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Carlos E. Piera Country Sector Coordinator, Turkey The World Bank November 17, 2008
High-income Economies
Source: WB, Forecast for 2008
Developing Countries
2007
2007 JanAug
2008 JanAug
Bond
Source: WB
Banks
Equity
Spreads (bps)
1000
EMBI+ Turkey
25-Oct
4-Nov
Nov 7
162 Turkey
99
Emerging Markets
71 109
Increase in spreads Stock market losses
75
Increase in spreads
95
Stock market losses
15 % 10
Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08
8 7 6 5 4 3 2 1 0
2007
Key events--Signs
April 2007. New Century Financial, which specialized in sub-prime mortgages, files for Chapter 11 bankruptcy protection. July 2007. Bear Stearns tells investors they cannot access the money invested in two of its hedge funds. July 2007. FRB Chairman: The credit losses associated with sub-prime have come to light and they are fairly significant...Some estimates are in the order of between $50bn and $100bn. August 2007. BNP Paribas tells investors they cannot liquidate positions because it cannot value the assets in their hedge funds, owing to a "complete evaporation of liquidity.
Key events--Effects
September 2007. A run on Northern Rock. October 2007. Major losses begin to appear. UBS ($3.4 billion); Citi ($9 billion); and Merrill Lynch ($8 billion). December 2007. Standard and Poor's downgrades its investment
rating of a number of so-called monoline insurers. April 2008. The International Monetary Fund warns that potential losses from the credit crunch could reach $1 trillion and may be even higher. July 2008. Major banks start collapsing with IndyMac first. September 2008. Freddie Mac and Fannie Mae rescued; Lehman collapses; Merrill Lynch sold; AIG rescued; Washington Mutual collapses; and HBOS sold after a major run. Fortis, Dexia, Wachovia and so on..
Lessons?
Market solution: Investment banks gone for the most part. Should others fail? Should we worry about moral hazard? Regulatory policy changes that should result from the subprime turmoil: Reforms of prudential regulation for banks; End of GSEs; The reform of the regulatory use of rating agencies opinions; The reform of the regulation of asset managers fee structures to improve managers incentives.
1. 2. 3. 4.
Is it over?
With default rates yet to peak and the recent heightened market distress, declared losses on U.S. loans and securitized assets are likely to increase further to about $1.4 trillion (October 2008, GFSR).