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Debt Securities Market Workshop

Carlos E. Piera Country Sector Coordinator, Turkey The World Bank November 17, 2008

What are we facing


The October 2008 World Economic Outlook notes that: the strains afflicting the global financial system are expected to deepen the downturn in global growth and restrain the recovery. Moreover, the risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat. The combination of mounting losses, falling asset prices, and a deepening economic downturn, has caused serious doubts about the viability of a widening swath of the financial system.

Growth is Slowing Down Everywhere


Real GDP Growth (%)
10.0 8.0 6.0 4.0 2.0 0.0 -2.0 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

High-income Economies
Source: WB, Forecast for 2008

Developing Countries

And prospects are not good

And confidence is lacking

Capital Flows to Emerging Markets are Declining


Gross Capital Flows to Emerging Markets
800 700 600 500 400 300 200 100 0 2006
Annual

2007

2007 JanAug

2008 JanAug

Bond
Source: WB

Banks

Equity

Financial Turmoil Drives Flight to Quality


1800 1600 1400 1200 1000 800 600 400 200 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
800

Spreads (bps)

1000

EMBI+ Turkey

600 400 15-Oct

25-Oct

4-Nov

Nov 7

Movements in Turkish Financial Markets are in line with Emerging Markets


Sep 5, 08 Nov 7, 08 Currency depreciation Dec 31, 06 Nov 7, 08 Currency depreciation

162 Turkey

99

Emerging Markets

71 109
Increase in spreads Stock market losses

75
Increase in spreads

95
Stock market losses

Turkey has Large External Financing Needs


140 120 100 80 60 40 20 0 2008 2009 ST MLT CAD

Requirement (US$ bn)

Transactions with Banks Abroad


25 90,000 80,000 20 19.6 16.0 16.6 19.1 19.1 19.1 19.2 70,000 60,000 50,000 40,000 30,000 5 20,000 10,000 0 29/12/06 31/12/07 29/09/08 31/10/08 03/11/08 04/11/08 05/11/08 0 Million YTL

15 % 10

Claims from Banks Abroad

Due to Banks Abroad

Due to Banks Abroad / Deposits (%)

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

NPL Ratios Remain Low


Net NPL Ratio to Loans (%)

Domestic Credit to Private Sector is Growing, but still Low


120 100 84 80 Percent 60 60 40 40 22 20 0 Turkey 2005 Turkey 2006 Turkey 2007 Kazakhstan Argentina Thailand Mexico Bulgaria Hungary Chile Malaysia Poland Brazil Czech Rep. Korea 26 29 14 18 44 47 61 67 73 105 106

Source: IMF, International Financial Statistics

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..

What went wrong?


Government financial subsidies for bearing risk seem to have been key triggering factors. So did an accommodative monetary policy. Overzealous asset managers: plausible deniability Investors in subprime-related financial claims must share the blame for making ex ante unwise investments? Homeowners? Credit agenciesconflict of interest? A relatively new instrument, with a short history of loss-risk track record?

Could this have been avoided?


Securitization is not new, so what is the problem? Are credit agencies to blame? Did regulators/supervisors look the other way? Are governments to blame? Did banks circumvent prudential requirements, or were these simply exploitable loopholes? Should monetary policymakers share the blame?

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).

Maybe, maybe not

Thank You Teekkr Ederim

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