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Unformatted text preview: HT PAREKH FINANCE COLUMN june 12, 2010 vol xlv no 24 EPW Economic & Political Weekly 10 Table 1: Banking Losses (in $ bn) Oct-08 % Apr-09 % Apr-10 % US Loans 425 30.2 1,068 39.4 588 66.4 Securities 980 69.8 1,644 60.6 296 33.4 Total 1,405 100 2,712 100 885 100 World Loans - 2,087 51.5 1,647 72.4 Securities - 1,966 48.5 629 27.6 Total - 4,054 100 2,276 100 World Economy Not Out of the Woods T T Ram Mohan The world banking system has been adjusting to the post-crisis deleveraging in the household and corporate sectors. At the same time, leverage in government has shot up as governments have intervened massively to rescue financial systems and to boost public spending in response to recessionary conditions. As the recent Greek crisis has vividly demonstrated, a new threat looms, namely, a rise in sovereign risks and the prospect of default on government debt. Where do we stand in relation to the crisis? Has the banking system recovered and to what extent? What new risks raise the prospect of another recession? What risks are emerging markets exposed to? A discussion based on the April 2010 edition of the Global Financial Stability Report of the International Monetary Fund. I t is nearly three years since the sub- prime crisis erupted. There was a sense until recently that the world economy had seen off the worst but the crisis in the Euro-zone has since revived fears of another recession. How to avoid a “double-dip” recession is now the preoccu- pation of policymakers. Where do we stand in relation to the cri- sis? Has the banking system recovered and to what extent? What new risks raise the pros- pect of another recession? What risks are emerging markets exposed to? The Interna- tional Monetary Fund’s ( IMF ) Global Finan- cial Stability Report ( GFSR ) of April 2010 pro- vides an excellent summary of the issues. 1 Magnitude of the Crisis The good news is that the latest estimate for banking losses is a great deal lower than earlier estimates (Table 1). United States ( US ) losses in April 2010 are esti- mated at less than $1 trillion compared to the estimate of $2.7 trillion in April 2009, six months after the Lehman collapse. Global losses had then been projected at $4 trillion. The latest estimate for global losses is $2.3 trillion. Of these, $1.5 trillion had been realised by end 2009. Where banking is concerned, there is light at the end of the tunnel. But it is im- portant to understand why the earlier loss estimates were wide of the mark. Losses on securities have turned out to be much lower than expected both in the US and globally. Losses on securities in the US had been projected at $1.6 trillion in April 2009 consequent to the collapse in Lehman in 2008. The current estimate is $296 billion....
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This note was uploaded on 07/31/2010 for the course FIN 201 taught by Professor Hcverma during the Summer '10 term at IIT Kanpur.
- Summer '10