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 AIG 1
Global Financial Markets Deteriorating Equity Markets Widening Credit Spreads Is the worse over? AIG 2
Global Equity Markets 14,000 (close - price) (close - price) 13,000 Dow Jones 1,600 12,000 1,400 11,000 10,000 S&P 500 1,200 9,000 8,000 1,000 7,000 800 6,000 Standard & Poors 500 Composite Index (Right) 2006 2007 2008 Dow Jones Industrial Average Index (Left) 600 Source: Bloomberg, Market Data, Last Update Jun 09 2009 AIG 3
Global Equity Markets 180 (US$ returns, 12/31/2008 = 100) 160 140 120 Latin America 100 Asia 80 60 Europe 40 EM Asia EM Europe EM Latin America Jan-07 Apr-07 Jul-07 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 4
U.S. Credit Market Spreads 20 (percentage points) (percentage points) 18 16 14 High Yield 9.4 12 10 8 6 High Grade 3.0 4 2 0 BarCap High Yield Spreads vs. Treasuries BarCap High Grade Spreads vs. Treasuries May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May FactSet Research Systems Source: Barclay's Capital, weekly averages, last observation Jun 10 2009 AIG 5
Spread between 3 Month LIBOR & T-Bills 500 450 400 (basis points) Wave of redemptions in Money Market Funds 350 300 250 Foreclosures accelerate from 5.5% to 6.9% First Federal Reserve Auction, $20bn Bear Stearns Collapses Lehman Brothers files for Bankruptcy 200 150 Countrywide Financial "Risks Bankruptcy" IndyMac seized by US Regulators 100 50 0 Subprime Crisis Liquidity Crisis 7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 Source: Federal Reserve, Reuters, last observation Jun 06 2009 AIG 6
Emerging Market Credit Spreads 1,000 (Basis points, index 1/1/2007=100) Europe 800 600 Asia 400 200 Latin America Latin America Europe Asia 0 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Source: JP Morgan, last observation Jun 09 2009 AIG 7
Subprime Crisis, Housing, and Banks Size of the Subprime Market Housing Prices and Household Wealth Delinquencies and Foreclosures Write-downs and Capital Raised AIG 8
U.S. Mortgage Market: 2003-2005 2003 2004 2005 Subprime, 7.9% Alt-A, 2.2% FHA/VA, 5.6% Subprime, 18.2% Alt-A, 6.3% FHA/VA, 4.5% Subprime, 20.0% Alt-A, 12.2% FHA/VA, 2.9% Prime, 78.8% Prime, 58.9% Prime, 53.2% Source: Inside Mortgage Finance, Last update February 8, 2008 AIG 9
U.S. Mortgage Market: 2006-2007 Alt-A, 13.4% 2006 2007 FHA/VA, 2.7% Alt-A, 11.3% 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 AIG 10
Changes in U.S. Home Prices 20 (% change from a year ago) 15 10 5 0-5 -10 Apr 2009-15.4% -15-20 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Nat'l Association of Realtors, quarterly averages, last observation 4/2009 AIG 11
U.S. Household Real Estate Wealth 140 (percent) 135 130 125 120 115 110 105 100 95 90 85 80 Q4 2008 73.99% 75 70 2000 2002 2004 2006 2008 Source: Federal Reserve, last observation Q4/2008 AIG 12
U.S. Delinquencies 25 20 (% of total loans) (% of subprime loans) Total Delinquencies as a % total Loanas (Right) Subprime Delinquencies as a % Subprime loans (Left) Q1 2009 25% (left) 13 12 11 10 9 15 Q1 2009 9.1% (Right) 8 7 10 6 5 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 4 Source: Mortgage Bankers Association, Last Observation Q1/2009 AIG 13
U.S. Foreclosures 16 14 (% of total loans) Foreclosures - Prime Foreclosures - subprime Foreclosures - total Q1 2009 14.3% 12 10 8 6 4 Subprime Q1 2009 3.8% 2 0 Total Prime '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 Q1 2009 2.5% Source: Mortgage Bankers Association, Last Observation Q1/2009 AIG 14
Write-downs & Credit Losses vs. Capital Raised: All Financials 500 (Billions Usd, Quarterly Value) 450 400 350 Capital Raised Writedowns & Credit Losses 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
Credit Market Losses: All Financials (bill. Usd) Credit Turmoil Losses Since Beginning of 2007 Europe Asia Americas Europe, 458.63 Americas, 975.2 Asia, 38.4 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 AIG 16
Capital Raised: All Financials (bill. Usd) Capital Raised Since Beginning of 2007 Europe Asia Americas Europe, 438.3 Americas, 726.1 Asia, 74.9 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 AIG 17
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 Source: Bloomberg, Quarterly, Last update Jun 9, 2009 Europe Asia Americas AIG 18
U.S. New Home Sales and Housing Starts (Tsd. units) (Tsd. units) 2.4 1.2 1 0.8 0.6 2 1.6 New Home Sales:.35M 1.2 0.4 0.2 Housing Starts:.46M Housing Starts (Right) New Home Sales (Left) 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 0.8 0.4 Source: US Dept. Commerce, Nat'l Assoc. of Realtors, quarterly avg., last observation 4/2009 AIG 19
The Global Economic System Global Growth Projections The Rise of Developing Countries Unemployment Global Trade AIG 20
Global GDP Growth (%) 6 (% change year ago) 5 4 3 IMF Forecasts 2009: -1.3 2010: +1.9 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) AIG 21
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) AIG 22
Real GDP Growth (%) Industrial Countries 8 (% from a year ago) 6 Asia NICs 0.8% 4 2 Japan 0.5% 0 US 0.0% -2 Eurozone -0.4% -4-6 US Eurozone Japan Asian NIC 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 23
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 Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast) AIG 24
Real GDP Growth (%) Developing Countries (% from a year ago) 10 8 Developing Asia 6.1% 6 4 2 Africa 2.0% Latin America -1.5% 0-2 -4 Central & East. Europe 0.8% -6 Russia Developing Asia Africa Central & Eastern Europe Latin America 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Russia 0.5% Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast) AIG 25
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, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast) AIG 26
Global GDP Shares 1990 2008 EU, 27.4% Brazil, 3.1% India, 2.8% China, 3.6% EU, 22.1% Brazil, 2.9% India, 5.0% China, 11.4% Japan, 9.1% USA, 22.8% Japan, 6.4% USA, 20.1% Source: IMF, Last Update May 2009 AIG 27
Global Growth Contributions (%) 70 (% contribution to GDP growth, based on PPP) 60 Developing 50 40 Industrial 30 Industrial World Developing World 1990 1992 1994 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
Unemployment Rate (%) (%) U.S. 9.4% 9 8 Eurozone 9.2% 7 6 5 4 U.S. Eurozone Japan 2000 2001 2002 2003 2004 2005 2006 2007 2008 Japan 5.0% Source: National Statistical Institutes, last observation Eurozone & Japan 04/09, U.S. 05/09 AIG 29
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 AIG 30
World Trade Volume (annual percentage change) 10 5 IMF Forecasts 2009: -11% 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) AIG 31
Global Payments Imbalances Current Accounts Imbalances Foreign Exchange Reserves Who Holds US Treasuries? Savings Imbalances AIG 32
Current Account of Balance of Payments 800 ($B) Asia $622B 600 Asia & Oil Exporters Save 400 200 ME Oil Exp. plus Russia $75B 0-200 -400 Europe Balances Eurozone -$135B U.S. - $397B -600 US Spends -800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2009 Estimate 2010 Forecast) AIG 33
Current Account of Balance of Payments 700 US$ billions, 2009 $643 400 Of which: China $497 Japan $76 100 -$4-200 -$134 -$73 -$77 -$393-500 US Eurozone Africa Latin America Middle East + Russia Asia Source: IMF, av. Annual growth rates, last update Apr 22 2009, WEO (2008 Estimate, 2009 forecast) AIG 34
Accumulation of Foreign Exchange Reserves ($B) 2,200 2,000 1,800 1,600 ($B) $1,954 Stock May 2009 1,350 1,100 ($B) $1,344 Flow (2005 2009) 1,400 850 1,200 1,000 $992 600 800 600 400 $386 $313 $226 350 100 $168 $265 $71 $28 200 0 China Japan Russia Taiwan South Korea -150 China Japan Russia Taiwan South Korea Source: Nat'l Statistical Institutes 05/2009 (China 03/2009), Foreign-Exchange Reserves ex. Gold AIG 36
Global Treasury Holdings $900 (Levels, bill. Usd) $800 $768 $700 $687 $600 $500 $400 $300 $200 $128 $214 $192 $127 $138 $100 $0 China Japan UK Caribbean OPEC Brazil Russia Source: US Treasury, Last Observation February, 2009 AIG 37
Global Treasury Holdings 25% (% of Total) 24% 21% 20% 15% 10% 7% 6% 5% 4% 4% 4% 0% China Japan UK Caribbean OPEC Brazil Russia Source: US Treasury, Last Observation February, 2009 AIG 38
National Savings Rate Comparison 60 Gross Domestic Savings: 2008 (% of GDP) 50 51.2 40 30 32.3 28.7 26.2 25.8 20 10 9.5 0 CHINA INDIA KOREA, REP. OF JAPAN GERMANY UNITED STATES Source: EIU estimates, annual average rates, Last update 5/2009 AIG 39
Inflation Headline Inflation Oil and Commodity Price Inflation Core Inflation AIG 40
Headline CPI Inflation (%) (%) 6 4 Eurozone -0.02% 2 0 Japan -0.1% -2 U.S. -0.6% Eurozone U.S. Japan 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation Eurozone 05/09, U.S & Japan 04/09 AIG 41
Global Headline Inflation (%) 10 (Cpi % Change - Percent Per Annum) 8 Developing Countries Developing 6.7% 6 4 World World 3.% 2 Industrial Countries 0 Developing Countries Industrial Countries World 2000 2001 2002 2003 2004 2005 2006 2007 2008 Industrial 0.0% Source: IMF, Last Observation 2/2009 (Developing), 3/2009 (World), 4/2009 (Industrial) AIG 42
Oil Price per Barrel 160 140 Q2 2008 $140 120 100 10 Jun '09 $70.0 80 2005 av. $59 60 40 2004 av. $39 2006 av. $65 2007 av. $95 20 0 2001 av. $24 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Reuters, Gold, USD/troy oz, Last observation Jun 10 2009 AIG 43
Reuters/CRB Commodities Index 220 (Index, 100 = Q1 2000) 200 180 160 140 120 100 80 Reuters/CRB RJ/CRB Index 2000 2002 2004 2006 2008 10 Jun '09 114.4 Source: Commodity Research Bureau, Quarterly Averages, last observation: 10 Jun 2009 AIG 44
Core CPI Inflation (%) 3 2 (%) United States U.S. 1.9% 1 Eurozone Eurozone 1.8% 0-1 Japan United States Japan Euro Zone 2000 2001 2002 2003 2004 2005 2006 2007 2008 Japan -0.4% Source: U.S. Dept. of Labor, Eurostat, Japan MIC, last observation 04/09 AIG 45
Monetary Policy Response Global Interest Rate Cuts Central Banks Balance Sheets Fed s Liquidity Measures AIG 46
Coordinated Global Rate Cuts 6 (%) 5 4 3 Eurozone 1.0% 2 1 UK 0.5% Canada 0.25% US 0.25% 0 Canada United Kingdom United States Euro Zone Japan 2005 2006 2007 2008 2009 Japan 0.1% Source: Bloomberg, Market Data, Last Update Jun 09 2009 AIG 47
U.S. Federal Reserve Balance Sheet Assets (in $Bil.) 2,000 1,500 1,000 500 Federal Reserve, U.S. Treasury Holdings Federal Reserve, Total Assets 2004 2005 2006 2007 2008 2009 Source: Federal Reserve, Last Update Jun 5, 2009 FactSet Research Systems AIG 48
Total Assets of Key Central Banks 400 (indexed July 2007=100) 350 300 BoE 277 250 Fed 239 200 150 ECB 144 100 BoE ECB Federal Reserve Jul-07 Oct-07 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
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
Interest Rates (%) Interest Rates 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 Source: Bloomberg Market Rates, end of period values of govt bonds and T-bills, Spread in bps, last update 0 AIG 51
Fiscal Policy Response Budget Deficits and Debt Global Fiscal Positions AIG 52
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
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
Fiscal Positions 2 (%) 0-2 -4 Eurozone -6.1% -6-8 U.S. -9.7% -10-12 -14 Japan -9.8% -16 United States Japan Eurozone 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 55
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 56
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
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
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
Risks and Policy Challenges(5) Protectionism Slow Regulatory Reform AIG 60