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Bank Guarantee Fund Conference
Warsaw, May 21, 2010
Mark Allen
Senior IMF Resident Representative for Central and Eastern Europe

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
Forecasts of the recovery

Factors that might hold back recovery

Situation of the financial sector

Fiscal worries

Summary

Change in GDP
(Year on year)
Emerging
2
0
-2
-4
-6
10
8
6
4
Developed World
2005 2006 2007 2008 2009 2010 2011
3
Source: World Economic Outlook, April 2010

Apr 2010
Jan 2010
Oct 2009
Jun 2009
Apr 2009
4
Real GDP growth forecasts
USA Eurozone
4
3
2
1
0
-1
-2
-3
2009 2010 2011
0
-1
-2
2
1
-3
-4
-5
2009 2010 2011
UK
4
2
0
-2
-4
-6
2009 2010 2011
China
15
10
5
0
2009 2010 2011

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Recover is driven by the rebound in world trade ...
Merchandise exports
(Three month moving average, year on year)
80
60
40
20
0
-20
-40
-60
-80
World
Developed
Emerging
Jan
-05
Ju l-0
5
Jan
-06
Ju l-0
6
Jan
-07
Ju l-0
7
Jan
-08
Ju l-0
8
Jan
-09
Ju l-0
9
Jan
-10
Source: Directions of Trade, April 2010

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…and restocking.
Industrial Production
(Annualized percent change of 3mma over previous 3mma)
15
10
-10
-15
-20
-25
-30
5
0
-5
20
05
Global Manf. PMI
(sa, 50+=Expansion; rhs)
20
06
20
07
20
08
Global IP
20
09
Source: World Economic Outlook, April 2010
20
10
65
60
40
35
30
25
20
55
50
45

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And financial markets are back from the brink too.
Global Stocks
(Morgan Stanley MSCI Stock Price Indices in USD, MER Weighted; 2007 = 100)
Sovereign and Corporate Bond Spreads
(basis points)
1200
120
110
Advanced economies: corporate 1 1000
100
800
90
80
600
70
EMBI
Global
400
60
200
50 MSCI Global
40
2007 2008 2009 2007
1 Averages of BB-B US, BB-B Euro, and BBB Japan corporate bond spreads
.
2008
0
2009
Source: Bloomberg

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Factors that might hamper growth

US savings rates

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Brakes on Growth: 1. U.S. Saving Rate?
U.S. Household Saving Ratio
(in percent of disposable income)
9
8
7
6
5
4
3
2
1
0
1990 1994
Household Saving Ratio
VAR Projection
Macroeconomic Advisers Forecast
October 2009 WEO
Current WEO
1998 2002 2006 2010 2014

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Factors that might hamper growth

US savings rates

Global imbalances

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Brakes on Growth: 2. Global imbalances?
Current account balances
(billion dollars)
2000
China
Japan
Other Emerging Economies
Other Developed Economies
1500
1000
500
0
-500
-1000
-1500
20
04
20
05
20
06
20
07
20
08
Source: World Economic Outlook, April 2010
20
09
20
10
Germany
United States
Other Euro Area
World
20
11
20
12
20
13
20
14

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Factors that might hamper growth

US savings rates

Global imbalances

High unemployment

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Brakes on Growth: (3) High unemployment?
Unemployment
(percent)
20
17
14
11
Euro Area
United States
Japan
Ireland
Portugal
Spain
United Kingdom
8
5
2
M ar-
07
Se p-
07
M ar-
08
Se p-
08
M ar-
09
Source: World Economic Outlook, April 2010
Se p-
09
M ar-
10
Se p-
10
M ar-
11
Se p-
11

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Factors that might hamper growth

US savings rates

Global imbalances

High unemployment

Bubbles in emerging markets

Brakes on Growth: 4. Overheating in some emerging markets?
Real Domestic Credit Growth and Equity Valuation
(Standard deviations from long-term average)
High Credit Growth
High Valuation
15
Local equity valuation
Source: Global Financial Stability Report, April 2010

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Factors that might hamper growth

US savings rates

Global imbalances

High unemployment

Bubbles in emerging markets

Commodity supplies

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Brakes on Growth: 5. Commodity prices?
Principal commodities prices
(Jan-09 = 100)
240
220
200
180
160
140
120
100
80
Metals
Food
Raw Materials
Crude Oil (APSP)
Jan
-09
Ap r-0
9
Source: Bloomberg; staff estimates
Ju l-0
9
Oc t-0
9
Jan
-10
Ap r-1
0

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Factors that might hamper growth

US savings rates

Global imbalances

High unemployment

Bubbles in emerging markets

Commodity supplies

Availability of credit

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12
9
6
3
0
-3
-6
Brakes on Growth: 6. Credit supply?
Nonfinancial Private Sector Credit
(Annual percent growth)
United States
United Kingdom
Euro Area
19
2000 2002 2004 2006
Source: Global Financial Stability Report, April 2010
2008 2010

Stronger growth has helped banks …
20
3
Average global growth
2007-2010
(percent, right scale)
2.2
2.8
2.8
2.3
2
1.3
1.4
1
0.9
0
Bank writedowns
(US$ trillions, left scale)
Mar-08 Sep-08 Oct-08 Jan-09 Apr-09 Oct-09 Apr-10
3
2
1
0
6
5
4
Source: Global Financial Stability Report, April 2010

… which have written down losses and raised capital.
(billions of US$) percent
21
Expected additional writedowns/loss provisions (left scale)
Realized writedowns/loss provisions (left scale)

But funding maturities have shortened.
Mature Market Bank Bond Maturities
(Percentage of initial stock)
22
10
8
6
4
2
0
18
16
14
12
6/30/2007 1/1/2010
1 2 3 4 5 6 7 8 9 10 11 12 13
Years
Source: Global Financial Stability Report, April 2010

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Nonbank credit only partly offsets weak bank credit.
Contributions to nonfinancial private sector credit growth
(Percent)
10
USA
Euro Area UK
8
6
4
2
0
-2
Bank
-4
Jan
-08
Ju l-0
8
Jan
-09
Ju l-0
9
Nonbank
Jan
-08
Ju l-0
8
Jan
-09
Ju l-0
9
Total
Jan
-08
Ju l-0
8
Jan
-09
Ju l-0
9
Source: Global Financial Stability Report, April 2010

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Sovereign risk now threatens to take the crisis to a new stage.
The Four Phases of the Crisis
(10-yr sovereign swap spreads, percent)
250
I.
Financial crisis
Buildup
II.
Systemic outbreak
III.
Systemic response
IV.
Sovereign
Crisis?
200
150
100
50
USA
Germany
Italy
UK
Japan
0
Ju l-0
7
Source: Bloomberg
Jan
-08
Ju l-0
8
Jan
-09
Ju l-0
9
Jan
-10

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Debt levels in advanced economies are increasing sharply …
Public Debt
(Percentage of GDP)
120
100
Advanced economies
80
60
40
20
Emerging and
Developing economies
0
1995 2000
Source: World Economic Outlook, April 2010
2005 2010 2015

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4
2
… and structural deficits are set to worsen.
Increase in aging-Related Spending in G20 Advanced Economies
(Percentage of GDP over 2010 aging-related spending)
10
8
Health care expenditure
Pension expenditure
26
0
20
15
20
20
20
25
20
Source: World Economic Outlook, April 2010
30
20
35
20
40
20
45
20
50

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The increase in debt is due to recession…
G-20 Advanced Economies: Increase in Public Debt, 2008-15
(Total increase: 39.1 percentage points of GDP; 2009 PPP weighted GDP)
2008-2009
Interest-growth
2010-2015
Interest-growth dynamics
7.5
dynamics
0.7
Lending operations
4.0
Financial sector support
3.2
Fiscal stimulus
4.5
Revenue loss
19.2

… which has undermined revenue expectations.
Real GDP
(2000=100)
USA
140 140
Euro area
140
Japan
28
130
120
110
100
20
00
20
04
130
Oct. 2007
WEO
Current
WEO
120
110
20
08
20
12
100
Oct. 2007
WEO
20
00
20
04
20
08
20
12
130
120
Current
WEO
110
100
20
00
20
04
Oct. 2007
WEO
20
08
20
12
Current
WEO
Source: World Economic Outlook

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Sovereign borrowing is increasing sharply.
Net Borrowing Needs
(percentage of GDP)
10
8
6
4
2
0
16
14
12
2003-08 average 2009 2010 (est) 2011 (est)
United States Euro Area United Kingdom
Source: Global Financial Stability Report, April 2010

30
150
120
90
60
30
0
-30
300
270
240
210
180
Risk premia reflect fiscal challenges and external financing risks …
Contributions to Five-Year Sovereign CDS Spreads
(basis points)
Foreign bank claims
Current account
Required fiscal adjustment
Actual spreads
Germany U.S.
France Japan U.K.
Italy Spain Ireland Portugal Greece

… and sensitivity to fundamentals is growing
800
= 60% debt to GDP
-3%
600
2007
2008
2009
2010
400
200
31
-16 Greece -12 -8 -4
0
0
-200
General Government Balance (as a percent of GDP)
Source: World Economic Outlook April 2010, Bloomberg
4

Problems in peripheral Europe may haunt banks in the core …
USD 100 bln
32

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… while the sovereign’s creditworthiness affects that of its banks
200
Greece
150
100
50
0
Ireland
Italy
Spain
Norway
Austria
Germany
United Kingdom
Switzerland
Denmark
Netherlands
Belgium
France
-50
Sweden
0 50 100 150
Percent change in sovereign CDS
October 2009 to March 2010
Source: Global Financial Stability Report, April 2010
200 250
Portugal
300

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





Recovery stronger than expected
But could easily be derailed
The banking system cannot provide much credit
The crisis has worsened fiscal positions
Fiscal problems may feed back to banking systems
But growth in emerging markets and trade may continue to surprise

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