US Financial Crises Impact on Investments

8/6/2019 US Financial Crises Impact on Investments

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The Global Financial Crisis & ItsImpact on Investments

Arif Malik08 November, 2008


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Faces of the CRISIS


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Crisis FAQs1. W hat s happening in USA? Is doomsday near?2. Can I trust my eyes? W alls street crashing? 15 0 Years old Banks going

bankrupt? USA nationalizing corporations? Are we seeing a socialistAmerica?

3. In USA, are the days of free market over?4. W ould US pull its forces out from Afghanistan and Iraq due to the financial

crunch?5. W hat made it happen? W hat kind of bubble burst?6. Could I say that the says of US superiority are gone? US is going to lick the

dust?7. W hat does this financial crisis mean for developing countries, specially for

Pakistan?

8. Is current financial crisis in Pakistan linked with the Global Financial Crisis?9. Are we going to see lots of banks going bankrupt in Pakistan in next few

days? Should I withdraw all of my money?1 0. W hy the dollar is going up in Pakistan when it is losing everywhere in the

world?11. ????????????????????????????????????????????????????????


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Gl oba lizat ion? Gl oba l imp act? Gl oba l Financ ia l Crises? Why?Q uestion: W hat is the truest definition of Globalization?Answer: Princess Diana's death .

Q uestion: How come?Answer: An English princess,with an Egyptian lover,crashes in a French tunnel,driving a German car,with a Dutch engine,driven by a Belgian who was drunk,

on Scottish whisky,followed closely by Italian Photographers,on Japanese motorcycles;treated by an American doctor,using Brazilian medicines .

This is being told by a Pakistani,using Bill Gates' technology,and you're seeing it through a Japanese multimedia projector,that use Taiwanese chips,and a Korean lens,assembled by Bangladeshi workers,in a Singapore plant,This is being told in front of Professors,

Educated in USA, UK, Japan and France,That, my friends, is Globalization


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Global Financial Crisis Dictionary 2008

W all Street CrashFinancial TsunamiCredit CrunchLehman Brother

AIGFinancial MeltdownHousing Bubble BustBailout PackagePREFERENCE SHARES

SECURITISATIONCasino CrisisTOXIC DEBTSHORTINGLiquidity squeeze

Real economySubprimeW rite-downsAlan G reens pan

Derivat ivesBlack Monday"Money m arket fundsDowjones P lungeEmergency Economic

Stabilization Act of 2008Me rri ll LynchJP Morgan ChaseFann ie Mae and F redd ie MacLiquidity crisis


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20 Steps to the DOOMSDAY1. In 200 1, fo llow ing a m ass ive stock m arket and ca pi ta l

spend ing bubb le, Fede ra l Rese rve Cha irm an Alan G reens panwo rried that the U.S. faced a se ve re recess ion. He begancutt ing inte rest rates down to 1% and ke p t the m at that leve l

unt il 2004

, raising the m slow

ly on

ly

0.25

% at a t imethe reafte r.2 . With inte rest rates so low, the f inanc ia l se rvices indust ry

sensed a lot of m oney cou ld be m ade and went a ll in on rea l estate, see ming ly unawa re that low inte rest rates we rem ask ing large risks.

3. Meanwh ile, Am e ricans had been ant icipat ing a nastydowntu rn afte r the bubb le bu rst. But, they soon rea lized thatm oney lost in the stock m arket was m ore than offset by rising

ho m e pri ces. So, Am e ricans cont inued to s pend f reely.


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4 . As Am ericans s pent f ree ly, the U.S. went fu rthe r into debt w ith the rest of the wo r ld. Fo re igne rs, used the ir do llar IOUs f rom these debts to sta rt

the ir own bubbles too.5 . Eventua lly, th ings sta rted to un rave l in 2006 when those that cou ld least

affo rd to purchase ho m es -- so ca lled sub prim e bo rrowe rs -- sta rted todefau lt in the U.S., pri ces ha ving run we ll out of the ir range of affo rdab ility.

6 . In Feb rua ry 2007 , HSBC issued the f irst majo r warning, a ha rbinge r of th ings to co me, writing down tens of b illions in losses f rom the ir ill-timed2002 acquisition of U.S. sub prim e lende r Househo ld Inte rnat iona l. At f irstth ings looked f ine and policy m ake rs con vinced the m se lves and the w ide r pub lic that the pr ob lem was conta ined to sub prim e.

7 . Howe ver, when two Bear Stea rns hedge funds with ex posu re to the UShous ing market b lew u p in June 2007 , peo p le beca me wo rried that therisks had been unde rest imated.

8. It was in August 2007 when BNP Pa ribas, a large French bank, f roze

withd rawa ls in th ree invest m ent funds that peo p le began to pan ic. If abank w ith zero ob vious ex posu re to the U.S. m ortgage secto r cou ld ha veth is m easu re of d iff iculty, anyone cou ld be h iding unto ld losses. Th ismarked the off icial beg inn ing of the c red it crisis. The resu lt was mutua l distrust a m ongst large banks o perat ing in the g loba l market fo r inte rbankloans wh ich meant c red it was ha rd to co m e by fo r m any banks.


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9 . By Sep te m be r, liquidity in the inte rbank m arket was so bad thatrum ors we re sw irling about various inst itut ions wh ich rece ivedm ost of the ir fund ing in who lesa le m arkets. One of these wasNorthe rn Rock, an agg ress ive British m ortgage lende r. The Brit ishpub lic pan icked and began lining u p to pull the ir m oney out of theinst itut ion. The Bank of Eng land was fo rced to ba il out thecomp any, subse quent ly nat iona lizing it a ltogethe r.

10 .Meanwh ile U.S. hous ing pri ces cont inued to dec line. The resu lt wasm ass ive losses in the a lphabet sou p of m ortgage- re lated de rivat iveassets he ld by large g loba l banks. These inst rum ents a re ca lledde rivat ives because the ir va lue is derived f rom the va lue inunde rlying assets like m ortgages. The f irst wa ve of m ortgage-re lated losses we re concent rated in these inst rum ents and invest ingveh icles: RMBSs (Resident ia l Mo rtgage Backed Secu rit ies) CDOs(Co llate ra lized Debt Ob ligat ions), and SIVs (St ructu red In vest m ent

Vehicles) and CDOs of CDOs. Me rri

llLynch was the f irst to report alarge loss, at $ 5 .5 billion on 5 Oct 2007 . Only to co m e back less than

th ree weeks late r on 24 Oct 2007 to say that the losses we re nowover $8 b illion . Eventua lly, losses reached $ 500 billion a yea r intothe c risis fo r a ll globa l inst itut ions.


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15. Next were the GSEs . The end result of the market panic was a questioning of theviability of Fannie Mae and Freddie Mac, the two largest mortgage lenders in theUnited States and at the core of the residential property market . Eventually theU. S. Government was forced to take the two companies into conservatorshi p .

1 6. Afterwards, all financial shares generally came under assault . The onesconsidered the weakest came under the heaviest selling pressure, resulting in thecollapse of Lehman Brothers . W ithout government support and unable to close amerger in around-the-clock negotiations at the weekend, the company filed forbankruptcy on Sep . 15 .

1 7. Merrill Lynch, the venerated US investment bank, sensing trouble, sought andreceived cover in a takeover by Bank of America that very same weekend .

1 8. Financial markets smelled blood after Lehman collapsed . Apparently no companywas too big to fail . So, the assault on financial service companies continued . Eventually, AIG, the largest insurance company in the world, succumbed to thispressure . The Federal Reserve, citing special considerations, bailed out the non-depositary institution .

1 9. At this stage, we were in free fall and the entire banking system was on the vergeof collapse in the United States . Global shocks had not ended either, as UKinstitutions were increasingly under attack as well, having been damaged by their

own property bubble.

At the urging of the British Prime Minister and the UKregulatory authorities, Lloyds TSB bought Britain's largest mortgage lender HBOS ,which was in jeopardy of failing .

20 . By this time, the Feds had had enough . The time for ad hoc crisis managementwas at an end . Hank Paulson moved decisively and put forward his $700 billionbailout plan . It awaits congressional approval .

And that's where we stand.


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Imp act of the s quee ze???Here are some startling statistics that make our financial crisis all too real:2/3 of Americans believe their children will be economically worse off then they are .

Profits are at a 40 year high for Fortune 5 00 companies ($70 5 billion) nearly 2X previous high .But average wages only up 1% (inflation adjusted) (Bureau of Labor Statistics (BLS)) .

Median personal income is actually down, below 2000 levels (BLS), and also below 1 977 levels in real dollars! The real medianincome in 1 977 was $ 51 ,223 (inflation adjusted) . In 2006 it was $ 5 0,700 . (National Center for Education Statistics (NCES)) .V irtually all income gains have gone to the richest Americans, the owners of capital and senior management compensation, which isnow an incredible 400 times the average employee wage .

In USA , out of 300 million people in which the richest 3 million own more than the bottom 2 5 6 million . 1% owns more than 90 % of us put together!Prices in real terms of housing, education, and health care have risen nearly 300 % more in the past 30 years, while individual

incomes are stagnant.

The amount of monthly income it takes to buy a house today is nearly 23 % vs . 1 7% in 1 970 . People who pay 5 0% of their income forrent or mortgage payments are at an all time high .

Private college tuition and public tuition is up nearly 300 % (College Board) .

The average debt of a college graduate is nearly $20,000+ (College Board) .

A majority of Baby Boomers expect to work beyond age 6 5 because they can t afford not to .

47 million are medically uninsured . Most are in families with at least one full time worker .

In many communities, teachers, policemen, and firefighters cannot afford housing .

Medical Insurance Premiums of an average American family exceed $ 1 000 per month .

Loan defaults and foreclosures are doubling monthly in many parts of the country .

In Cleveland, Ohio nearly 1 0% of the homes are vacant and abandoned due to foreclosure caused by job loss .

Retail sales are declining due to increase costs of gasoline, insurance, and housing .

The savings rate for the average American 30 years ago was 9 %. Today it is at zero .

America has fewer manufacturing jobs ( 1 4.3 million) than it did in 1 95 0 with 2 times the population . (In 1 95 0 there wereapproximately 15 0 million Americans; today there are approximately 300 million . )Since 1 977, inflation-adjusted medium income for U . S. males has declined 7 .5%.

U. S. productivity in terms of output ranks 8th behind Norway, Belgium, France, Ireland, Italy, Austria, and Germany (OCED) .

U.S household debt exceeds $

12 trillion

.

U. S. Federal Deficit is $8 . 8 trillion! And climbing every second .


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The Nosed ive


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the e lephant in the roo m


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Origin point of the c risisOrigin point of the c risisUnited States, 2007 : a pri ce bubb le in the hous ing m arket bu rstsUnited States, 2007 : a pri ce bubb le in the hous ing m arket bu rsts

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

Nominalne cene nepremi nin Cene nepremi nin, prilagojene za inflacijo


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Origin point of the c risisOrigin point of the c risism arking the end of the largest s pecu lat ive su rge of rea l hous ing pri ces in them arking the end of the largest s pecu lat ive su rge of rea l hous ing pri ces in the

U.S. in the last 50 yea rs U.S. in the last 50 yea rs

Notice theNotice theprolongedprolonged

exponentialexponentialgrowth!growth!


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Origin point of the c risisOrigin point of the c risis and resu lt ing in a su rge of loan de linquenc ies in the res ident ia l m ortgage loan and resu lt ing in a su rge of loan de linquenc ies in the res ident ia l m ortgage loan

m arket m arket


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Origin point of the c risisOrigin point of the c risis es pec ia lly am ong the recent loan es pec ia lly am ong the recent loan

vintages on the sub prim e m arketvintages on the sub prim e m arketseg m ent. V intage 2007 is the wo rstseg m ent. V intage 2007 is the wo rstperformi ng yetperformi ng yet

% of % of delinquentdelinquentloans (60+loans (60+

days)days)

Months from originationMonths from origination


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Mo rtgage loan m arket in the U.S.Mo rtgage loan m arket in the U.S. segm entat ionseg m entat ionof the m arketof the m arket

U.S. mortgageU.S. mortgageloan marketloan market

PrimePrimeLTV660

NonNon--primeprime

ConformingConformingPrincipal Principal >

conforming limitconforming limit

Near Near--primeprime(Alt(Alt--A) A)

LTV~80LTV~80--90%90%FICO~581FICO~581- -659659

SubprimeSubprimeLTV>90%LTV>90%FICO


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Mo rtgage loan m arket in the U.S.Mo rtgage loan m arket in the U.S. re lat ive s ize of re lat ive s ize of the sub prim e seg m entthe sub prim e seg m ent

The sha re of sub prim e increased by 13 0 % f rom 200 3 to 2005!The sha re of sub prim e increased by 13 0 % f rom 200 3 to 2005!

The pe rcent of loans secu ritized increased by 60 % f rom 200 1 to 2005!The pe rcent of loans secu ritized increased by 60 % f rom 200 1 to 2005!

S hare of subprimeS hare of subprimeIn total U. S . economyIn total U. S . economy

(measured by GDP): 1 % (measured by GDP): 1 % (2001), increasing to 5 % (2001), increasing to 5 %

(2005)(2005)


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Mo rtgage loan m arket in the U.S.Mo rtgage loan m arket in the U.S. types of pr oductstypes of pr oducts

Mortgage loansMortgage loans

Fixed rateFixed ratemortgagemortgage

(FR M)(FR M)

Adjustable rate Adjustable ratemortgagemortgage

(ARM)(ARM)

Common AR MCommon AR M AR M AR M payment optionpayment optionInterest onlyInterest only(I(I--O) AR M O) AR M Hybrid AR MHybrid AR M


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Funct ion ing of the m ortgage loan m arket inFunct ion ing of the m ortgage loan m arket infavorab le m arket cond it ionsfavorab le m arket cond it ions

Assump tionsAssump tionsRising rea l estate pri cesRising rea l estate pri cesRising inco m e leve lsRising inco m e leve lsLow or falling inte rest ratesLow or falling inte rest rates

Resu ltResu ltAdditiona l rea l estate e quity due toAdditiona l rea l estate e quity due topri ce a ppr ec iat ionpri ce a ppr ec iat ionBorr owe rs a re ab le to repay the ir Borr owe rs a re ab le to repay the ir loans w ith ref inanc ing.loans w ith ref inanc ing.

Examp le of ref inanc ing:Examp le of ref inanc ing:

Real estateReal estatevalue:value:

$200.000$200.000

MortgageMortgageloan:loan:

$200.000$200.000

Real estateReal estatevalue:value:

$300.000$300.000

After 1 year After 1 year

MortgageMortgageloan:loan:

$300.000$300.000

RepaymentRepaymentof initialof initial

loan:loan:$200.000$200.000

Cash remainingCash remaining$100.000$100.000


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Funct ion ing of the m ortgage loan m arket inFunct ion ing of the m ortgage loan m arket inst rained m arket cond it ionsst rained m arket cond it ions

Assump tionsAssump tionsStagnat ing o r falling rea l estateStagnat ing o r falling rea l estatepri ces.pri ces.Stagnat ing o r falling inco m e leve ls.Stagnat ing o r falling inco m e leve ls.

High o r rising inte rest rates.High o r rising inte rest rates.

Resu ltResu ltNo new rea l estate e quity.No new rea l estate e quity.Repym ent of loans by ref inanc ing notRepym ent of loans by ref inanc ing notposs ib le.poss ib le.Borr owe rs faced w ith increas ingBorr owe rs faced w ith increas ingdiff icu lt ies in se rvicing rea l estatediff icu lt ies in se rvicing rea l estatedebt.debt.

Figure:Figure:Interest rate movements on U. S .Interest rate movements on U. S .

mortgage market (hybrid A RMmortgage market (hybrid A RMrates).rates).


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Gl oba l f inanc ia l im ba lancesGl oba l f inanc ia l im ba lances

U.S. current account def icit recent ly as h igh as 6 % of U.S. G DP! Financ ingU.S. current account def icit recent ly as h igh as 6 % of U.S. G DP! Financ ingpr ovided m ost ly by ca pita l inf lows f rom Asian count ires and o il exporte rs.pr ovided m ost ly by ca pita l inf lows f rom Asian count ires and o il exporte rs.


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Equity m arketsEquity m arkets

Equity m arkets we re not anEquity m arkets we re not anatt ract ive invest m ent o pp ortun ityatt ract ive invest m ent o pp ortun ityin the afte rm ath of the co llapsein the afte rm ath of the co llapseof the dot co m bubb le.of the dot co m bubb le.


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Inte rest ratesInte rest rates

Inte rest rates in 2002Inte rest rates in 2002 --200 3 we re h isto rically low as a resu lt of 200 3 we re h isto rically low as a resu lt of expans iona ry m oneta ry policies by m ajo r wor ld cent ra l banks.expans iona ry m oneta ry policies by m ajo r wor ld cent ra l banks.


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Structu red f inance: the f irst round of secu rit izat ionStructu red f inance: the f irst round of secu rit izat ion(sche m at ic pr esentat ion)(sche m at ic pr esentat ion)

MortgageMortgageloansloans

Total value:Total value:$900.000$900.000

Mortgage loan portfolioMortgage loan portfoliocan be divided into 9.000can be divided into 9.000

bonds with $100 face falue.bonds with $100 face falue.Different tranches of bondsDifferent tranches of bonds

carry different levels of carry different levels of risk depending on their risk depending on their

seniority/subordination inseniority/subordination indebt repayment.debt repayment.

1. tranche1. tranche(low risk)(low risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 10 % Coupon rate: 10 %

2. tranche2. tranche(medium risk)(medium risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 15 %Coupon rate: 15 %

3. tranche3. tranche(high risk)(high risk)

3.000 bonds at $1003.000 bonds at $100Coupon rate: 20 %Coupon rate: 20 %

S ecuritizationS ecuritization

Mortgage backed securities (MB S )Mortgage backed securities (MB S )

Demand:Demand:financialfinancialinvestorsinvestors

S upply:S upply:originatorsoriginators

of mortgageof mortgageloansloans


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Structu red f inance:Structu red f inance:The p laye rs in secu rit izat ionThe p laye rs in secu rit izat ion

Originator Originator

End borrowersEnd borrowers

Conduit/trust/Conduit/trust/S PV/SPE /S IVS PV/SPE /S IV

Investment bankInvestment bank(underwriter)(underwriter)

Rating agencyRating agency InstitutionalInstitutionalinvestor investor

End lendersEnd lenders

InsuranceInsurancecompanycompany

Broker Broker

S ervicer S ervicer $$

$$

$$

$$

$$

MortgagesMortgages

MortgagesMortgages

MBSMBS

I&P ($)I&P ($)

I&P ($)I&P ($)

MBS , I&P ($)MBS , I&P ($)

FinancialFinancialreturns ($)returns ($)

LEGE ND KEYLEGE ND KEYO&G O&G interest and principalinterest and principal

S PVS PV special purpose vehiclespecial purpose vehicleS PE S PE special purpose enterprisespecial purpose enterpriseS IVS IV special investment vehiclespecial investment vehicle

MBS MBS mortgage backed securitiesmortgage backed securities

Founder: loan originator or Founder: loan originator or investment bankinvestment bank

Purpose: transferingPurpose: transferingownerhship of claims (loans)ownerhship of claims (loans)and collateral (mortgages) inand collateral (mortgages) in

order to issue mortgageorder to issue mortgagebacked securities (bonds).backed securities (bonds).

Exposure of founder: implicitExposure of founder: implicitguarantee in case of largeguarantee in case of large

losses.losses.

Assigns creditAssigns creditrating to issuedrating to issued

MBS s.MBS s.

Organizes issuing of Organizes issuing of MBS s and placesMBS s and places

MBS s to investors inMBS s to investors infinancial markets.financial markets.

Broker places mortgage loansBroker places mortgage loansto borrowers for feeto borrowers for fee

Manages the flow of interestsManages the flow of interestsand principal (I&P); usually,and principal (I&P); usually,

but not necessarilly thebut not necessarilly theOriginator Originator

Typically a specializedTypically a specializedmortgage bankmortgage bank

Mutual funds,Mutual funds,pension funds,pension funds,hedge fundshedge funds

Can assume part of Can assume part of risks (insurance of risks (insurance of mortgage loans,mortgage loans,

insurance of MB S insurance of MB S returns).returns).


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Structu red f inance:Structu red f inance:The second round of secu rit izat ionThe second round of secu rit izat ion

Mortgage bondsMortgage bondsRating: AAA/AaaRating: AAA/Aaa

Mortgage bondsMortgage bondsRating: AA/Aa2Rating: AA/Aa2

Mortgage bondsMortgage bondsRating: A/A2Rating: A/A2

Mortgage bondsMortgage bonds

Rating: BBB/Baa2Rating: BBB/Baa2Mortgage bondsMortgage bondsRating: BB/Ba2Rating: BB/Ba2

Mortgage bondsMortgage bondsRating: B/B2Rating: B/B2

Equity tranche Equity tranche

Mortgage backed securities (MB S )Mortgage backed securities (MB S )

InvestmentInvestmentgradegrade

S peculativeS peculativegradegrade

CDOCDORatings: AAA/AaaRatings: AAA/Aaa BBB/Baa2BBB/Baa2

CDOCDORatings: less than BBB/Baa2Ratings: less than BBB/Baa2

Collateralized debt obligations (C DO)Collateralized debt obligations (C DO)

InvestmentInvestmentgradegradeMBSMBS

Other Other claimsclaims


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Structu red f inance:Structu red f inance:The th ird round of secu rit izat ionThe th ird round of secu rit izat ion

A mil. $ question:A mil. $ question:if I am a sponsor bankif I am a sponsor bankof the S IV that issuedof the S IV that issued

CDO2, what is myCDO2, what is my

risk exposure?risk exposure?


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Structu red f inance:Structu red f inance:Inst rum ents and vo lum esInst rum ents and vo lum es

RMBSRMBS res ident ia l m ortgage backed secu rit iesres ident ia l m ortgage backed secu rit iesCMBSCMBS comm ercia l m ortgage backed secu rit iescomm ercia l m ortgage backed secu rit ies

MBSMBS m ortgage backed secu rit iesm ortgage backed secu rit iesABSABS asset backed secu rit iesasset backed secu rit iesCDOCDO collate ra lized debt ob ligat ionsco llate ra lized debt ob ligat ionsCDSCDS cred it defau lt swa pscred it defau lt swa ps


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Structu red f inance: rat ings of issued secu rit ies andStructu red f inance: rat ings of issued secu rit ies andtypes of c laim s for SIVstypes of c laim s for SIVs


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Structu red f inance: fund ing pr of ile of SIVs and c laim s of Structu red f inance: fund ing pr of ile of SIVs and c laim s of ABCP condu itsABCP condu its


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Unre liab le rat ings of rat ing agenc ies in the MBSUnre liab le rat ings of rat ing agenc ies in the MBSm arketm arket


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Trans mi ssion of risk aversion (1):Trans mi ssion of risk aversion (1):From the RMBS to the CMBS segm entFrom the RMBS to the CMBS segm ent

Record dropsRecord dropsin pricesin prices

Record increasesRecord increasesin risk premiumsin risk premiums


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Trans mi ssion of risk aversion ( 2 ):Trans mi ssion of risk aversion ( 2 ):f rom MBS to the ent ire ABSm arketf rom MBS to the ent ire ABSm arket


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Trans mi ssion of risk aversion (3):Trans mi ssion of risk aversion (3):and e ven to co rp orate debt m arketsand e ven to co rp orate debt m arkets


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Trans mission of the c risis to the inte rbank m arketTrans mission of the c risis to the inte rbank m arket increaseincreasein cred it and liquidity risksin cred it and liquidity risks


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Bank ca pi ta l writeBank ca pi ta l write--downs and reca pi ta lizat ionsdowns and reca pi ta lizat ions


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What a re the costs of the c risis?What a re the costs of the c risis?

Current est imates of potent ia l losses f rom Current est imates of potent ia l losses f rom the c risis a re $ 9 45 bil. (IMF).the c risis a re $ 9 45 bil. (IMF).

Of th is, $ 225 bil. is due to est imatedOf th is, $ 225 bil. is due to est imatedlosses on outstand ing loans, $ 720 bil. duelosses on outstand ing loans, $ 720 bil. dueto est imated losses on secu rities.to est imated losses on secu rities.

About $ 440About $ 440 --5 10 bil. losses ex pected in5 10 bil. losses ex pected inbanks, $1 05banks, $1 05 --130 bil. losses in insu rance,130 bil. losses in insu rance,$9 0$9 0 --160 bil. in pens ions/sa vings, $ 70160 bil. in pens ions/sa vings, $ 70 --140 140 bil. in G SEs and go vernment and $11 0bil. in G SEs and go vernment and $11 0 --200 200 bil. in othe r inst itut ions ( inc lud ing hedgebil. in othe r inst itut ions ( inc lud ing hedgefunds).funds).


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Conc lus ion: syste mic risks in inte rnat iona l f inanc ia l syste m Conc lus ion: syste mic risks in inte rnat iona l f inanc ia l syste m have increasedhave increased


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Gl oba l m ortgage boo m and bust


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The end of the stock m arket boo m


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Scale of the potent ia l ba ilout (a lready u p to

$850 bn)


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Wo r ld growth w ill slow, reduc ing t rade

expans ion etc.


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An end to the co mm od ity boo m ?


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Unsu rpri sing ly, G 3 m arket ex pectat ions a re

bad


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US now HIRC?


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Recent ODA rise w ill be d iff icu lt to susta in


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Transat lant ic recess ion risks: 1. A rea l estate bubb le

Housing prices adjusted for inflation(GDP weighted averages for Euroland )

Source: OECD, DB Global Markets Research51

-20

-15

-10

-5

0

5

10

15

20

25

30

71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07

Euroland

US

% deviation from trend

H i g k t i th US d E


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Hous ing m arkets in the US and Eu rope:som e s imi larit ies in va luat ion

de ve lopm entsP rice-to-rent ratio P rice-to-income ratio

52

Source: OECD, DB Global Markets Research

0.8

0.9

1

1.1

1.2

1.3

1.4

1996:1 1997:4 1999:3 2001:2 2003:1 2004:4 2006:3

USA

euro area

2000=1.0

0.8

0.9

1

1.1

1.2

1.3

1.4

1970:1 197 :1 1980:1 198 :1 1990:1 199 :1 2000:1 200 :1

USAeuro area

2000=1.0


53/91

Euro land s key hous ing m arkets: Hot,exce p t in G erm any

Housing prices adjusted for inflation


53

-

-

-

Fr c

It l

iG rm y

vi i fr m tr


54/91

Adjust m ent is unde r way


54

House prices adjusted for inflation

-

-

hp

Rhp

y y


55/91

Th e power of real estate

R

= . 23

2

3

4

-

h s p ric s ( )

c s m p ti( - )

E

IRE

F

I

FI

D

55 Source: ECB, Haver, DB Global Markets Research

The cooling real estate market is likely to exert a dragon construction investment and consumption

60

70

80

90

100

110

120

130

140

1995 1997 1999 2001 200 3 2 005 2007

E r l

R si ti l h si p r m it s, s , 2 000 =100


56/91


57/91

Transat lant ic recess ion risks: 2 .Financ ia l crisis

A stubborn risk premium on banks

57 Source: Bloomberg, DB Global Markets Research

0.00

0.20

0.40

0.60

0.80

1.00

1.201.40

1.60

1.80

2.00

Jan-2005

Ju l-2005

Jan-2006

Ju l-2006

Jan-2007

Ju l-2007

Jan-2008

US

Eu r a r a

bp "TED s p r ad"

0

20

40

60

80

100

120

01/01/2007 01/05/2007 01/0 9/2007 01/01/2008 01/05/2008

US Ba s issw ap

3m EURIBOR-EO I sw ap

bp


58/91

and credit



Credit spreads relati & e to US Treasuries

-1.0

-0.5

0.0

0.5

1.0

1.5

' .0

' .5

( .0

( .5

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

%

-1.0

-0.5

0.0

0.5

1.0

1.5

' .0

' .5

( .0

( .5%

Agency AAAMuniHigh grade

Agency MBS

15

5

55

75

95

115

1 5

155

175

0 /0 / 007 0 /07 / 007 0 /11 / 007 0 /0 / 008

150

00

50

00

50

00

50

500

550

600

650

in es tment g rade

high yield (rhs)

bpbp Credit default s ap spreads in urope


59/91

leading to a tightening of lending standards

Sources: Fed, C B, M Research

59


-40

-20

0

20

40

60

80

100

90 9 2 94 96 98 00 0 2 04 06

All

rim

Sub -prim

% FRB s i r f f ic rs s ur v y : ti ht i f m rt l i st r s

-30

-20

-10

0

10

2 0

3 0

4 0

50

60

70

2 00 3 2 00 4 2 005 2 006 2007 2008

h usi l s

c s um r l s

t r p ris s

%

ti h t r


60/91


and in Euroland to an increase in bank lending rates

Consumer credit

Mortgages Smallcorporations

Largecorporations

Feb 07 Feb 08

+0. 8bp +0. 5bp +0. 1 +0.77

Lending rates on new loans with 1-5 year fixed rates

Sources: C B, M Research

60


61/91


Hunt for collateral widens Euroland sovereign spreads

0

10

0

0

0

50

60

70

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

No -07

ec-07

Jan-08

Feb-08

Mar-08

Austria France

reece Spain

Italy

Source: Bloomberg, DB Global Markets Research61

bp


62/91



94

96

98

100

10 2

10 4

106

108

110

J -2 007 A p r-2 007 J ul-2007 Oct-2 007 J -2 008

I

122

126

130

134

138

142

IBr TWI: S (ls)

DB's Br TWI: E ur r (rs)

while policy divergence is creating exchange rate tensions


63/91

Europe as vu lne rab le to the f inanc ia l crisis as US

Tab l 1. A s r a r d f r unt ri s v u lne r ab i lity to the financ ia l c ri se s

Stocks * Score Housing * ScoreCurrent

account * * ScoreHousehold

debt * * * ScoreEquity

capital * * ScoreTotalScore

Spain 146.7 7 76.3 8 -9.8 8 * * * * 8 96.9 4 35 UK 67.7 1 46.4 6 -2.9 6 30.6 7 151.4 8 28 France 97.6 4 67.4 7 -1.3 4 14.0 5 104.0 5 25 US 68.4 2 45.6 4 -5.6 7 25.9 6 115.2 6 25 Canada 110.2 5 46.1 5 1.9 3 5.4 3 128.6 7 23 Italy 84.0 3 37.1 3 -2.0 5 10.5 4 52.6 1 16 Japan 111.4 6 -17.2 1 4.7 2 -2.1 2 95.4 3 14 Germany 176.8 8 9.3 2 6.0 1 -7.2 1 65.4 2 14

India 293.3 2 -2.1 4 147.2 4 10

Brazil 394.7 4 0.8 3 120.5 2 9

ussia 340.9 3 5.9 2 88.6 1 6

China 187.4 1 11.7 1 127.9 3 5

* change end 2002 to id-2007 * * 2007 * * * C hange between 2002 and 2006 * * * * W e d id not find compa r ab le hou s eho ld debt r at ios f o r Spa in , but ava ilab le ind icato rs po inted to an inc r ea s e e ven g r eate r than in the UK. Source: OECD, Haver, DB Global M arkets Research

63


64/91

Cred it and bank ing crisis like ly toda mp en bus iness invest m ent g rowth

0

1

2

3

4

5

6

7

2000 2001 200 2 2 00 3 2 00 4 2 005 2006 2007-4. 5

-4. 0

-3. 5

-3. 0

-2. 5

-2. 0

-1.5-1.0

-0.5

0.0

Pr fits ( r ss p r t i s ur p lus) (l hs)

-fi ci l c r pr t s ct r f i ci lb l c (- m s t b rr w r) (r hs)

% y y % f DP

D espite rising profits, firms need credit to fund their growth

64Source: Haver, Bloomberg, DB Global Markets Research


65/91

Source: Eurostat, Haver, DB Global Markets Research65

Investment has benefited from buoyant export growth

-4

-2

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004 2005 2006 2007

eal ex ortseal investmenteal o .sur lus

o


66/91

Rise of the eu ro to s low ex port growth,re info rcing the da mp en ing effect f rom t ighte r cred it on bus iness invest m ent

Source: Eurostat, Haver, DB Global Markets Research

66

-

-

0

6

8

10

1

1

16

96 97 98 99 00 01 0 0 0 05 06 07

-15

-10

-5

0

5

10

15

0

exports

reer (rhs)

% yoy % yoy

Export elasticities*t ty x h e r te

1 9 -0ro 1 1 -0 5

* o -ter es ( e 19q ro 1 q

o r e B o r ets ese r h

-1 ) 0

-1

-0 ) 8

-0 ) 6

-0 ) 1

-0 ) 0

0

98 99 00 01 0 0 0 2 01

05 06 07

s ) t ) 3 oe ff )

+ 0 s ) e )

-0 s ) e )

R ecursive eur regressions suggest no major changes in coefficient


67/91

Invest m ent g rowth to be s quee zed

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009

Con st r uct ion

E uipm nt

Tot l inv st m nt

R l, % oq

For c sts

Source: ECB, Haver, DB Global Markets Research

67


68/91

Transat lant ic recess ion risk: 3. Rising

oil and co mm od ity pri ces

G r t los rs (t r b l nc w ors ning gr t r t h n by 1% of G DP)Sm ll los rs (t r b l nc w ors ning l ss t h n by 1% o f G DP)

Sm ll ga ine rs (tr ade ba lan ce impr oving by le ss t han by 1% of G DP)

Big ga ine rs (tr ade balan ce impr oving by g r ea te r t han by 1% of G DP )

o da ta

F irst-round impact on trade balance of the oil price surge since September 2007

Sources: I MF, B lobal Markets Research

68


69/91

Transat lant ic recess ion risk: 3. Risingoil and co mm od ity pri ces

F alling terms of trade hurting consumer

60

70

80

90

100

110

120

130

98 99 00 01 02 03 04 05 06 07 08

US

Euro l d

J

2000=100

Source: Haver, DB Global Markets Research

69


70/91

Consu m e rs ret rench ing

R etail sales plunge as surging food and energy prices tax consumers

Source: Haver, DB Global Markets Research

70

- .5

0

0 .5

1

1 .5

2

2 .5

3

3 .5

98 99 00 01 02 03 04 05 06 07 08

-1

0

1

2

3

4

5

6

7

8

Re t a il a le

Foo & ene r gy p ri e (r )

yoy

moo t e

yoy

0

0.5

1

1.5

2

2.5

33.5

4

4.5

98 99 00 01 02 03 04 05 06 07 08- 5.

- .

-15.

-10.

-5.

.

5.Re ta il a le ( moo t e )

PCE

n ume r nfi ence (r )

yoy yoy


71/91

Slowe r growth like ly to reduceinf lat iona ry pr essu res

Source: ECB, OECD, Haver, DB Global Markets Research

Headline inflation boosted by food and energy

Wage inflation remaining contained

71

1.8

2.0

2.2

2.4

2.6

2.8

3.0

1999 2001 2003 2005 2007 2009-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

contract wage

out ut ga (-1y) (r

% yoy %

0.0

0.5

1.0

1.5

2.0

2.5

3.03.5

4.0

1998 2000 2002 2004 2006 2008

H CP

core

% yoyf oreca t


72/91

Conc lus ion: a coo le r wo r ld econo my

Source: DB Global Markets Research

72

2007 2008F 2009F 2007 2008F 2009FUS 2.2 1.2 1.3 2.9 3.7 2.5Japan 2.0 1.1 1.8 0.0 0.6 0.3

Euroland 2.6 1.7 1.1 2.1 3.3 2.1

G7 2.2 1.3 1.5 2.2 2.9 2.0 Asia(ex Japan) 9.4 7.5 7.5 4.3 6.3 4.1

EMEA 6.7 6.0 6.2 10.5 9.7 7.4Latam 5.4 4.8 4.2 6.8 7.0 7.3

Global 4.7 3.6 3.7 3.6 4.5 3.4

GDP growth, % CPI inflation, %


73/91

and sh ift ing sou rces of g rowth

Source: DB Global Markets Research

73

-1..

1.

.

.

.

.

.

1980 1984 1988 1992 1996 2000 2004 2008

Gl b l GDP

IC t .

t .

f ' st

Th C i i P li i d I ti


74/91

The Crisis: Policies and Incentives

Excep t ing the period 2005 -2006 , m oneta ry po licy hasrem ained ex pans ive in indust ria l count ries (w ith periodsof negat ive rea l inte rest rates).

US Fed Funds Rate (%)

-4-2

0

2

4

6

8

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 Q 1

2 0 0 7 Q 2

2 0 0 7 Q 3

2 0 0 7 Q 4

M a y - 0

8

Nominal RealSource: IFS-IMF and FED.

Japan Overnight Call Rate (%)

-0.2

0

0.2

0.4

0.6

0.8

1

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 Q 1

2 0 0 7 Q 2

2 0 0 7 Q 3

2 0 0 7 Q 4

M a y - 0

8

Nominal RealSource: IFS-IMF andCentral Bank of Japan.

c

Euro Area Main Refinancing Rate (%)

-10

1

2

3

4

5

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7 Q 1

2 0 0 7 Q 2

2 0 0 7 Q 3

2 0 0 7 Q 4

M a y - 0

8

Nominal RealSource: IFS-FMI andEuropean Central Bank.



75/91

The Crisis: Policies and IncentivesDespi te the stock m arkets c rash in 200 1, m oneta ry po licy stab ilized rea l

consu mp t ion g rowth in the period 2000 -2006 , th rough its effects onthe consu m ers wealth. Th is was poss ib le because of the largeincrease in hous ing pri ces assoc iated w ith low inte rest rates.

Over the last decade, consu mp t ion has offset dec lines in invest m ents.This res ponds to the consu m ers percep t ion of g reate r wea lth,th rough the va lue of stocks at f irst and then th rough the va lue of rea l state.

GDP, Consumption and Investment Growth (% )

-4

-2

0

2

4

6

8

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Consumpt ion Inves tmen t GDPSource: Bureau of Economic A nalysis



76/91


The Mo rtgage Loans Ex pans ion in the Indust ria l Wor ldBefore:

Traditional Relationship between Borrower and Creditor

Bank

Borrower

- Pays interestandprincipal

- Lends money- Managesdelinquencies



77/91


The Mo rtgage Loans Ex pans ion in the Indust ria l Wor ldNow: Mortgage

Broker Creditors:Banks and

othersBorrower

Loan

S ervicer

Monthlypayments

Issuer of S tructuredProducts -securities-

(S IV)

Monthlypayments

Loan Cash

Investors (investmentbanks,

hedge funds, pensionfunds,

Cash S ecurities

Monthlypayments

Fuente: S hila Bair, F DIC

Trustee

Underwriter

Rating Agencies

Insurers (monolines)

And Mo ing For rd?


78/91

And Moving Forward?

Unde r current c ircum stances, when the va lue of thefunda m enta ls is adjust ing (the dec rease in hous ing pri ces)

Hou ng P % nnu h ng n S PSh nd

-10

-

10

15

20

2003 2004 2005 2006 2007Sou r c : oms on st r m

E Hou ng P u tuon t t d

140

150

160

170

1 0

1 0

200 200 2010 2011 2012Sou r c : C ic o M r c ntil xc nge; loombe r g

And Moving Forward?


79/91

And Moving Forward? The syste m s equilibrium invo lves a lowe r size of the

bank ing syste m (acco rding to the a vailab

le ca pi ta

l)

And that s a lready ha pp en ing.

Marke a i a li a i ($ )

0 50 100 15 0 200

H SBSan t nde r

Uni r ed it

Inte a Sanpao lo

BNP Pa ribaBBVA

Sbe r banBS

UBS

So it G nr l eeu ts he B n

B rcl s

r 5 200 8 an 1 200 7Sou rc e Tho s on D t st r ea

And Moving Forward?


80/91

And Moving Forward?With a lowe r lend ing ca pac ity to co rp orat ions (affect ing

invest m ent) and w ith a poo re r consu m er (dec rease inwea lth), the chances of a pr o longed US s lowdown o r recess ion a re ve ry high.

Consu m er conf idence is at leve ls of past recess ions.

University of ichigan Consumer Confidence Index

40

50

60

70

80

90

100

110

120

1 9 7 8

1 9 7 9

1 9 8 0

1 9 8 1

1 9 8 2

1 9 8 3

1 9 8 4

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

Source: University of Michigan

Effects of the Current Financial Turmoil on Emerging


81/91

MarketsA m ost imp ortant cu rr ent featu re of m any e m erging m arkets is the ir

ab ility to t ighten m oneta ry po

licy -increase inte rest rates- in thepr esence of inf lat iona ry pr essu res.

S ource: Central Banks and IF S -IMF

C ech Republ ic

1%

4

%

5

%

6

%

5%

6%

7%

8%

J 7 n-0 68

a y-0 6 O 9 @

-0 68

ar- 0 7A

ug- 0 7 J 7 n- 0 8

Inf B

7

@ C

on D oB C

9 y ra@

e

Ch ile

1%

4

%

5

%

6

%

5%

6%

7%

8%

9%

J 7 n- 0 68

a y-0 6 O 9 @

-0 68

ar- 0 7A

ug- 0 7 J 7 n- 0 8

Inf B

7

@ C

o n D oB C

9 y ra@

e

Ch ina

%

1%

4

%

5

%

6

%

5%

6%

7%

8%

9%

J 7 n-0 68

a y-0 6 O 9 @

-0 68

ar- 0 7A

ug- 0 7 J 7 n-0 8

Inf B

7

@ C

on D oB C

9 y ra@

e

Colo b ia

E %

F %

5%

6%

7%

8%

9%

10 %

J G n- 0 6H

a y-0 6 O I P -0 6H

ar- 0 7 Q ug- 0 7 J G n- 0 8

Inf R

G

P S o n T oR

S I y ra P e

S outh fr ica

E %

F %

5%

6%

7%

8%

9%

10 %11%

1U %

J G n- 0 6H

a y-0 6 O I P -0 6H

ar- 0 7 Q ug- 0 7 J G n- 0 8

In f R

G

P S o n T oR

S I y ra P e

S outh orea

1%

U %

E %

F %

5%

6%

J G n-0 6H

a y-0 6 O I P -0 6H

ar- 0 7 Q ug- 0 7 J G n-0 8

Inf R

G

P S on T oR

S I y ra P e

Effects of the Current Financial Turmoil on Emerging


82/91

g gMarketsThis cont rasts w ith m oneta ry po licy in indust ria lized count ries whe re fea rs

of a s ignif icant s lowdown in econo mic growth a re kee ping inte rest rateslow and dec reas ing

in spite of ex pectat ions of h ighe r inf lat ion.

I l i

%

1%

2%

3%

4%

S Eu r r

2 7 2 8FS ur c e : rke t F r e c s ts

I r F r

%

1%

2%

3%

4%5%

6%

2

V V

7Q1 2

V V

7Q2 2

V V

7Q3 2

V V

7Q 4 2

V V

8Q1 2

V V

8Q2 2

V V

8Q 3 2

V V

8Q4US Fe

W

FunW

s X Y te ECB X e f ` nY nce X Y te Ba nk a f b

a pa n Call X a te

S a ur c e : c a rke t Fa r e c a s ts

The External Risks affecting Emerging Markets


83/91


1. US Recess ion / Bank ing Crisis Without doubt the wo rst case scena rio fo r globa l growth and

em erging m arkets perform ance is a syste mi c bank ing crisis inthe US.

This wo rst case scena rio can on ly m ate ria lize if the US ente rs ina vicious c ircle whe re:

severe dec line in the value of banks assets loss of bank ca pita l cred it crunch f inanc ing pr ob lem s in co rp orat ions and non-bank

f inanc ial inst itut ions recess ion increase in se verity of bad

banks assets bank ing crisis pr olonged recess ion

This is st ill a re lat ive ly low pr obab ility scena rio, howe ver,because the Fed and the T reasu ry are cu rr ent ly aligned topr event its occu rr ence.



84/91

The External Risks affecting Emerging Markets1. US Recess ion / Bank ing Crisis

While a mi ld US recess ion wou ld f ind e m erging m arkets ingood stand ing, a se vere and pr o longed recess ion wou ldincrease risk aversion, hu rt ing invest m ent inf lows to e m ergingm arkets.

Fore ign d irect invest m ent tend to dec line sha rp ly in the face of globa l slowdowns.

Globa l Fo r e gn Dir ec t Inves t en t (as % o f GDP )

-2%

0%

2%

4%

6%

8%

10%

12%

1990 1992 1994 1996 1998 2000 2002 2004 2006

Sou r d e: e FS - e f F g



85/91

The External Risks affecting Emerging Markets1. US Recess ion / Bank ing Crisis

Trade f lows wou ld a lso be affected, es pec ia lly if the US f inanc ia l

troub les ex pand to othe r indust ria l count ries, part icu lar ly Europe(som e m arkets est im at ions ca lcu late that UK res ident ia l pr opert iesare 3 0 % overva lued).

Export g rowth has suffe red the m ost in periods of g loba l slowdowns. Re-em e rging ca lls for trade pr otect ion ism in the US ex ports a re a lso a

potent ia l th reat fo r em erging m arkets ex ports.

Glob l R l GD P a nd M r a nd ise Expo r t Vo lum e Annu al cha ng e)

-5

0

5

10

15

198 0 19 82 1 984 198 6 198 8 19 90 1 992 199 4 19 96 19 98 2 000 200 2 20 04 20 06 2 008

Rh i l G p P Mh r q h i r dis h Et u v rt Vv lumeS v u r q e : WEO - w MF x



86/91

The External Risks affecting Emerging Markets2 . The Costs of P revent ing a US Financ ia l Me ltdown: Inf lat ion

Conce rns about inf lat ion a re kee ping long-te rm inte rest rates h igh.

A m ed ium -te rm risk (200 9 onwa rds) is a sudden increase ininte rest rates in indust ria l count ries to conta in inf lat ion.

This risk, wh ich w ill affect e m e rging m arkets f inanc ing costs, has alow pr obab ility unde r current c ircum stances, when fea rs of apr olonged recess ion in the US is the m ain d river of m oneta rypolicy.

Fe Fund s a e Ra e a nd o po a e Ra e

1

5

6

7

8

J n 0 7 Ma 0 7 Ma y 0 7 Jul 0 7 ep 0 7 Nov-0 7 J n-0 8 Ma -0 8 Ma y-0 8

Fede a l Fund s ge R e o po a e R edou c e F



87/91

The External Risks affecting Emerging Markets3. A Decline in Comm od ity Prices?

Although, as stated befo re, g loba l exports a re at risk in the face of aUS-led g loba l slowdown, the susta inab ility of h igh co mm od itypri ces is less risky in the sho rt and m ed ium -te rm due to twofacto rs:

A. Cyclical

There is an inverse co rre lat ion between the value of the do llar and the pri ceof co mm od ities.

This is because co mm od ities (es pec ially oil and go ld and food, m orerecent ly) are perce ived as a hedge aga inst do llar weakness and the risk of inf lat ion.

Nom i a l Do lla r r o a I e r a e e i e ) a ommod i ies I d e

80

90

100

110

120

130

140

y an - 1 y an - 2 y an - 3 y an - 4 y an - 5 y an - 6 y an - 7 y an - 8150

200

250

300

350

400

450

500

550

o a r Inde R B o od t eS ou r e : ED nd

RB .



88/91

g g g3. A Decline in Comm od ity Prices?

A. Cyclica l

and the do llar is expected to de pr ec iate fu rthe r, es pec ia lly withres pect to As ian cu rrenc ies. Recent po licy signa ls by the Chineseautho rit ies to cont ro l inf lat ion point towa rds fu rthe r increases ininte rest rates in China and fu rthe r appr ec iat ion of the RMB aga inst theUS dollar.

JPY pe r USD: Spo t and Fo r a r ds

80

90

100

110

120

130

140

2002 2003 2004 2005 2006 2007 2008 2009 2010

ou r e J P Mor gan

or r ds



89/91


B. Structu ra l Facto rs

And the m arkets a re fo recast ing a cont inuat ion in theupwa rd t rend of m ajo r comm od it ies pri ces.

A l m i m ices ts a t es

1200

1 00

16 00

18 00

2000

2200

2400

2 600

2 800

3000

2002 2003 2004 2005

2006

2007

2008

2009

201

0

U

D

e m

e t i c t

Sou r e IFS-I F nd L E

Futur e s

l ices ts a t es

200

400

600

800

1000

1200

2002 2003 2004 200 5 200 6 200 7 200 8 200 9 20 10

U

D

e t

c e

Sour e IFS-I F nd YMEX

Futur es



90/91


Also o il pri ces w ill rem ain h igh, su pp orted by: (a) China s strongde m and, (b) age ing inf rast ructu re lead ing to un p lanned outages and (c)clim ate change lead ing to ext rem e weathe r cond it ions.

Futu re pri ces ant icipate a m odest dec line, but these pri ces ha ve notbeen effect ive pr ed icto rs of o il retu rns in the past.

O il P r ices: Spo ts a t res

0

20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008 2009 2010

S D

p e r

a r r e

l

po t Futur e Sep-04 Futur e Apr -05 Futur e t-07 Futur e M y-08

ou r e : IF -IMF nd N

M X


91/91

Sign of Econo mi c Recove ry

-4

-2

0

2

4

6

8

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04CY

(year on year, %)

Real GD P growth

US Financial Crises Impact on Investments

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