1. 1 The Global Financial Crisis: What’s Next? Bank Guarantee Fund Conference Warsaw, May 21, 2010 Mark Allen Senior IMF Resident Representative for Central and Eastern Europe

2. 2 Outline of presentation Forecasts of the recovery Factors that might hold back recovery Situation of the financial sector Fiscal worries Summary

3. 3 Good News: the world economy is recovering … Source: World Economic Outlook, April 2010 Change in GDP (Year on year) Emerging DevelopedWorld

4. 4 … and the recovery in 2010 is faster than we expected. UK USA China Eurozone Source: World Economic Outlook Apr 2010 Jan 2010 Oct 2009 Jun 2009 Apr 2009 Real GDP growth forecasts

5. 5 Recover is driven by the rebound in world trade... Source: Directions of Trade, April 2010 Merchandise exports (Three month moving average, year on year) Emerging Developed World

6. 6 …and restocking. Industrial Production (Annualized percent change of 3mma over previous 3mma) Global IP Global Manf. PMI (sa, 50+=Expansion; rhs) Source: World Economic Outlook, April 2010

7. 7 And financial markets are back from the brink too. Sovereign and Corporate Bond Spreads (basis points) Global Stocks (Morgan Stanley MSCI Stock Price Indices in USD, MER Weighted; 2007 = 100) Advanced economies: corporate 1 1 Averages of BB-B US, BB-B Euro, and BBB Japan corporate bond spreads. Mar-10 200720082009 Mar-10 200720082009 Source: Bloomberg

8. 8 Factors that might hamper growth US savings rates

9. 9 U.S. Household Saving Ratio (in percent of disposable income) Brakes on Growth: 1. U.S. Saving Rate?

10. 10 Factors that might hamper growth US savings rates Global imbalances

11. 11 Brakes on Growth: 2. Global imbalances? Current account balances (billion dollars) Source: World Economic Outlook, April 2010

12. 12 Factors that might hamper growth US savings rates Global imbalances High unemployment

13. 13 Brakes on Growth: (3) High unemployment? Unemployment (percent) Source: World Economic Outlook, April 2010

14. 14 Factors that might hamper growth US savings rates Global imbalances High unemployment Bubbles in emerging markets

15. 15 Brakes on Growth: 4. Overheating in some emerging markets? Real Domestic Credit Growth and Equity Valuation (Standard deviations from long-term average) Local equity valuation Real credit growth High Credit Growth High Valuation Source: Global Financial Stability Report, April 2010

16. 16 Factors that might hamper growth US savings rates Global imbalances High unemployment Bubbles in emerging markets Commodity supplies

17. 17 Brakes on Growth: 5. Commodity prices? Principal commodities prices (Jan-09 = 100) Source: Bloomberg; staff estimates

18. 18 Factors that might hamper growth US savings rates Global imbalances High unemployment Bubbles in emerging markets Commodity supplies Availability of credit

19. 19 Brakes on Growth: 6. Credit supply? Nonfinancial Private Sector Credit (Annual percent growth) Source: Global Financial Stability Report, April 2010

20. 20 Stronger growth has helped banks … Bank writedowns (US$ trillions, left scale) Average global growth 2007-2010 (percent, right scale) Source: Global Financial Stability Report, April 2010

21. 21 … which have written down losses and raised capital. (billions of US$) percent Expected additional writedowns/loss provisions (left scale) Realized writedowns/loss provisions (left scale)

22. 22 But funding maturities have shortened. Mature Market Bank Bond Maturities (Percentage of initial stock) Years Source: Global Financial Stability Report, April 2010

23. 23 Nonbank credit only partly offsets weak bank credit. Contributions to nonfinancial private sector credit growth (Percent) USA Euro AreaUK Source: Global Financial Stability Report, April 2010

24. 24 Sovereign risk now threatens to take the crisis to a new stage. Source: Bloomberg I. Financial crisis Buildup II. Systemic outbreak III. Systemic response IV. Sovereign Crisis? The Four Phases of the Crisis (10-yr sovereign swap spreads, percent)

25. 25 Debt levels in advanced economies are increasing sharply … Advanced economies Emerging and Developing economies Public Debt (Percentage of GDP) Source: World Economic Outlook, April 2010

26. 26 Increase in aging-Related Spending in G20 Advanced Economies (Percentage of GDP over 2010 aging-related spending) Source: World Economic Outlook, April 2010 … and structural deficits are set to worsen.

27. 27 The increase in debt is due to recession… G-20 Advanced Economies: Increase in Public Debt, 2008-15 (Total increase: 39.1 percentage points of GDP; 2009 PPP weighted GDP) Source: World Economic Outlook, April 2010; Staff estimates

28. 28 … which has undermined revenue expectations. Real GDP (2000=100) Oct. 2007 WEO Current WEO Oct. 2007 WEO Current WEO Oct. 2007 WEO Current WEO USAEuro areaJapan Source: World Economic Outlook

29. 29 Sovereign borrowing is increasing sharply. Net Borrowing Needs (percentage of GDP) 2003-08 average 2009 2010 (est) 2011 (est) United States Euro Area United Kingdom Source: Global Financial Stability Report, April 2010

30. 30 Risk premia reflect fiscal challenges and external financing risks … Contributions to Five-Year Sovereign CDS Spreads (basis points)

31. 31 … and sensitivity to fundamentals is growing General Government Balance (as a percent of GDP) CDS Spreads (year average) Greece Source: World Economic Outlook April 2010, Bloomberg = 60% debt to GDP -3%

32. 32 Problems in peripheral Europe may haunt banks in the core … Source: BIS USD 100 bln

33. 33 … while the sovereign’s creditworthiness affects that of its banks Percent change in sovereign CDS October 2009 to March 2010 Average percent change in local senior financial CDS Source: Global Financial Stability Report, April 2010

34. 34 Conclusions Recovery stronger than expected But could easily be derailed The banking system cannot provide much credit The crisis has worsened fiscal positions Fiscal problems may feed back to banking systems But growth in emerging markets and trade may continue to surprise

35. 35 Thank you