The Global Economy and Financial Markets: Where Next? John Lipsky, First Deputy Managing Director, International Monetary Fund.

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Presentation transcript:

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... Global inflation 1/ (yoy, rhs) World GDP Growth (Annual percent change) 1/ Country CPI inflation rates aggregated using PPP weights.

Global Risk Factors Tilted to the Downside (Percentage points of global GDP growth over next 12 months) Protectionism/

Hallmarks of Financial Innovation Securitization New Risk Transfer Instruments New Asset Management Institutions

The Effects – Record Cross-Border Flows

The Effects - Reduced “Home-Bias”

The Latest Challenge- The Re-Pricing of Credit Risk

Months after Origination Subprime 60-Day Delinquencies by Mortgage Vintage Year (adjustable rate mortgages, in percent of payments due) U.S. Sub-Prime Market Credit Quality Deterioration

Loans with Payment Shock (in billions of U.S. dollars) Sub-Prime Mortgages: Long-Tailed Impact

Flex and Reverse Flex Deals (in percentage of deals) Terms flexed in favor of borrower Terms flexed in favor of lender Net percent of deals (4 quarter moving average) Discipline Weakening in Corporate Credit Markets

US CDOs: Outstanding Volumes ($900 billion total) Collateralized Debt Obligations

CDO Holders: Riskiest Portions (Not delta adjusted) Riskiest Positions Held by a Wide Variety of Investors

Primary Market Spreads of Mezzanine CDO Tranches over LIBOR (in basis points, CDOs with collateral of BBB average quality) AAA AA A BBB June 15 CDO Spreads Widened, Post Bear-Stearns Hedge Fund Troubles...

IMPLICATIONS MarketsFundamentalsPolicies