The World Financial and Economic Crisis:

Impact on Debt, Private Flows and FDI

United Nations High-level Dialogue on Financing for Development

December 8, 2011

Important Notice

Proprietary and Confidential

This presentation and any information and discussions concerning its contents, are the proprietary information of the Center for Financial Stability (CFS). Disclosure of this information is accompanied by an obligation

that the recipient receive and hold this information in confidence, and not use or disclose it except for the purposes of conducting business with CFS or except with the prior written permission of CFS.

Copyright © 2011 CFS as an unpublished work. All rights reserved.

Lawrence Goodman President

2

Major Themes

• Economies and financial markets will remain highly inter-

connected, as evidenced by the present crisis. The crisis was not

created nor did it result from these long-standing relationships.

• The future for emerging economies is bright, yet focus is

critical as direct and portfolio investors more actively scrutinize

risks. Fiscal and monetary policies matter.

• Communication strategies of policy and plans are pivotal.

3

World Trade: At Risk for a Stall

Source: IMF Direction of Trade Statistics and Center for Financial Stability Inc.

0

200

400

600

800

1,000

1,200

1,400

1,600

Jan-70 Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

US$

Bill

ion

, R

eal

Ju

n '

11

$

Oil ShockTrade = - 26%15 months

Fed Policy ShiftTrade = - 31%47 months

Tech BubbleTrade = - 24%16 months

US RecessionTrade = - 24%27 months

Financial CrisisTrade = - 42%7 months

4

Governments

• Risk Free rates are no longer “Risk Free.”

• Public spending propped demand in many nations. Limits will

soon be reached and markets will increasingly scrutinize

sovereign balance sheets and income statements.

• Public spending limits will impact MDG. Nations should

manage local public finance and think creatively regarding

engaging the private sector.

• Sovereign credit crisis and FX volatility are opposite sides of the

same coin.

5

Fiscal Stimulus and Capacity to Expand

-80

-60

-40

-20

0

20

40

60

80

-45

-35

-25

-15

-5

5

15

25

35

45

Ch

ileSin

gapo

reK

ore

aR

ussia

Can

ada

Au

straliaV

en

ezu

ela

Ecuad

or

Switze

rland

Me

xicoA

rgen

tina

Ind

on

esia

Thailan

dU

SP

eru

Spain

C

hin

aN

eth

erlan

ds

S Africa

Co

lom

bia

UK

Taiwan

Ukrain

eP

hilip

pin

es

Cze

chP

olan

dM

alaysiaG

erm

any

France

ItalyP

ortu

galIn

dia

Brazil

Hu

ngary

Turke

yG

ree

ceJap

an

% o

f G

DP,

Fis

cal

Spac

e

% o

f G

DP,

St

imu

lus

Fiscal Ease 08 - 11 (Stimulus)

Cumulative 95 - 07 (Fiscal Space)

STRONGFiscal Space

orAbility to Spend

WEAK

Source: Datastream and Center for Financial Stability Inc.

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8 Yr 9 Yr 10

Great Recession

Great Depression

1982 Recession

6

Cumulative Deficits in Deep Downturns, % of GDP

Source: Office of Management and Budget, Historical Financial Statistics and Center for Financial Stability Inc.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1973 1978 1983 1988 1993 1998 2003 2008

Mat

uri

ng

De

bt,

% o

f G

DP

Average (1973 - 2010)

7

USG Debt Maturities Spike in Coming Year

Note: Interest bearing public debt held by private investors.

Source: US Treasury and Center for Financial Stability Inc.

8

Debt Restructuring: The Way Forward

The Economic Subcommittee (ESC) to Bank Advisory

Committees during the Brady Debt restructuring era

provides a blueprint for identifying common ground,

deepening communication, and paving the way for the

benefit of creditors and debtors alike.

9

Economic Growth Improvement Post Debt Reduction

Note: Brady Deals include Mexico (1990), Venezuela (1990), Argentina (1993), Brazil (1994), Dominican Republic

(1994), Bulgaria (1994), Poland (1994), and Ecuador (1995).

Source: Datastream, IMF and Center for Financial Stability Inc.

-8

-6

-4

-2

0

2

4

6

8

Dom Republic

Poland Argentina Venezuela Mexico Brazil Ecuador Bulgaria

Ave

rage

An

nu

al %

5 years BEFORE Brady Plan

5 years AFTER Brady Plan

10

New Strategy: Financial Program

• Economics – restoring growth for a long-term solution,

• Finance - identifying sustainable levels of debt and potentially

needed support for banks,

• Official Institutions - highlighting available official resources to

support and ensure implementation of a successful program.

Substitute Math for Rhetoric

-40%

-30%

-20%

-10%

0%

10%

20%

30%

GRD PTE IEP BEF NLG ESP ATS FRF DEM ITL EUR FIM

1990 to euro entry

Euro entry to October 2011

Cumulative

11

Component Currency Strains in the Euro

Note: The CFS real exchange rates incorporate 48 nations with calculations from January 1990 to October 2011.

Source: International Financial Statistics, Direction of Trade Statistics, and Center for Financial Stability.

Real Appreciation / Overvaluation

Real Depreciation / Undervaluation

-10%

-5%

0%

5%

10%

15%

20%

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Year

-ove

r-Ye

ar

M1 - CFS Divisia

M4 - CFS Divisia

12

Limits to the Fed’s Quantitative Easing (QE)

With thanks to William Barnett, Director of Advances in Monetary and Financial Measurement at the Center for Financial Stability Inc.

Source: Federal Reserve, other official, bank rates, and the Center for Financial Stability Inc.

13

Commodity Market Paradigm Shift

Source: Thomson Reuters/Jefferies CRB and the Center for Financial Stability Inc.

200

300

400

500

600

700

800

900

1,000

1,100

1,200

Jan-74 Jan-78 Jan-82 Jan-86 Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

CR

B S

po

t In

de

x (1

96

7 =

10

0)

in N

ove

mb

er

20

11

USD

Long-Term Bear Market:Falling prices in real terms

Emerging demand for commodities, easier money and per haps shifting weather patterns end Bear Market.

12 month moving average

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011 2012

US$

Tri

llio

ns

Asia EMEA Latin America

GDP doubles in

15

A Changing World: Largest 20 Nations by Population

Source: United Nations and Center for Financial Stability, Inc.

-2%

-1%

0%

1%

2%

3%

4%

5%1

99

0

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

% o

f G

DP

Advanced Economies Latin America EMEA Asia

16

Regional Trends in Direct Foreign Investment

Source: Datastream and Center for Financial Stability Inc.

17

CFS Solution: Platform and Community

What we are doing to help!

Financial

Policy

Research

Economic

Analysis

Education

Investors

Public

Ac

ad

em

ics

CFS facilitates development of a

community of market participants, officials, and academics.

The community is built on research,

events, and outreach to officials.

Technology is at the heart of the CFS.

Off

icia

ls

18

Educational Tools

• Advances in Monetary and Financial Measurement (AMFM) – CFS Director William A. Barnett directs a program to deepen state-of-the-

art advances in monetary and financial measurement and to make the

result in data available to the public.

• Historical Financial Statistics – CFS formed a joint venture with Johns Hopkins University to develop the HFS, which is now the central,

online source in the world for free economic and financial data.

• Financial Policy Library – Brief synopsis of key issues and relevant studies across 14 major financial policy.

• Financial Stability Reports – Monthly compilation of a broad range of Financial Stability reports by financial regulators and central banks in over

60 countries.

• Financial Crisis Timeline – Key events from 2007 to the present across markets, the Fed, Treasury, institutions, and other areas.

19

Conclusions

• Economies and financial markets will remain highly inter-

connected, as evidenced by the present crisis. Nations and

financial markets will remain highly inter-connected with

implications for MDG.

• Corporations seek to invest in emerging economies, providing

potential opportunities for capital, job creation and technology.

• The conduct of policy matters.

• Communication strategies related to policies and plans are

pivotal.

20

About CFS and Disclosure

The Center for Financial Stability (CFS) is a private, nonprofit institution focusing on global finance and markets. Its research is nonpartisan.

The CFS is dedicated to the integration of finance, law, and economics. The organization is unique,

as it focuses on market mechanics and linkages while serving as a private sector check on

government actions.

This publication reflects the judgments and recommendations of the author(s). They do not

necessarily represent the views of Members of the Advisory Board or Trustees, whose involvement

in no way should be interpreted as an endorsement of the report by either themselves or the

organizations with which they are affiliated.

The organization’s website is www.CenterforFinancialStability.org.

The Center for Financial Stability is a non-profit 501(c)(3)

organization formed for educational purposes.