Tequila etc);
?
?
?
But this is by far the most serious systemically because it threatens the global banking system itself as creditor, and whole US electorate as debtor.
?
Sub-prime lending had spread from inner-city areas right across the US in 2007 end. By then, one in five mortgages were sub-prime, and they were particularly popular among recent immigrants trying to buy a home for the first time, and the poor. House prices were high, and it was difficult to become an owner-occupier. But these mortgages had a much higher rate of repossession than conventional mortgages (and thus much riskier) because they were adjustable rate mortgages (ARMs). Payments were fixed for two years, and then became higher and linked to Fed interest rates, which also rose substantially.
?
?
A wave of repossessions is sweeping America as many of these mortgages reset to higher rates. By late 2007, one in ten homes in Cleveland had been repossessed and Deutsche Bank Trust, acting for of bondholders, was the largest property owner in the city. As many as two million families will be evicted from their homes as their cases make their way through the courts. The Bush administration is pushing the industry to renegotiate, but mortgage companies are being overwhelmed by a tidal wave of cases.
?
? Collapse
of the government backed mortgage system in the USA (Fannie and Freddie) followed by meltdown of major investment banks (Lehman, Bear, Merrill) exposed to mortgage market
? Mark-to-market
asset pricing effects on balance sheets and cumulative liquidity retraction due to rising risk aversion; ? Now affecting Insurance (AIG) ; and pensions funds next?
? “…
bank boards and bank executives have failed to understand complex mortgagebacked banking products, as have central bankers, regulators and credit rating agencies.” ? “…a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….” ? “Almost as absurd has been the degree of leverage racked up by investment banks.”
?
“There are no atheists in foxholes and no ideologues in financial crises,” Mr. Bernanke told colleagues…(NYT 21.09.08)
?
Freddie Mae and Freddie Mac (re)nationalised; Merrill sold to BankAmerica; Lehman to Barclays; Goldman and Morgan become banks again; US Govt. $700bn purchase of bad debt; G3 central banks support world banking.
Expansionary monetary policy (to avoid recession like 1930s) and scale of US Govt. (and G3) bailouts will have large repercussions, yet to be evaluated [lessons of Mexico etc?]
?
What does it mean for developing countries?
? World
GDP growth by IMF to reduced by 2 % (from 5 to 3 for 2008 and 09). So with 2% world growth; global GDP per capita falls.
? Asia
probably most resilient (though exports to US will fall).
Pries & Volume has reduced. Natural resource exporters are hit but food and oil importers have been benefitted.
? Commodity
• World Growth • Reducing Trade Expansion
?
International Investment (bonds, FDI) will slow down; as will emerging market stocks; as global confidence declines.
Global Confidence Reduced Emerging Market Stock International Investment Slowdown
?
Sovereign spreads has risen due to rising risk premium (default probability x risk aversion): which was already up to 4% in 2008. Aid flows already under pressure; will be hurt by fiscal overload in G3.
? ?
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market exchanges; the NYSE Euro next and the NASDAQ OMX.
What can be done from a human development perspective?
?
Countercyclical Monetary Policy & Real Exchange Rate Management (inc. capital controls) necessary:
• MICs with forex reserves already do this; • but LICs constrained by IMF.
?
Support domestic banks (esp. for agriculture), underwrite long-term investment lending Keep real interest rates low.
?
?
Raise tax pressure to maintain fiscal balance and reduce public borrowing.
? Evidence
(UNICEF) that for children employment stability more important than wages; implications for e.g. inflation policy
to ringfence budgets (in real terms) for education and health; extend schemes for (simple) universal benefits. on inequality (especially horizontal) rather than just poverty; to reduce conflict and increase social cohesion.
? Essential
? Focus
? Essential
to moderate G8 policy shifts (e.g. bank regulation, interest rates, exchange rates) from viewpoint of impact on world poor.
? Need
for UN to speak in a clear, timely and credible fashion on these issues. arrangements for mutual currency support etc are vital.
? Regional
doc_567261463.pptx