1. 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

2. 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

3. 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

4. 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

5. Global Financial Risk Indicators Have Improved
Risk Appetite 4

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

7. 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

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

9. 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

10. What Are The Effects Of Deleveraging On The Region…
(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

11. ..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

12. 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

13. 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

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

15. In Latin America, Strong Foreign Bank Presence In Many Countries14

16. 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
3.1
5.5
3.5
3.2 15

17. 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

18. Title page
Thank you