Recent developments on global financial markets

TD//54/CRP.2 28 September 2007 Distr.: Restricted English 07- Trade Development Board Fifty-fourth session Geneva, 1–11 October 2007 Item 3 provisional agenda Interdependence global economic issues trade development perspective: regional cooperation development developments global financial markets Note UNCTAD secretariat Executive summary Turmoil financial markets . years relative calm, uncertainty apprehension market participants prompted aggressive action policymakers number developed economies. , massive provision liquidity central banks attempt interest rates target levels calmed financial markets shock waves -called -prime mortgage crisis hit banks Europe United States America. , cut 50 basis points policy interest rates United States Federal Reserve 18 September shown policymakers ready stabilize real economy prevent major breakout financial panic. , fundamental wrong financial system survive years facing damaging unsettling crisis. Apparently, recurrent episodes financial volatility driven financial firms’ attempts extract consistent double-digit returns real global economic system manages grow rates single-digit area. kind financial alchemy based massive leverage opaque instruments confuse naïve market participants risks . Time reality check, triggered central banks rising interest rates, leads recurrent crises driven realign financial assets underlying real assets. deny financial services play key role allocating funds high-return activities, frequency crisis suggests regulated financial markets yield outcome. important implications advanced financial markets emerging markets pressure increase financial openness promote deregulation. Effective regulation sustain finance initiate innovative financial engineering preventing excessive risk- negatively affect financial market agents wider constituency. short-term response financial turmoil proven , long-term policy responses developed developing countries alike require wider deeper reflection. , lack transparency TD//54/CRP.2 2 root current crisis. due fact spreading risk transparent foreseen economic theory, market operators chose ways “securitize” risky assets spreading high-yielding assets marking risk. Additionally, credit-rating agencies failed understand products, fact rarely traded led situation approximate structured financial products . note emphasizes current light regulatory stance creates bias favour “sophisticated” opaque financial products encourages banks operate lightly supervised affiliates “special purpose vehicles”. bias corrected adopting regulations favour simpler transparent financial products banks engage risky - balance-sheet activities. , events give developing countries pause reflect path financial sector development level sophistication suited level development. note discusses role credit-rating agencies. Financial regulation rating decisions important establishing assets held types financial intermediaries. obtain rating shields rating agencies market discipline force increase accuracy ratings. time, rating agencies held legally accountable decisions claim ratings opinions accurate predictions risk instrument. problem solved establishing regulatory agency supervise role credit-rating agencies. , federal food drug authorities certify safety pharmaceutical products, agency certify AAA assets minimal probability default. , depends -prime mortgage crisis proper, solvency crisis private households, affect growth United States economy similar pressures build European economies ( United Kingdom Spain noted potentially fragile markets respect). decade, United States accumulated large current account deficits driven high consumption private households. turn, consumption boom fed easy access credit partly driven mortgage-refinancing. collapse housing prices lead sudden reversal situation contraction United States consumption , years, main drivers world demand. part mechanism , fall dollar, kick starts unwinding global imbalances. , dollar fall controlled Governments central banks, consequences global economy dire. note examines scenarios highlights potential repercussions developing countries. , short-term actions, longer-term vigilance monetary policy needed. bailing single players dubious path, policymakers stand ready mitigate macroeconomic effects crisis prevent contagion. information vulnerable parts financial system , European Central Bank, United States Federal Reserve major central banks normalize liquidity supply endangering interest rate inflation targets. TD//54/CRP.2 3 bottom line liquidity problems allowed amplify mask solvency problems root crisis. real challenge, , devise long term policies financial markets penalize responsible causing crisis protecting innocent bystanders . Economic background liquidity crunch 1. precautionary regulatory reasons, banks maintain amount liquid reserves. costly reserves remunerated United States America pay -market interest rates Europe. order minimize amount reserves hold, banks engage lending borrowing activities inter-bank market. inter-bank market efficiently allocates excess liquidity acts central nervous system financial sector. 2. small glitch inter-bank market lead liquidity crisis. early August 2007, United States banks held approximately $12 billion reserves deposited accounts United States Federal Reserve System. average day, $12 billion reserves daily inter-bank transfers amounting approximately $4 trillion. implies , average, dollar reserves hands 300 times day.1 change large multiplier driven banks’ desire hoard reserves lead enormous drop liquidity. 3. Banks lend inter-bank market reserves minimum reserves borrow . , banks view access market, start hoarding reserves reduce liquidity. bank run, process -fulfilling. , reason, banks expect liquidity crisis, stop lending inter-bank market liquidity crunch emerge.2 4. problems originated United States -prime mortgage market, trigger crisis sudden drop liquidity European inter-bank market ( annex chronology events). driver liquidity shortage deterioration market Asset Backed Commercial Papers (ABCP) issued European structured investment vehicles (SIV, annex ).3 collapse market ABCP weeks news revealing increasing problems United States -prime mortgages 1 discussion based Cecchetti (2007) Federal Reserve policy actions August 2007: frequently asked questions (updated) http://www.voxeu.org/index.phpq=node/466 2 crisis, banks rushed inter-bank market started hoarding short-term United States Treasury bill leading dramatic drop yield instruments. tranquil times yield United States treasury bills close Fed Funds rate ( United States inter-bank market). peak crisis, yield Treasury bills 200 basis points Fed Fund Rate. 3 crisis started liquidity crisis German bank IKB. July 2007, IKB’ conduit Rhineland Funding outstanding stock approximately €20 billion ABCP. , mid-July, investors refused rollover part Rhineland Funding’ ABCP, conduit asked IKB provide credit line. IKB revealed cash liquid assets meet request conduit saved €8 billion credit facility KfW. intervention KfW, stopping panic led reserve hoarding run commercial paper issued SIVs. TD//54/CRP.2 4 packaged collateralized debt obligations (CDO),4 AAA tranche mortgage backed CDOs ( annex ). 5. collapse inter-bank market lead disintegration financial system, central banks massive injections liquidity support normal functioning inter-bank market August 2007.5 problem interventions European banks seeking dollar liquidity ( expiring ABCP denominated United States dollars) European Central Bank (ECB) provide euro liquidity. 6. surprising element current crisis driven sudden collapse confidence CDOs supposedly enjoyed AAA ratings. high- quality financial instruments carry default risk sold premium ( discount) periods financial turmoil. problem CDOs issued, rarely traded. , valuations, market-driven, based complicated theoretical models. CDO holders needed liquidity face market turmoil, market CDOs book . , generating liquidity selling CDOs, sold high-quality liquid equities. , crisis led loss CDOs liquid equities. drop price liquid equities source contagion hedge funds. price behavior predicted theoretical models built quantitative hedge funds (Quants) led large losses segment market ( annex ). Significant losses leading hedge funds contributed increasing uncertainty amplified crisis. 7. drop housing prices wave defaults -prime market widely expected anticipated, speed price adjustments segments financial market surprise, created rapid adjustments positions market participants. , wave losses -prime market estimated $35 billion, corresponds 0.2 cent United States stock market. Subsequent estimates $100 billion losses, cent United States GDP.6 impact Savings Loans crisis, occurred United States late 1980s estimated cost 2.5 cent United States GDP. 4 detailed discussion United States -prime mortgage crisis John Kiff Paul Mills (2007) “Money checks free: developments .. -prime mortgage markets,” IMF Working Paper 07/188. http://www.imf.org/external/pubs/cat/longres.cfmsk=21200.0 5 Thursday 9 August 2007, ECB injected €95 billion European financial system, day added E48 billion Monday €25 billion. day European intervention, United States Federal Reserve injected $24 billion United States financial system, $38 billion intervention Friday 10 August $2 billion Monday 13 August. 17 August Fed lowered discount rate 50 basic points ( 6.25 cent 5.75 cent, 50 basic points Fed Funds rate remained 5.25 cent) accepted mortgage backed securities collateral discounting. 6 AAA tranches CDOs booking large losses, liquidity solvency problem. . CDO face $100 million AAA tranche covers 90 cent loans included CDOs assume 20 cent mortgages packaged CDO default ( high default rate). holders AAA tranche receive $80 million ( defaulted loans). , assets backing defaulted mortgages foreclosed holders AAA tranche paid. long foreclosure processes houses valued $20 million yield $10 million, holders AAA tranche capital loss. TD//54/CRP.2 5 8. important, circumscribed, problem causing pain explanations. explanation problem larger originally assumed. similar lines, investors , financial markets overshot , deleveraging process overshoot downside, amplifying effects coming automated trading models adopted Quants. 9. explanation loan securitization, supposed disperse allocate risk equipped bear , led situation risk . uncertainty institution affected default generated current panic attack ensuing liquidity crisis. fact months -prime crisis emerged force, full extent risk loss revealed, suggests operation loan securitization market deserves greater scrutiny received. II. securitization worse 10. security-based system, banks originate loans sell loans investors equipped bear risk. system supposed superior bank-based system , slicing dispersing risk, increase resilience financial system isolate banks costly defaults. , -prime mortgage crisis highlights problems securitization. 11. , clear system successful isolating banks market turbulence. structured products owned -bank institutions ( SIVs) implicit explicit guarantees parent banks. -bank institutions face problems, parent banks step ( annex ). banks, -bank institutions supervised. , SIVs’ liabilities guaranteed SIVs access lender resort create liquidity, -banks subject runs. , crisis securitization isolate banks , increasing opaqueness system, worse. 12. , purported advantages market-based system price discovery ability mark assets market. problem structured instruments ( CDOs) rarely traded valuations based market prices theoretical models. model-based valuations highly subjective proved optimistic instruments traded. Sophisticated structured products difficult understand, investors idea risk assuming. money market mutual funds (MMMF) heavily invested CDOs based packages -prime loans retail holders MMMF aware fact. , system supposed transparent bank-based system ended opaque. 13. , bank-based system holds risk (.., banks). opaque market-based system risk resides. report (June 2007), Bank International Settlements states: “Assuming big banks managed distribute widely risks inherent loans , holds risks, TD//54/CRP.2 6 manage adequately honest answer . risk embodied forms asset-backed securities growing complexity opacity. purchased wide range small banks, pension funds, insurance companies, hedge funds, funds individuals, encouraged invest generally high ratings instruments. , ratings reflect expected credit losses, unusually high probability tail events large effects market values” (. 145). 14. holders risk priori unknown, state affairs generates climate deep uncertainty ( -called “Knightian uncertainty”, .., unknown immeasurable risk, measurable risk, based -defined probability distributions financial sector specialists). Uncertainty basis turmoil led collapse inter-bank market. Banks wary lending holds risk. , derivatives CDOs complex instruments, market participants information form expectations instruments behave stress. Uncertainty leads market participants decisions based worst-case scenarios hoard liquidity people hoard bottled water canned food expect war.7 15. Fourth, banks careful evaluating risk plan loan books. plan sell loan, worry creditworthiness borrower. , securitization lead laxer credit standards deterioration credit quality. reasonable assume absence securitization -prime loans extended.8 16. , securitization severs relationship lenders borrowers. traditional banking, borrowers unable service debt reach rescheduling agreement bank ( bank foreclosing asset costly). loans packaged securities, reaching agreements difficult. , missed payments lead foreclosing. increases cost default lenders borrowers accelerate drop asset prices increases number foreclosures. 17. sixth problem related previous . traditional banking, lenders privileged information quality loan. bank hold loan support market periods market turmoil. securitization, credit risk moved knowledgeable bankers originated credit institutions limited knowledge origin credit. , securitization increase herding accentuate market swings holders structured instruments sell assets periods market turmoil. 7 theoretical discussion issues Caballero Krishnamurthy, “Collective risk management flight quality episode”, forthcoming Journal Finance. 8 negative fact point view financial stability, positive implications securitization access credit segments populations previously excluded credit market ( estimated securitization reduced borrowing rates approximately 200 basis points). , systems grant access credit poor segments population involve increase financial fragility. TD//54/CRP.2 7 18. , arguments favour market-based system. , opaque spread risk risk concentrated institutions. problem securitization lead loss information. Supporters securitization argue loss loan-specific information compensated fact behavior packaged loans predicted statistical techniques. sense, law large numbers substitute loan-specific information. problem standard probability distributions work periods market turbulence, time information valuable. fact observing 25 standard deviation events (.., events happen 100,000 years, annex short discussion “black swan” events) driven fact probability models evaluate risk packaged debt fully account fact panic episodes shocks highly correlated effects shocks feed vicious circle implies massive process deleveraging built standard models.9 III. Amplifying factors: carry trade currency misalignments 19. Currency carry trade speculative financial operation consists borrowing -yielding currency, lend high-yielding currency, profits interest rate differential , possibly, exchange rate variations.10 20. UNCTAD repeatedly pointed carry trade plays negative role prevents smooth adjustment exchange rate correction current account imbalances, risks abruptly stopping trade. rapid unwinding carry trade positions lead large swings exchange rates contribute financial instability. current turmoil originated United States -prime credit market affect carry trade operations amplified sudden carry trade unwinding (annex shows examples carry trade unwinding). 21. Carry trade positions world market estimated $1 trillion. operations role determination exchange rates, market volatility, flows liquidity United States emerging markets (Trade Development Report, 2007). implies massive reversal positions critical factor worldwide financial crisis liquidity crunch. , carry trade speculations prevent exchange rate adjustment mechanism working proper , leading divergent real exchange rates global imbalances, increase fragility world financial system, making economies prone reversal market sentiments liquidity crisis. , carry trade contribute financial instability builds unwinds. 9 instance, drop housing prices leads defaults -prime loans, leads foreclosures contributes home prices defaults -prime mortgages credit card debt. 10 discussed chapter 1 Trade Development Report, 2007, operation affected high income economies Australia, Iceland, Japan, Zealand, Switzerland United States, emerging market transition economies Brazil, Bulgaria, Hungary, Romania Turkey. TD//54/CRP.2 8 IV. happen emerging markets 22. years, developing countries recorded rapid growth, averaging 6.5 cent year. recession United States sudden jump risk aversion large negative impact emerging markets (EM). main transmission mechanisms sudden drop demand developing countries’ exports coupled large change international investors’ appetite EM assets. emphasis change sudden drop sudden increase demand fro EM assets problematic. sudden stop episode lead crisis similar hit emerging market countries 1998. sudden increase capital flows emerging market countries, , positive effects short run potentially large negative effect long run lead appreciation real exchange rate ( loss competitiveness) bubble emerging market assets. 23. happen depend magnitude United States crisis. decade, United States accumulated increasingly larger current account deficits driven high consumption , , large public sector deficits. turn, consumption boom ( year culminated negative household savings, .., situation United States households consumed earned) fed easy access credit driven fact , increasing housing prices, United States consumers obtain financial resources continuously refinancing mortgages. , household debt increased parallel increase housing prices. collapse housing prices bring sudden reversal situation lead slackening United States consumption , years, main drivers United States world demand. high public sector deficit, fiscal expansion compensate decline consumption. , collapse housing prices mechanisms kick-starts unwinding global imbalances. unwinding chaotic consequences global economy dire. 24. scenarios envisaged: () benchmark scenario characterized mild growth slowdown United States; (ii) benign scenario limited impact United States world economy; (iii) crisis scenario characterized full-blown recession United States sudden jump investors’ risk aversion. 25. benchmark scenario, United States mild recession investors’ risk aversion increases remains . Developing countries benefit suffer scenario. general, suffer reduced demand exports commodity prices, gain drop ( expected increase) interest rates slow United States economy.11 demand rest world remains strong, beneficial effect factor dominate negative effect factor. 26. benchmark scenario based rule thumb , United States, $1 drop housing wealth leads 0.06 cent decline consumption. 11 increase risk aversion negative effect developing countries, regional differences magnitude negative effect. Liquidity issue countries running current account deficits accumulate international reserves. TD//54/CRP.2 9 estimates suggest 10 cent correction United States housing prices, ensuing drop private consumption lead 1 cent decline United States GDP growth. IMF estimates suggest “shocks United States economy significant implications growth regions. spillovers roughly ¼ ½ large disturbance United States growth”. 27. benign scenario, interventions major central banks successful, current crisis dissipates quickly advanced economies emerging markets growing (possibly slightly rate expected). scenario, CDOs market successfully passed stress test, asset markets developing advanced economies benefit expected interest rates. 28. , -prime crisis full-blown financial market crisis cum recession. “perfect-storm” crisis scenario, United States full-blown recession , happened 1998, risk aversion skyrockets. scenario, emerging markets receive negative shocks real ( reduced demand exports) financial sides ( considerably higher spreads). emerging market countries running current account surpluses, crisis painful hit emerging world 1998. , painful small group countries East Europe Central Asia, running large current account deficits. perfect storm financial problems emerging countries running current account surpluses.12 29. biggest risks current crisis sudden jump risk aversion. Markets nervous, expected volatility United States equities (measured VIX index) increased form historical lows 30, remains levels reached 1998 Russian Crisis levels prevailing 2002-2003 (fig. 1). positive side, markets pricing run emerging market assets. EMBI+ spreads increased remain levels level reached Asian Russian crises (fig. 2 annex ). Spreads United States high-yield (junk) bonds increased remain (fig. 3). Interestingly, increase spreads United States junk bonds higher emerging market bonds (160 basis points 53 cent increase, 56 basis points, 33 cent increase), indicating , , contagion limited. 12 Calvo Talvi (2006), “ resolution global imbalances: soft landing North, sudden stop emerging markets”, point 18 cent countries suffered sudden stop 1980–2005 period running current account surplus. TD//54/CRP.2 10 Figure 1. Expected volatility United States stocks measured VIX Index (January 1990–17 September 2007) Source: UNCTAD secretariat calculations based Thomson Financial Data Stream. Figure 2. Emerging market spreads (JPM EMBI + composite spread) (Weekly data January 1990–12 September 2007) 0 5 10 15 20 25 30 35 40 45 50 1990 1995 2000 2005 pe rc en ta ge 0 200 400 600 800 1000 1200 1400 1600 1800 7- Ja - 98 7- Ju -9 8 7- Ja - 99 7- Ju -9 9 7- Ja - 00 7- Ju -0 0 7- Ja - 01 7- Ju -0 1 7- Ja - 02 7- Ju -0 2 7- Ja - 03 7- Ju -0 3 7- Ja - 04 7- Ju -0 4 7- Ja - 05 7- Ju -0 5 7- Ja - 06 7- Ju -0 6 7- Ja - 07 7- Ju -0 7 pr ea ( oi nt ) Increase respect June 27, 2007: 64 basis points (38%) TD//54/CRP.2 11 Figure 3. United States high-yield bond spreads (Lehman high-yield spread) (Weekly data January 1990–17 September 2007) Regional repercussions 30. general, size regional repercussions depend factors: size shock United States economy linkages developing regions United States. importance factor reduced increasing reliance south-south trade integration reducing reliance markets advanced economies.13 31. early September, indication regional ripples turmoil developed economies’ financial markets gauged. Latin America 32. Latin American close links United States markets crisis United States large negative regional repercussions. Latin American financial markets anticipating crisis. early July spreads Latin component EMBI+ risen 90 basis points ( 48 cent increase). , moderate increase compared 800 point drop December 2002–June 2007 period, future direction country risk clear, . 13 issues discussed UNCTAD, Trade Development Report, 2007. 0 200 400 600 800 1000 1200 5- Ja - 98 5- Ju -9 8 5- Ja - 99 5- Ju -9 9 5- Ja - 00 5- Ju -0 0 5- Ja - 01 5- Ju -0 1 5- Ja - 02 5- Ju -0 2 5- Ja - 03 5- Ju -0 3 5- Ja - 04 5- Ju -0 4 5- Ja - 05 5- Ju -0 5 5- Ja - 06 5- Ju -0 6 5- Ja - 07 5- Ju -0 7 ad ( ts ) Increase respect June 25, 2007: 157 basis points (54%) TD//54/CRP.2 12 Central Eastern Europe, Central Asia, Russian Federation Turkey 33. Central Eastern Europe closely linked Europe United States, demand euro-zone countries expected slacken slightly. Countries large domestic absorption suffer demand. outward oriented economies suffer . 34. Central European, Baltic, Central Asian countries running large current account deficits severely hit jump risk aversion sudden stop capital flows. Asia 35. export orientation importance United States market, East Asian countries exposed vagaries United States economy. , share exports United States decrease couple years, GDP decline capped 0.5 cent. 36. Asian countries hold large assets denominated United States dollars large depreciation United States currency negative fiscal implications countries. Africa 37. slow- United States economy impact -Saharan Africa reduction commodities exports. countries -Saharan Africa limited access international capital market potential increase risk aversion damaging countries. Middle East North Africa 38. Middle Eastern North African economies subject oil gas prices ( case -oil exporting countries receive remittances, tourists, economic aid oil exporters). large drop oil prices slower growth region, market expecting drop prices. Official United States forecasts project oil price $70 barrel 2008. NYMEX crude oil futures declined roughly 10 cent early August, started recover weeks. 39. oil-exporting Middle Eastern countries estimated substantial investment positions world capital market (hard data difficult obtain) large decreases asset prices negative wealth effects countries. magnitude effects , , hard estimate affect long-term growth short-term cyclical effects. . Lessons learned 40. thinking policy recommendations, distinguish short-term long-term measures. short-term, policy-makers stand ready mitigate effects crisis prevent contagion. long term, policy-makers potential measures preventing recurrence crisis. Long-term policies focus regulatory supervisory frameworks. , interaction short long-term TD//54/CRP.2 13 policies. instance, observers short-term policies aimed rescuing financial markets risk raising moral hazard issues lead larger future crises. discussing policies, worth reiterating basically interpretations current crisis: • interpretation fundamentals solid turmoil panic-driven liquidity crisis. confidence restored, markets problems absorbing modest losses United States - prime mortgage market. • interpretation living Minsky Moment lead massive de-leveraging negative long-term effects United States economy ( annex ).14 view, suggest deep problems current state financial markets, assets overvalued financial institutions realize holding huge amount worthless paper. view, current turmoil reveals solvency crisis. . Short-term policies 41. , views short-term policy measures.15 42. subscribe liquidity crisis view generally approve cash injections United States Federal Reserve ECB. Supporters camp price stability fundamental objective modern central banks recognize financial crises lead deep recessions preventing financial instability crucial stabilizing output fluctuations (Bernanke, 1983). view, cutting discount rate leaving Fed Funds rate unchanged Fed : signal stands ready provide liquidity financial markets, assuming conservative stance prospects future monetary policy . 43. Central banks adopt actions aimed reducing uncertainty. central banks “constructive ambiguity”. constructive ambiguity play role reducing moral hazard, generates problems investors face deep uncertainty start adopting worst-case scenario strategies. environment, central banks reduce uncertainty explaining act worst-case scenario unfolds. crises driven panic attacks, central banks avoid panic credibly promising large liquidity injections. market believes promise, liquidity injection run avoided. 44. agreeing central banks provide liquidity, Willem Buiter Anne Sibert argued standard monetary policy instruments valid tools handling current crisis. argument : financial instruments center crisis traded liquid markets, central banks act market maker instruments. words, central banks jump-start market standing 14 George Magnus (2007) “ Minsky moment means,” Financial Times, 22 August. 15 view Central Banks save markets, matter . Supporters view rarely analysts. TD//54/CRP.2 14 ready buy CDOs heavy discount ( discount prevent moral hazard). , acting lender---resort, central banks act “market-makers---resort”.16 45. observers subscribe solvency crisis view argue looser monetary policy restore solvency. Central banks focus maintaining price stability abstain constantly rescuing markets. Advocates view claim central banks stop serving serial bubble blowers recession painful, lowering interest rates create moral hazard delay day reckoning.17 46. , turmoil reflects fundamental problems working financial market based solvency problems, hard cold turkey policies work. Allowing interest rates skyrocket counterproductive lead situation liquidity problems amplify solvency problems root crisis. policy measures adopted major central banks reasonable. real challenge, , devise policy actions punish responsible injecting crisis protecting innocent bystanders. . Long-term policies 47. short-term response financial turmoil , legitimate questions wrong system , decades, delivered financial crisis years.18 48. observers claim wrong current system financial instability collateral damage increasingly complex system plays positive role allocating funds activities highest economic return. view, financial disruptions unpleasant, financial engineering plays positive role accelerates GDP growth.19 49. observers claim recurrent crises driven financial firms’ attempt extract double-digit returns manipulating claims assets single digit returns. financial alchemy, based massive leverage opaque instruments, positive effect real economy leads recurrent crises driven realigning financial assets underlying real assets. supporters view deny finance plays key role allocation funds high-return activities, question fact financial deregulation yields outcome. 16 discussion supporting current policies adopted Fed ECB Martin Wolf (2007) “ Federal Reserve prolong party”, Financial Times, 21August. details Buiter-Sibert proposal Buiter Sibert (2007) “ missed opportunity FED” http://www.voxeu.org/index.phpq=node/481. 17 illustration view, Andy Xie (2007) “Time central banks bailout markets”, Financial Times, 13 August. 18 stock market crash 1987, & crisis early 1990s, Mexican crisis 1994/95, Asian, Russian LTCM Crises 1997/1998, corporate governance scandals 2002, -prime crisis 2007. 19 application view Emerging Market countries . Ranciere, . Tornell, . Westermann (forthcoming) “Systemic crises growth”, Quarterly Journal Economics. TD//54/CRP.2 15 50. Effective regulation promote financial development preventing financial engineering leads excessive risk-. Prudential regulation, , comprehensive focus segment financial system. , instance, prudential regulation focused banking activities banks responded regulation hiding risk lightly regulated -bank institutions. Excessive financial engineering, SIVs, answers stricter regulation brought Basel accord aimed increasing bank stability. , regulatory proposal anticipate unintended consequences regulation. 51. Focusing current crisis, observers agree lack transparency root current crisis lack transparency due factors: () securitization leads situation holding risk -prime mortgages (ii) real rarely traded structured financial products . 52. Long-term policies aim increasing transparency structured financial products. easy task , nature, structured products complex instruments. , , steps . 53. role credit-rating agencies: Credit-rating agencies, solve information problems increase transparency, played role case market opaque. agencies played important role creation CDOs center crisis. observers convinced , conflict interests, credit-rating agencies optimistic rating CDOs.20 54. Rating important crisis involved highly rated tranches repackaged debt based -prime mortgages. top tranches CDOs based -prime mortgages received AAA ratings. AAA rating allowed sale instruments investors restricted internal rules invest investment grade securities. , questionable top tranche CDO AAA rating carries risk-reward profile AAA-rated Treasury bond. -prime market, history type borrowers behave downturns. , historical data , making modeling default probabilities extremely unreliable.21 European United States regulators calling inquiry examine data -prime robust justify ratings, caveats issued banks passed accurate sufficient information. 55. Rating agencies respond affirming ratings include disclaimers clarify paid companies rate ratings opinions accurate predictions risk instrument. problem rating agencies play ambiguous role current regulatory environment renders rating decisions important establishing assets held types financial intermediaries. , rating agencies fully subject 20 forthcoming UNCTAD discussion paper credit-rating agencies affect market sovereign debt. 21 , rating agencies CDOs rating generous. Bloomberg report, Baa rated ccorporate bonds ( lowest Moody’ investment grade rating) average default rate 2.2 cent. 1993–2005 period CDOs Baa rating default rates 24 cent. TD//54/CRP.2 16 market discipline force increase accuracy ratings companies obliged agencies order place instruments. 56. reform crediting rating agencies role rating complex financial instruments unavoidable step increasing transparency. views reform implemented. market-based discipline, suggest conflict interests eliminated removing existing regulations credit ratings determine type assets held regulated institutions.22 policy benefits, clear fully solve conflict interests. Issuers incentives suborn rating agencies market mechanism work , ultimate risk borne ( pension fund managers) choose composition portfolio assets. 57. alternative view favours establishment regulatory agency supervise role credit-rating agencies. , FDA certify safety pharmaceutical products, agency certify AAA asset minimal probability default.23 issues design agency. instance, national supranational agency national agency, assets rated AAA country considered AAA countries agency deal political sensibility linked rating sovereign bonds 58. important issues, worth noting agencies ( European Union, United States, Japan) cover majority world’ financial assets case agencies allowed supervise rating sovereign issuers. 59. Incentives simpler financial instruments: Research shows current regulatory stance creates bias favour sophisticate opaque financial products. modified adopting regulations favour simpler transparent financial products. 60. Maturity mismatches -bank financial institutions: Part crisis due presence maturity mismatches -bank agencies enjoy liquidity guarantees parent banks. Regulation limit involvement banks lightly regulated agencies transmit problems banking system. 61. Credit deterioration linked securitization: Banks quickly sell loans interested monitoring quality borrowers. problem mitigated forcing banks books part loans extend. 22 Calomiris Mason (2007) “ judge risk”, Financial Times, 23 August. 23 decisions agency inceptive compatible committing buy amount assets certified AAA precommitted price. TD//54/CRP.2 17 Annex Chronology Background. summer 2005 increase number defaults -prime mortgages United States. problem 2006 2007. 7 February 2007: Century Financial HSBC announce losses • Century Financial, specialized lender -prime mortgage, announced accumulated heavy losses previous quarters. • , HSBC announced heavy losses -prime segment. June 2007: Bear Stearns Hedge Funds announce funding problems • highly leveraged hedge funds run Bear Stearns Asset Management experienced sustained losses due decline -prime mortgage market. Investors reacted announcement requesting redemptions Bear Sterns Funds. Merrill Lynch JPMorgan Chase asked collateral called loans. • Bear Stearns sell $4 billion mortgage-backed securities raise funds meet demands, immediately provide capital funds. Eventually, fund received $1.6 billion. credit line repay lenders. , hedge funds lost total , lost 91 cent. 30 July 2007: impact Europe • “Rhineland Funding”, conduit owned German IKB, high exposure -prime mortgage experienced funding problems.24 • public-sector banks, private banks funds rescue IKB. 9 August 2007: PNB Paribas closes investment funds • PNB Paribas decided freeze withdrawals investors investment funds invested United States mortgage market.25 • funds declined approximately 20 cent July beginning August ( $2.08 billion $1.6 billion). • week preceding announcement, BNP Paribas presented financial results semester 2007 notifying mentioning funds facing problems. resulted significant fall share prices financial companies general decline French CAC 40 index. 24 conduit special purpose vehicle entity (SPV SPE), invests ABS MBS raises funds issuing asset-backed commercial papers (ABCP). ABCP short maturity 30 60 days ( annex ). 25 Parvest Dynamic ABS, BNP Paribas ABS Euribor BNP Paribas ABS Eonia. TD//54/CRP.2 18 9 August 2007: central banks’ intervention • 9 13 August ECB injected €168 billion liquidity European banking system ( happened interest rates inter-bank money market risen 4.7 cent). 22 August, ECB injected €40 billion month money market. • 9 16 August, United States Federal Reserve $57 billion short-term liquidity banks. 17 August, FED reduces Discount Rate 6.25 cent 5.75 cent leaves Fed Fund rate untouched 5.25 cent. • Bank Japan ¥ 1 trillion extra liquidity market. • Swiss National Bank, Bank Canada, Reserve Bank Australia injected liquidity market. 13 August 2007: Goldman Sachs capital hedge fund • Goldman Sachs injected $2 billion funds bail Global Equity Opportunities hedge fund fund experienced losses 30 cent week. External investors injected $1 billion. 20 August 2007: problems German banks • Ormond Quay, Irish-based conduit owned SachsenLB Europe, experienced difficulties raising funds parent bank, state-owned SachsenLB, needed extra credit line €17.3 billion publicly owned Sparkassen Finanzgruppe avoid liquidity problems. consequence, SachsenLB . 22 August 2007: United States Banks access discount window • discount window considered signal bank problem. diminish stigma related accessing discount window capitalized United States Banks (Citigroup, JP Morgan-Chase, Bank America, Wachovia) borrowed $500 million discount window. banks pointed step understood symbolic act order encourage banks calm market. 26 August 2007: Turmoil impact Chinese banks • Bank China Industrial Commercial Bank China disclosed exposure United States -prime mortgage market due total investments $12.5 billion. share prices decreased considerably aftermath announcement. 6 September 2007: ECB leaves interest rate untouched. • ECB leaves interest rate level 4 cent inflation risk remains high. ECB President stated due high uncertainty preferable wait information. 6 September, Fed injected $31.25 billion money market. TD//54/CRP.2 19 14 September 2007: Northern Rock liquidity squeeze Bank England trouble • Northern Rock, United Kingdom-based mortgage lender, suffered liquidity constraints due decreased liquidity inter-bank money market, minimal exposure United States -prime mortgage market. consequence turmoil United States mortgage market inter-bank money market lost liquidity banks tend lend money . • Bank England act lender resort provide emergency credit line Northern Rock. Mortgage collateral credit line, gilts, usual. Bank England criticized behavior conflicts statements governor. • Additionally, Bank England liquidity offering emergency credits securitized mortgages cash strapped banks, starting injection £10 billion 24 September 2007. • , British Government guarantees Northern Rock deposits. • announcement Northern Rock’ liquidity problems, hundreds savers withdrew deposits, withdrawals estimated reach £1.5 billion. 18 September 2007: Fed reduces federal funds target rate 50 basis points • Fed reduced Federal Funds Target Rate time years 5.25 cent 4.75 cent. 25 basis points expected observers understood attempt stimulate economic growth. Stock markets worldwide reacted positively decision, United States dollar experienced depreciation euro. 20 September 2007: Differing consequences market turmoil • Banks’ figures quarter 2007 interest supposed give evidence crisis affects banks’ returns. Bear Stearns announced heavy losses quarter 2007, Goldman Sachs Lehman Brothers disclosed high returns. • , turmoil ongoing: Fed injected $29 billion 20 September $9.75 billion 19 September. TD//54/CRP.2 20 Annex Structured investment vehicles years, banks created -bank subsidiaries conduits structured investment vehicles (SIVs). banks, SIVs business transforming liquid liabilities -liquid assets built- maturity mismatch. , collecting deposits public, SIVs raise funds issuing short-term asset-backed commercial paper (ABCP) funds buy long-term structured products, , AAA tranches collateralized debt obligations (CDOs). regular market conditions, SIVs profits spread interest rate paid short-term ABCP interest rate paid long-term liquid CDOs. , short-term interest rates increase SIVs raise cheap finance ABCP market, start accumulating losses. big problem SIVs completely separated banking system. , SIVs implicit explicit agreements stating , SIV raise finance, bank owns SIV provide emergency credit line. sense, parent bank lender resort SIV. , traditional lender resort ( central bank), parent banks create liquidity. happened weeks. Suspecting CDOs held European SIVs quality previously thought, investors stopped buying ABCP issued SIVs. SIVs roll- maturing ABCP, parent banks step finance SIVs (credit lines guaranteeing banks cover ABCP issued SIVs).26 snowball effect, banks provide credit lines SIVs started hoarding funds order honor commitments liquidity lines called. hoarding funds, banks drained liquidity inter-bank market incentives hoard liquid reserves. problem worse fact banks needed liquidity based Europe needed United States dollar funds. , helped European Central Bank ( issue euros). Knowing , United States-based banks stopped lending dollars European banks. , system supposed isolate banks financial crises, put banks center action operation opaque lightly regulated institutions SIVs. 26 estimated August German banks owned €93 billion ABCP conduits. largest participants market (IKB Sachsen LB) banks troubles. TD//54/CRP.2 21 Annex Structure CDOs role credit-rating agencies Structured finance instruments defined key characteristics: () pooling assets ( cash-based synthetically created); (ii) tranching liabilities backed asset pool ( property differentiates structured finance traditional “pass-” securitizations); (iii) de-linking credit risk collateral asset pool credit risk originator, finite-lived, standalone special purpose vehicle (SPV).27 key goal tranching process create class securities rating higher average rating underlying collateral asset pool create rated securities pool unrated assets. accomplished credit support transaction structure create securities risk-return profiles. equity/-loss tranche absorbs initial losses, mezzanine tranches absorb additional losses, senior tranches. , due credit support resulting tranching, senior claims expected insulated – adverse circumstances – default. Tranching contributes complexity risk properties structured finance products. challenges posed estimation asset pool’ loss distribution, tranching requires detailed, deal-specific documentation ensure desired characteristics, seniority ordering tranches, delivered plausible scenarios. addition, complexity increased account involvement asset managers parties, incentives act interests investor classes expense balanced. Structured finance largely “rated” market. Issuers structured instruments wanted rated scales identical bonds, investors, bound ratings-based constraints defined investment mandates, purchase structured products. Activities related rating structured products largest fastest growing business segment leading credit-rating agencies. revenues rating agencies generated rating structured finance products.28 turmoil -prime market led number criticisms regard rating tranches. , widespread dissatisfaction slow response rating agencies downgrade CDOs - prime crisis gathered momentum. , conflict interests prevent rating agencies playing role impartial evaluators credit risk. conflict interests due fact credit-rating agencies paid banks 27 paragraph BIS (2005) paper “ role ratings structured finance: issues implications.” forthcoming UNCTAD discussion paper entitled “Rating credit-rating agencies” discusses credit-rating agencies affect market developing countries’ debt. 28 Data collected David Evans Bloomberg suggest , years, Moody’, Standard & Poor’ Fitch earned money evaluating CDOs activity. TD//54/CRP.2 22 corporations sponsor issue bonds. , issuers choose agencies give high rating. , rating agencies involved lucrative consulting activities aimed advising issuers structure product order obtain high rating. TD//54/CRP.2 23 Annex Quantitative hedge funds Quantitative hedge funds (Quants) trading decisions based sophisticated computerized models. Quants established 1980s James Simons ( founded Renaissances Technologies 1982) David Shaw ( founded DE Shaw 1988). high returns ( twenty years Renaissance Technologies’ flagship fund average annual return 30 cent). Quants grew rapidly thought represent quarter United States equity hedge funds. Originally, Quants computer models analysts pick stocks. Modern Quants computerized models detected small anomalies pricing securities automatically trade securities. , large amount trading modern exchanges computers similar trading strategies. Automated trading leads rapid trading Quants account 50 cent daily trading United States stock market. Markets shocked , early August, highly respected Quants (including James Simons’ Medallion Goldman Sachs’ quant) announced large losses. wrong crisis, Tett Gangahar (2007) describe chain events:29 investment managers realized losses -prime mortgage markets, investment banks asked hedge funds reduce leverage. order obtain cash, hedge funds sell assets, mortgage-linked CDOs liquid, decided sell liquid high-quality equities. prices high quality liquid assets started falling, quant funds (, credit crunch scenario, programmed long type assets short illiquid high beta stocks) started making losses market prices confirming assumptions. , margin calls sell high quality assets forced market models predicted. Losses amplified high initial leverage fact Quants worked similar models. suggests automated trading works market conditions “normal” ( probability distribution events approximated probability distribution), computers problems dealing “black swans”.30 Computer programs base decisions data recognize data driven trading activities. , automated trading programs tend similar trading strategies ( based set information) lead herding. , automated trading deal exceptional volatility forced selling. Computer models assume trading driven valuation liquidity , trading decisions driven valuation, computerized model useless , happened week, predict market . Goldman Sachs announced Quant funds lost approximately 30 cent week. letter investors Goldman Sachs announced 29 Tett Gangahar (2007), “Limitation computer models”, Financial Times, 14 August. 30 Karl Popper, Nassim Nicholas Taleb calls “black swans” large-impact, hard--predict rare events realm normal expectations. TD//54/CRP.2 24 losses due “25 standard deviation event”. 25 standard deviation event event happen probability 5 cent. probability 25 standard deviations event infinitesimal: event happen 100,000 years. problem “black swans” happening ( event caused LTCM collapse 1998). suggests wrong models predict events. TD//54/CRP.2 25 Annex unwinding carry trade Yen/US$ carry trade Figure E1 shows trend yen/US$ exchange rate rate change yen/US$ exchange rate. strong appreciation yen, June, increase volatility yen/US$ exchange rate. Figure E1. Yen US$ (left) daily rate change () (June 2007–21 September, 2007) expectations interest rates United States higher interest rates Japan playing role latest developments, driven increasing currency market volatility rising risk aversion. Currency volatility discourages carry trade operation raising risk gains interest rate differentials funding target currency eroded exchange rate movements. amplified fact unwinding positions increases volatility probability appreciation -yielding currency. Carry trade Brazil current market turmoil increasing risk aversion reducing demand emerging market assets currencies. Currency carry trade Brazilian real partly unwinding persistently large interest differential Brazilian assets United States dollar (fig. E2). Japanese Yen US$ 106 108 110 112 114 116 118 120 122 124 126 01 .06 .0 7 07 .06 .0 7 06 /13 /2 00 7 06 /19 /2 00 7 06 /25 /2 00 7 01 .07 .0 7 07 .07 .0 7 07 /13 /2 00 7 07 /19 /2 00 7 07 /25 /2 00 7 07 /31 /2 00 7 06 .08 .0 7 12 .08 .0 7 08 /18 /2 00 7 08 /24 /2 00 7 08 /30 /2 00 7 05 .09 .0 7 11 .09 .0 7 09 /17 /2 00 7 Yen Daily Percentage Change -2 -1.5 -1 -0.5 0 0.5 1 1.5 01 .06 .0 7 07 .06 .0 7 06 /13 /20 07 06 /19 /20 07 06 /25 /20 07 01 .07 .0 7 07 .07 .0 7 07 /13 /20 07 07 /19 /20 07 07 /25 /20 07 07 /31 /20 07 06 .08 .0 7 12 .08 .0 7 08 /18 /20 07 08 /24 /20 07 08 /30 /20 07 05 .09 .0 7 11 .09 .0 7 09 /17 /20 07 TD//54/CRP.2 26 Figure E2. Brazil real US$ (left) daily rate change () (June 2007–21 September 2007) Carry trade Hungary Swiss franc carry trade Eastern Europe funded regional property bubbles ( 2006 80 cent Hungarian mortgages denominated Swiss francs). sudden reversal speculative flows strong depreciation Hungarian forint (fig. E3) generate defaults falling house prices. Figure E3. Hungarian forint Swiss franc (June 2007–21 September 2007) Carry trade Republic Korea Bank Korea estimates 2006 flow yen-carry trade funds amounted $6 pushing stock carry trade positions $29 billion (approximately 10 cent Republic Korea’ foreign exchange reserve). sudden depreciation won (fig. E4) driven liquidation carry trade positions. Brazilian Real 1.7 1.75 1.8 1.85 1.9 1.95 2 2.05 2.1 01 .06 .0 7 07 .06 .0 7 06 /13 /2 00 7 06 /19 /2 00 7 06 /25 /2 00 7 01 .07 .0 7 07 .07 .0 7 07 /13 /2 00 7 07 /19 /2 00 7 07 /25 /2 00 7 07 /31 /2 00 7 06 .08 .0 7 12 .08 .0 7 08 /18 /2 00 7 08 /24 /2 00 7 08 /30 /2 00 7 05 .09 .0 7 11 .09 .0 7 09 /17 /2 00 7 Real Daily Percentage Change -3 -2 -1 0 1 2 3 4 5 01 .06 .0 7 07 .06 .0 7 06 /13 /2 00 7 06 /19 /2 00 7 06 /25 /2 00 7 01 .07 .0 7 07 .07 .0 7 07 /13 /2 00 7 07 /19 /2 00 7 07 /25 /2 00 7 07 /31 /2 00 7 06 .08 .0 7 12 .08 .0 7 08 /18 /2 00 7 08 /24 /2 00 7 08 /30 /2 00 7 05 .09 .0 7 11 .09 .0 7 09 /17 /2 00 7 Hungarian Forint 170 175 180 185 190 195 200 01 .06 .0 7 07 .06 .0 7 06 /13 /2 00 7 06 /19 /2 00 7 06 /25 /2 00 7 01 .07 .0 7 07 .07 .0 7 07 /13 /2 00 7 07 /19 /2 00 7 07 /25 /2 00 7 07 /31 /2 00 7 06 .08 .0 7 12 .08 .0 7 08 /18 /2 00 7 08 /24 /2 00 7 08 /30 /2 00 7 05 .09 .0 7 11 .09 .0 7 09 /17 /2 00 7 Forint Daily Percentage Change -4 -3 -2 -1 0 1 2 3 4 01 .06 .0 7 07 .06 .0 7 06 /13 /2 00 7 06 /19 /2 00 7 06 /25 /2 00 7 01 .07 .0 7 07 .07 .0 7 07 /13 /2 00 7 07 /19 /2 00 7 07 /25 /2 00 7 07 /31 /2 00 7 06 .08 .0 7 12 .08 .0 7 08 /18 /2 00 7 08 /24 /2 00 7 08 /30 /2 00 7 05 .09 .0 7 11 .09 .0 7 09 /17 /2 00 7 TD//54/CRP.2 27 Figure E4. Korean won yen (June 2007–21 September 2007) Korean Won 7 7.2 7.4 7.6 7.8 8 8.2 8.4 8.6 01 .06 .0 7 07 .06 .0 7 06 /13 /20 07 06 /19 /20 07 06 /25 /20 07 01 .07 .0 7 07 .07 .0 7 07 /13 /20 07 07 /19 /20 07 07 /25 /20 07 07 /31 /20 07 06 .08 .0 7 12 .08 .0 7 08 /18 /20 07 08 /24 /20 07 08 /30 /20 07 05 .09 .0 7 11 .09 .0 7 09 /17 /20 07 Won Daily Percentage Change -3 -2 -1 0 1 2 3 4 5 01 .06 .0 7 05 .06 .0 7 09 .06 .0 7 06 /13 /2 00 7 06 /17 /2 00 7 06 /21 /2 00 7 06 /25 /2 00 7 06 /29 /2 00 7 03 .07 .0 7 07 .07 .0 7 11 .07 .0 7 07 /15 /2 00 7 07 /19 /2 00 7 07 /23 /2 00 7 07 /27 /2 00 7 07 /31 /2 00 7 04 .08 .0 7 08 .08 .0 7 12 .08 .0 7 08 /16 /2 00 7 TD//54/CRP.2 28 Annex Financial instability Hyman Minsky Hyman Minsky’ model credit cycles financial fragility sound interpreting key previous financial economic booms crises. model builds Keynesian Schumpeterian tradition originally developed explain credit economic cycles industrialized market economies highly developed financial institutions markets. Saving Loan-based real estate boom bust late 1980s tech bubble burst late 1990s, instance, widely acknowledged Minsky cycle episodes. , model’ relevance contemporary world economy underlined series financial crisis developing newly industrializing countries liberalization domestic international capital markets 1990s current -prime loan- based credit crisis affecting industrialized economies raising concerns number emerging market economies. element Minsky’ model distinction types finance: hedge finance, speculative finance Ponzi finance. economic unit household, firms financial investor operate hedge, speculative Ponzi investor/borrower switch type credit macroeconomic conditions economy. economic unit defined “hedge” operating income cash-flow sufficiently large cover interest payments amortization debt eventually build assets. speculative unit, hand, service interest payments loans finance amortization debt buy assets, “Ponzi unit”, operating income cover interest debt amortization, builds debt meet scheduled repayments interest, amortization pursue investments. households investors, -prime -prime, “speculative units” refinance mortgages paying principal. allowed “Ponzi units” subject verification income assets -payment. element model role credit expansion. Supply credit highly pro-cyclical increases economic booms contracts slowdowns. due concomitant factors. economic expansions investors expectations optimistic risk averse. Loans obtained easily process leveraging sets . Borrowing pursuing larger investment projects highly speculative assets rising prices. Investment, consumption, profit growth rates surge. Financial innovation loosening credit standards supervisors regulators critical factor credit expansion allowing financial institutions avoid prudential regulation supervision booms bubbles. evident mortgage credit cycle disinflation housing prices bubble generated large rate defaults, foreclosures - prime, prime -conventional mortgages, bankruptcies -prime lenders recession housing market generating historical real estate price fall. critical element cycle market psychology leading phases “manic” acquisition assets real investment market “euphoria”. TD//54/CRP.2 29 Banks reluctant lose market shares eager extend credit creditworthy borrowers. Speculative acquisitions build asset prices real estate stock markets; investment consumption booms raise profits income. mid late 1990s United States Asian crises current turmoil characterised stock market consumption booms fed concomitant real estate bubble. Euphoria propagated internationally production networks, commodity price arbitrage, income spillovers import export linkages, finally speculative financial flows. Production credit expand originating affected economies. Firms households progressively leveraged switch hedge finance speculative finance. progressive sudden slowdown economic boom lowers asset returns profits relative interest rates units turn Ponzi . slowdown boom lead “revolution”, panic crashes. financially fragile system breaks facing chain series defaults Ponzi speculative units longer roll debts. Asset prices decline investors flying liquidity perception spreads price level profitable buy liquid assets sufficient amount liquidity injected system halt fear liquidity shortage. case confidence restored national international lender resort. TD//54/CRP.2 30 Annex Weekly EMBI+ spreads ( region) January 1997–12 September 2007 (Source: Thomson Financial DataStream) Europe 0 400 800 1200 1600 2000 2400 2800 3200 Ja - 98 Ju - 98 Ja - 99 Ju - 99 Ja - 00 Ju - 00 Ja - 01 Ju - 01 Ja - 02 Ju - 02 Ja - 03 Ju - 03 Ja - 04 Ju - 04 Ja - 05 Ju - 05 Ja - 06 Ju - 06 Ja - 07 Ju - 07 Sp ad ( ba si po ts ) Latin America 0 200 400 600 800 1000 1200 1400 1600 Ja - 98 Ju - 98 Ja - 99 Ju - 99 Ja - 00 Ju - 00 Ja - 01 Ju - 01 Ja - 02 Ju - 02 Ja - 03 Ju - 03 Ja - 04 Ju - 04 Ja - 05 Ju - 05 Ja - 06 Ju - 06 Ja - 07 Ju - 07 Sp ad ( ba si po ts ) Africa 0 200 400 600 800 1000 1200 1400 1600 1800 Ja - 98 Ju - 98 Ja - 99 Ju - 99 Ja - 00 Ju - 00 Ja - 01 Ju - 01 Ja - 02 Ju - 02 Ja - 03 Ju - 03 Ja - 04 Ju - 04 Ja - 05 Ju - 05 Ja - 06 Ju - 06 Ja - 07 Ju - 07 Sp ad ( ba si po ts ) Asia 0 200 400 600 800 1000 Ja - 98 Ju - 98 Ja - 99 Ju - 99 Ja - 00 Ju - 00 Ja - 01 Ju - 01 Ja - 02 Ju - 02 Ja - 03 Ju - 03 Ja - 04 Ju - 04 Ja - 05 Ju - 05 Ja - 06 Ju - 06 Ja - 07 Ju - 07 Sp ad ( ba si po ts ) TD//54/CRP.2 31 Annex Selected emerging markets stock market indices January 1997–12 September, 2007 (Source: Thomson Financial DataStream) Ar gentina (Mer val ) 0.00 500.00 1000.00 1500.00 2000.00 2500.00 janv.97 janv.99 janv.01 janv.03 janv.05 janv.07 Brazil (Bovespa) 0.00 10000.00 20000.00 30000.00 40000.00 50000.00 60000.00 ja nv .9 7 ju il. 97 ja nv .9 8 ju il. 98 ja nv .9 9 ju il. 99 ja nv .0 0 ju il. 00 ja nv .0 1 ju il. 01 ja nv .0 2 ju il. 02 ja nv .0 3 ju il. 03 ja nv .0 4 ju il. 04 ja nv .0 5 ju il. 05 ja nv .0 6 ju il. 06 ja nv .0 7 ju il. 07 Mexico (Bolsa) 0.00 5000.00 10000.00 15000.00 20000.00 25000.00 30000.00 35000.00 ja nv .9 7 ju il. 97 ja nv .9 8 ju il. 98 ja nv .9 9 ju il. 99 ja nv .0 0 ju il. 00 ja nv .0 1 ju il. 01 ja nv .0 2 ju il. 02 ja nv .0 3 ju il. 03 ja nv .0 4 ju il. 04 ja nv .0 5 ju il. 05 ja nv .0 6 ju il. 06 ja nv .0 7 ju il. 07 Hong Kong (Hang Seng) 0.00 5000.00 10000.00 15000.00 20000.00 25000.00 30000.00 ja nv .9 7 ju il. 97 ja nv .9 8 ju il. 98 ja nv .9 9 ju il. 99 ja nv .0 0 ju il. 00 ja nv .0 1 ju il. 01 ja nv .0 2 ju il. 02 ja nv .0 3 ju il. 03 ja nv .0 4 ju il. 04 ja nv .0 5 ju il. 05 ja nv .0 6 ju il. 06 ja nv .0 7 ju il. 07 Shanghai 0.00 1000.00 2000.00 3000.00 4000.00 5000.00 6000.00 ja nv .9 7 ju il. 97 ja nv .9 8 ju il. 98 ja nv .9 9 ju il. 99 ja nv .0 0 ju il. 00 ja nv .0 1 ju il. 01 ja nv .0 2 ju il. 02 ja nv .0 3 ju il. 03 ja nv .0 4 ju il. 04 ja nv .0 5 ju il. 05 ja nv .0 6 ju il. 06 ja nv .0 7 ju il. 07 Koreo (Kospi) 0.00 200.00 400.00 600.00 800.00 1000.00 1200.00 1400.00 1600.00 1800.00 2000.00 ja nv .9 7 ju il. 97 ja nv .9 8 ju il. 98 ja nv .9 9 ju il. 99 ja nv .0 0 ju il. 00 ja nv .0 1 ju il. 01 ja nv .0 2 ju il. 02 ja nv .0 3 ju il. 03 ja nv .0 4 ju il. 04 ja nv .0 5 ju il. 05 ja nv .0 6 ju il. 06 ja nv .0 7 ju il. 07