Recent Global Financial and Economic Developments International Monetary Fund Recent Global Financial and Economic Developments Jan W. Brockmeijer Deputy Director Monetary and Capital Markets Department VI ABC-BBVA International Conference La Moraleja, Madrid - April 24, 2012

The Crisis: A Recurrent Theme Financial stability not assured Need to finish the job: Address causes, not just symptoms Macro-financial repair needed Job not finished Stability did not last 1

Political Resistance and/or Complacency Déjà-vu? Sovereign and Bank Credit Spreads (basis points) Buildup of Stress Crisis Begins Policy Response Relief Political Resistance and/or Complacency 2

This time CAN be different… The Storyline Back from the brink But how fragile? Global financial stability has improved AE - Sovereign financing strains - Disorderly bank deleveraging - Financial de-globalization Risks remain elevated EM - Home-grown vulnerabilities - Potential capital flow surges Cannot afford to pause/relax Need to complete macro-financial repair and reform Policy This time CAN be different… 3

Global Financial Risk Indicators Have Improved Risk Appetite 4

But Markets Are Volatile And Stability Is Fragile (September 2011 = 0) 5

Policy Action To Entrench Stability And Avoid Downside Risks Present: Funding remains strained, home bias, credit squeeze, low growth, spillovers. Complete Policies Weak Current Policies Downside: escalating funding pressures, credit crunch, default, falling growth, global contagion. Upside: Full national implementation; structural and governance reforms; ex-ante risk sharing; smoother deleveraging; higher growth. 6

Drivers Of Bank Deleveraging ? Structural Shed Legacy Assets Better Capitalization Reduce Reliance on Wholesale Funding Cyclical Earnings Pressures Funding Pressures 7

European Banks Need To Reduce Leverage And Shrink Balance Sheets Bank Leverage (Adjusted tangible assets to Tier 1 common capital) Bank Loan-to-Deposit Ratios (Loans as a percentage of deposits) 8

What Are The Effects Of Deleveraging On The Region… 2012-2013 (in percent of end-2011 stock, deviation from baseline growth) +0.6% 0.0% -0.6% -1.4% -1.7% -4.4% -$2.2 tn -$2.6 tn -$3.8 tn Current Policies Complete Policies Weak Policies 9

..And On Credit In The Rest Of The World? Impact of EU Bank Deleveraging On Global Bank Lending Supply (in percent of total bank credit) 10

U.S./Japan Public Debt: Latent Risk To Stability Required Fiscal Adjustment and Interest Rate Historical Volatility in One-Month U.S. Treasury Bills During Debt Ceiling Negotiations (in percent) U.S. Japan 11

Capital Flows Have Become More Volatile And Less Predictable Emerging Market Portfolio Flows (In billions of U.S. dollars, 3-month moving average) Emerging Market Asset Performance (January 1, 2010=100) 12

What Happens If Bank And Portfolio Flows Reverse? Credit to GDP Ratio GDP Growth Rate 13

In Latin America, Strong Foreign Bank Presence In Many Countries 14

EMs Have Policy Room To Buffer Shocks But Homegrown Vulnerabilities Remain Credit Policy Room Fiscal Policy Room Monetary Policy Room Hungary Poland Russia Turkey South Africa China India Indonesia Korea Brazil Mexico Peru 10.7368405 36.57098271 39.78204563 23.29249406 23.5610262 30.28578836 63.97290738 21.60017491 3.1 6.11615086 5.5 3.5 8.549267935 3.2 5.003352744 3.345152851 2.499537501 -0.794832851 7.027696688 9.433981925 11.03613394 4.465779187 7.12925671 15

Policy: The Quest For Lasting Stability Euro Area Breathing Space Limited; Use it Wisely Euro Area Start Addressing Now Medium-Term Challenges US, Japan Emerging Markets Do Not Take Stability For Granted Global The World Needs Collaboration 16

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