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

2. The Favorable Global Backdrop

3. 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.

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

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

6. The Effects – Record Cross-Border Flows

7. The Effects - Reduced “Home-Bias”

8. The Latest Challenge- The Re-Pricing of Credit Risk

9. Months after Origination 2006 2000 2001 2005 2003 2002 2004 Subprime 60-Day Delinquencies by Mortgage Vintage Year (adjustable rate mortgages, in percent of payments due) U.S. Sub-Prime Market Credit Quality Deterioration

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

11. 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

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

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

14. 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...

15. IMPLICATIONS MarketsFundamentalsPolicies