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The Global Economy and Financial Markets: Where Next?

The Global Economy and Financial Markets: Where Next?. John Lipsky, First Deputy Managing Director, International Monetary Fund. The Favorable Global Backdrop . The Global Expansion Has Been Strong. . World GDP Growth (Annual percent change). Global inflation 1/ (yoy, rhs).

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The Global Economy and Financial Markets: Where Next?

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

  2. The Favorable Global Backdrop

  3. The Global Expansion Has Been Strong... World GDP Growth (Annual percent change) Global inflation 1/ (yoy, rhs) 1/ Country CPI inflation rates aggregated using PPP weights.

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

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

  6. The Effects – Record Cross-Border Flows

  7. The Effects - Reduced “Home-Bias”

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

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

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

  11. Discipline Weakening in Corporate Credit Markets Flex and Reverse Flex Deals (in percentage of deals) Terms flexed in favor of lender Net percent of deals (4 quarter moving average) Terms flexed in favor of borrower

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

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

  14. CDO Spreads Widened, Post Bear-Stearns Hedge Fund Troubles ... Primary Market Spreads of Mezzanine CDO Tranches over LIBOR (in basis points, CDOs with collateral of BBB average quality) June 15 AAA BBB A AA

  15. IMPLICATIONS • Markets • Fundamentals • Policies

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