Macroeconomic Issues and Vulnerabilities in the Global Economy:

A Summer 2006 Overview

by

Nouriel Roubini

Stern School of Business, NYU

and

Roubini Global Economics

(www.rgemonitor.com)

September 2006

The current major global concerns are over several “E”s. These E’s are as follows:

· Economy: The main risk is that three bearish shocks – a housing bust, high oil prices, and the delayed effects of the Fed Funds rate increases - will lead to a sharp U.S. slowdown as the U.S. economy is already imbalanced with low private savings, large budget deficits, large current account deficits, a real estate bubble that is now bursting and a “shopped-out” consumer. These shocks are hitting a US consumer facing falling real wages, negative savings, high debt ratios, increasing debt servicing ratios, a softening labor market; no wonder consumer confidence is sharply down? In 2001, the U.S. economy experienced a recession; there was a sharp slowdown of growth in other developed and developing countries, with recession in several of them. Twin (fiscal and current account) deficits emerged and got worse until 2005. The U.S. recovery in 2002 was weak (growth of output but not of jobs). In 2003 the economy picked up after the Iraq war uncertainty was cleared, but it remained a “jobless recovery”. In 2004, job growth started to be positive (but still sub-standard); the economy hit a growth “soft patch” in Q2 of 2004, then recovered for the rest of the year. In 2005, the economy followed a yo-yo pattern: high growth in Q1, concerns about a new “soft patch” in part of Q2, renewed optimism about a “goldilocks economy” (with low inflation and good growth) in the early summer and renewed concerns about an economic slowdown in the late summer because of the further spike in oil prices. The growth rate took a hit in Q4 in the aftermath of the Katrina hurricane. Growth recovered to above 5% in Q1 of 2006 but it slowed down sharply in Q2 to 2.9%. How rapidly will the U.S and global economy grow in the second half of 2006 and 2007? Will the US experience a soft landing or a hard landing? What will be the macro effects of the bust in the housing sector? Will the rest of the world decouple from a US slowdown? What are the risks of a major US and global slowdown? Will the Fed maintain its pause? Will the next Fed move be a hike – given inflation concerns – or a cut rates given growth slowdown?

· Energy: The spike in the price of oil since 2004 has led to concerns about stagflation (recession plus inflation) as oil prices have been hovering around $70 a barrel or above for several months now. Earlier in the decade, the 2000 oil price shock negatively affected oil importing countries and contributed to the 2001 recession. Oil prices went up again in late 2002 and the first quarter of 2003 because of expectations of a war with Iraq and supply shocks in Venezuela and Nigeria. But even after the war was oil prices remained high and they spiked sharply in 2004 and 2005 because of high demand (especially from China and the U.S.), low global spare production and refining capacity, concerns that terrorism (Iraq, Saudi Arabia) will lead to supply shortages (“fear premium”) and continued supply concerns about Russia, Venezuela and Nigeria. Will recent oil spike lead to a U.S. and global slowdown in 2007? Why didn’t the 2004-2005 oil shock lead to a slowdown? What is the risk that the currently high oil prices and further oil price spikes will lead to a sharp U.S. and global economic slowdown?

· Exchange Rates: The strength of the U.S. in the 1990s relative to Euro, Yen and other currencies led to a large a growing current account deficit in the US. After 2000, the US current account deficit worsened further as the fiscal deficits mushroomed (“twin deficits”) and as the private savings rate sank to zero. Is this current account deficit sustainable or is going to lead to a crash in the value of the US dollar and/or a spike in US interest rates (hard landing)? The dollar peaked and started to decline in 2002-2004, especially relative to the Euro, but then it sharply appreciated again in 2005 as interest rates and real growth differentials favored the dollar relative to the euro and the yen. But the dollar resumed its fall in 2006 when signals of a US slowdown and a Fed pause increased. Will the U.S. dollar continnue its fall? Will the adjustment of global current account imbalances be orderly or disorderly? How will the Euro perform during the rest of 2005 and in 2006? Will the yen weaken or strengthen? Will China further revalue its currency? Will other Asian economies keep on aggressively intervening in the forex market to prevent the appreciation of their currencies relative to the US dollar? Are we going to experience other currency crisis in some emerging markets as the market turmoil in May-June 2006 seemed to intimate?

· Europe/Euro/ECB: Growth was sluggish in Europe in the 1990s relative to the U.S. given structural impediments to growth; and the Euro showed significant weakness relative to the Dollar until mid 2002. It then sharply appreciated until the end of 2004 (by about 30%) but it has sharply weakened relative to US dollar in 2005. European growth in 2002-2003 was dismal compared to the US moderate growth recovery, in part because the ECB did not ease as much as the Fed. Eurozone growth recovered in 2004 but it remained substandard (about 2%) and it relapsed further in 2005 to 1.2% following the strength of the Euro in 2004. Eurozone growth recovered to 2% plus in the first half of 2006 but there are now signal that another slowdown may be in the making. What will the ECB policy be in 2006-2007? The ECB started raising policy rate in 2006; how far will it go? Are its concerns about inflation valid? Will European growth weaken now that the Euro has strengthened again relative to the dollar or will the Eurozone economy show growth resilience?  What are the prospects for structural economic reforms in Europe? Will the Euro strengthen or weaken relative to the US dollar? What is the future of the EMU? Is it in a crisis?

· Emerging Market Economies: 2001 was a dismal year for emerging market (EM) economies. The slowdown of growth in US and G7, the tech bust and the reduction of flows of capital to emerging markets led to a sharp slowdown of growth in many emerging markets. Outright currency and financial crises emerged in Turkey (February 2001) and Argentina (December 2001). In 2002, severe pressures mounted in Uruguay and Brazil; Uruguay experienced a severe financial crisis in mid 2002; Brazil barely escaped a financial crisis as elections loomed in October 2002 but then it recovered after Lula followed moderate policies. 2003 was also a poor year for emerging markets (especially Latin America) as the global economy did not recover fast enough. Emerging market economies’ growth recovered sharply in 2004, especially in Asia but also in Latin America. 2004-2006 were excellent years for EMs as global growth was high, global interest rates were low and commodity prices were high. But as short rates are going up (in the G7) and the global economy may be slowing down, oil prices and commodity prices may fall; thus, economic and financial conditions may get rougher for some emerging markets. The turmoil in emerging markets in May-June 2006 is a signal that rougher times are ahead. Which emerging market economies are vulnerable to financial stress in 2006-2007?

· Elections: 2006-2007 has been and will be election year in many advanced economies (France, U.S., Argentina, Brazil and other Latin American countries). Elections often lead to political and policy uncertainty that may rattle markets. Will market-oriented reformers be elected in Latin America? Will political change in Germany, Italy and France lead to Eurozone economic reforms?

· East (as in Middle East): further turmoil in the Middle East (a worsening Iraq security situation and a further cut in their oil exports; further terrorist attacks in Saudi Arabia; tensions between Israel and its neighbors; the risk of a military confrontation with Iran on nuclear issues) will affect oil prices that may skyrocket further. Also, such oil market turmoil affects skittish investors’ mood and consumer confidence as it increases uncertainty and reduces real incomes. The Middle East and oil prices are a major source of geo-political tension on global markets.

· East (as in Far East).

1. After excessive growth overheating in 2003 and early 2004, China tried a soft landing of its economy via policy tightening measures (credit controls, etc.) in 2004; but the Chinese economy did not experience any meaningful slowdown, either soft or hard. In late 2005 and in 2006 the economy actually accelerated and there is now a serious risk of overheating? What are the risks of an economic and financial crisis in China as the unsustainable investment boom and real estate boom are still persisting? And how vulnerable is the Chinese banking system to an economic downturn? Will the Chinese authorities be able to achieve a soft landing?

2. India (as well as China) is at the center of the debate on offshore outsourcing. Dynamism of the IT sector in India has contributed to the last few years of high economic growth. But India faces severe fiscal problems (high budget deficits and debt) and the need for major structural economic reforms.

3. A confrontation with North Korea may be a new source of geo-strategic tension in 2006-2007.

4. Will East Asia be hurt by the coming US slowdown? Can Asia decouple from the US

5. Japan. Is the latest Japanese economic recovery – and exit from deflation for real or will it fizzle out again as in previous recoveries? Recent signals are mixed.

· Earnings/Equity markets: The U.S. and global economic slowdown in 2001 led to a sharp slowdown of earnings and underperformance of equity markets (on top of the dotcom bust and Nasdaq collapse in 2000). Equity markets also underperformed in 2002 as the stock market rally after the 9/11 drop was excessive and based on overoptimistic expectations of growth. Stock markets slumped again in the first quarter of 2003 as the concerns about a war with Iraq led to renewed risk aversion. But they then recovered sharply after the war in 2003 as markets started to expect a sustained economic recovery and a sharp pick-up in profits and earnings. But stock indexes remained mostly flat on average in 2004 and even in 2005 and 2006 (with only a modest uptrend since 2004) even if corporate balance sheets have improved sharply (with debt deleveraging) and earnings growth has been sustained in 2004-2006. Profits have sharply increased as a share of GDP but their growth may have peaked recently. How will equity markets perform in the rest of 2006 and 2007? Is the stock market overvalued based on historical cyclically adjusted P/E ratios? How would a U.S. slowdown or hard landing affect equities?

· Electronic and investment cycle: the boom/bust cycle in IT, semiconductors and electronic goods was an important factor in the US and global slowdown in late 2000 and 2001. Demand and prices went sharply down in 2000-2001; the Nasdaq crash severely hurt IT firms as well as Asian exports of these goods to the U.S. The end of the overinvestment boom in the U.S. (over 50% of business investment was in IT rather than traditional equipment) severely hurt IT intensive exporters in Asia (Korea, Taiwan, Singapore, Hong Kong, Malaysia and Philippines). In 2002, the IT sector started a tentative recovery but the depth and extent of this recovery was shaky as the glut of IT production/supply – given the 1990s overinvestment - maintained the demand for IT/Tech goods low. The IT sector recovered since late 2003 as a mini-investment boom led to sustained economic growth in the US into 2004-2006, and as there was a pent-up demand for tech goods after three years of little investment by firms. But as the economy may now slow down as a consequence of a shopped-out consumer, the strength of the IT recovery may be put into question. Q2 figure show that real investment in equipment and software has already started to fall; i.e. corporations flushed with profits do not seem to find profitable real investment opportunities and they are returning such earnings to shareholders in the biggest share buyback bonanza ever. Thus, the view that real non-residential investment could lift GDP growth as housing slumps and consumption slows down does not seem to be confirmed by the data.

Current Issues and questions:

Will the recent housing bust severely slow down and trigger a recession in a U.S. economy that is already experiencing severe financial imbalances? Or will the US achieve a soft landing with growth only modestly below trend? Most forecasters expect US growth to achieve a soft landing the second half of 2006; but the housing bust and signals of a consumer burn-out may soon lead to downward revisions to the forecast of U.S. and global growth in 2006.

U.S. economy vulnerabilities:

- Housing bubble that is now turning into a bust; sharp fall of all measures of activity in the housing sector

- large current account deficit and dollar that need to fall even more to reduce this imbalance; risk of hard landing for the dollar and/or US interest rates;

- low private savings rate; negative household savings;

- high levels of household indebtedness (mortgages, consumer credit, etc.) with debt service now rising because of increasing short term and long term interest rates;

- political risk from global security/military developments (Iraq, Iran, Mid-East, North Korea);

- vulnerability to further oil shocks and risk that oil at $70 or above will be a tipping point for the economy;

- sluggish labor market with sub-standard employment growth and weak real wage/income growth;

- risk of a slowdown of household consumption (the main growing component of aggregate demand) especially as the housing bubble bursts and oil prices stay high;

- possible need for further monetary tightening if inflationary pressures continue; but uncertainty about how much the Fed policy ahead given the mixed signals on inflation and growth;

- risk of further rising inflation, especially if oil prices remain high and go higher;

- limited role for further fiscal policy easing as very large fiscal deficits have emerged; need for fiscal tightening;

- risk of a systemic financial crisis (as in the 1994 bond rout or 1998 LTCM crisis) as a combination of excessive liquidity, low interest rates, high leverage, poor risk management, excessive risk taking has possibly led to bubbles in many asset prices (bonds, commodities, housing, emerging market debt, equities).

The latest IMF forecasts, consistent with private forecasts, suggest the global recovery of 2004-2006 will continue in 2007 (after the sluggish 2001-2003 years). The latest IMF forecasts are from April 2006; the new ones will be out at the middle of September when the new IMF’s World Economic Outlook (WEO) is:

2004 2005 2006 f 2007 f

World 5.3 4.8 4.9 4.7

USA 4.1 3.5 3.4 3.3

Euro area 2.1 1.3 2.0 1.0

Germany 1.6 0.9 1.3 1.0

Japan 2.3 2.7 2.8 2.1

UK 3.1 1.8 2.5 2.7

Developing countries 7.6 7.2 6.9 6.6

China 10.1 9.9 9.5 9.0

Newly industrial. Asia 5.8 4.6 5.2 4.5

Western Hemisphere 5.6 4.3 4.3 3.6

Russia 7.2 6.4 6.0 5.8

Main risk factors for a global recovery:

- Bursting of housing bubbles in the US and other countries

- High oil prices and possible new oil shocks leading to a global slowdown.

- Geo-strategic risks (terrorism, Iraq, Middle East, Iran, North Korea).

- Avian flu shock in Asia.

- Erosion – and reversal - of policy stimulus (fiscal and monetary) in US, EU and Asia in 2006; thus, a slow-down in private demand (especially consumption) would hurt growth given the lessened policy stimulus.

- Large and unsustainable US current account deficit and risk of a hard landing of the US $.

- Excessive US fiscal deficit and debt accumulation.

- Still uncertainties about the quality and robustness of the recovery in Japan and Euro area with mixed signals about such recovery.

Will the global economy perform well in H2:2006 and 2007 as clouds are gathering around the US, the rising interest rates, the global imbalances and the high oil prices?

Linkages between the U.S. and the rest of the world occur via:

- trade,

- capital flows and FDI (Europe, Japan, Emerging markets),

- value of the US dollar,

- US monetary and fiscal policy,

- global stock market links,

- IT sector performance,

- developments in oil and commodity markets,

- political risks.

The Fed reduced the Fed Funds rates 11 times in 2001, by 475pbs to a rate of 1.75%. The Fed was expected to reverse course and increase the Fed Funds rate in early 2002 as the economy recovered. But the faltering in the US recovery in the fall of 2002 and the risk of a double dip recession led the Fed to reduce the Fed Funds again, down to 1.25% in November 2002 and down to 1% in June 2003 as a jobless recovery emerged during and after the war with Iraq. In 2004, as growth of output and jobs picked up and inflation started to increase, the Fed increased the Fed Funds rate in 17 consecutive steps bringing it to 5.25% by June 2006 and then pausing in August 2006. Will this pause become a stop? Will the next Fed move be a hike or a cut?

What will be the stance of fiscal policy in the U.S. in 2007? The improvement in the fiscal balance in 2005-06 looks like it is driven by temporary factors increasing revenue on a one time basis. Is the reemergence of large budget deficits in the U.S. a severe problem, especially if the economy slows down? Will it lead to higher long term interest rates? What are the risks of high budget deficits in the US?

What is the business cycle outlook for Europe and will it be affected by US growth prospects? Economic performance in Europe in 2002-2003 was dismal (about 0.5% per year); growth recovered modestly in 2004 (2.0%) but it sharply slowed down again in 2005 (1.2%), only to recover to a rate close to 2% in the first half of 2006. What will be the Eurozone economic performance in 2007? Will the ECB aggressively tighten or be more cautious as the signals about the Eurozone recovery are mixed? The ECB dropped rates much less than the Fed in the 2001-2003 downturn, from 4.75% to 2.0%.

What are the prospects for the Japanese economy? Is the recent economic recovery robust – and the exit from deflation- after a decade of economic stagnation and near zero growth? The BoJ dropped its quantitative easing in 2006 and phased out its ZIRP (zero interest rate policy). But it is not clear how rapidly it will raise rates as the Japanese recovery still seems tentative and as it is not clear that deflation is permanently defeated. Will the rest-of-Asia growth depend on the economic developments in Japan or can Asia maintain sustained growth regardless of Japan’s performance?

Will China have a soft or hard landing after its overheating? Will China allow its currency to appreciate further and by how much?

Will global protectionist pressures increase (especially in U.S. and Europe) as global trade imbalances increase and the Chinese trade surplus is surging?

What are the risks of a global inflation? Deflation – the worry of 2001-2003 - is out; inflation is in again even if inflationary pressures are still moderate.

Are the global current account imbalances (large deficit in the US, large surplus in Europe, Japan, China and most emerging market economies) sustainable over time?

Is the US current account deficit and external debt sustainable?

What are the implications of this deficit for the US dollar in the future?

How will the major currencies ($, Yen and Euro) perform in 2006-2007? Will the dollar weaken further? Is there a risk of a hard landing of the US $? Will Asian countries (China, Japan, Korea, etc.) allow their currency to appreciate relative to the US $ (more than the modest appreciation of the Chinese currency since the 2.1% revaluation in July 2005) or will they keep on aggressively intervening to prevent such appreciation?

What will be the role of the high oil and commodity prices on global growth? (The last four US and global recessions were partly caused by oil price shocks: 1973-74, 1979-80, 1990-91, 2001). How will oil affect the US and global economy in 2006-2007?

What will happen to emerging markets in 2007? After a sharp slowdown in 2001 and poor recovery in 2002-2003, growth in emerging markets was sustained in 2004 (even in Latin America) and 2005-2006, led by U.S. and Chinese growth and the rise in commodity prices. Will the recovery continue in 2007? Will some emerging market economies experience a currency and/or financial crisis in 2007? Which ones are at risk? How will international capital market for emerging markets perform in 2006? Ws the turmoil in emerging markets in May-June 2006 a temporary phenomenon or a signal or rougher times ahead?

Some of the cutting edge issues (and jargon terminology used) in international macro policy debates:

· What is the risk of a systemic crisis and what structural characteristics would trigger one?

· What causes asset bubbles? What causes housing bubbles?

· How should monetary policy react to asset bubbles and asset bubble bursting?

· Are we back to a Bretton Woods Two regime of exchange rates on a global scale?

· Should we worry about deflation or inflation?

· Why have we had recently a bond conundrum?

· Are we going to observe a yield curve inversion in the U.S. and what does such inversion imply?

· Are we back to stagflationary shocks?

· Are global external imbalances sustainable or not, and for how long?

· Are the twin deficits sustainable?

· Will global rebalancing be orderly or disorderly?

· Should we worry about asset protectionism?

· What is the future of offshore outsourcing?

· Will the rest of the world decouple from a US slowdown? Will we experience a rotation in global growth or a locomotive switch?

· Is Doha as dead as Dodo?

· Are target zones for major currencies necessary and/or desirable?

· Is free trade compatible with flexible exchange rates or does greater trade integration require managed or pegged exchange rates?

· What is the BBC (Basket, Band and Crawl) exchange rate regime allegedly chosen by China?

· Are highly-leveraged institutions and hedge funds a source of systemic risk?

· Is offshore outsourcing a threat or a benefit for the global economy?

· Will the BRICs dominate the world economy in the next decades?

· Is the balance sheet approach the appropriate framework for thinking about financial crises in emerging economies?

· Are crises due to fundamentals or self-fulfilling liquidity runs?

· What explains sudden stops and reversals of capital inflows?

· What explains the joint eruption of currency, sovereign debt, systemic banking and systemic corporate crises?

· What is the appropriate form of PSI/bail-in/burden-sharing in crisis resolution?

· Do we need an international lender of last resort (ILOR)?

· What explains international contagion, is it reduced lately and if so why?

· How to deal with liability dollarization and original sin?

· Is debt intolerance an endemic element of sovereign debt markets?

· Do we need an international bankruptcy regime for sovereigns?

· What is the most desirable sovereign debt restructuring mechanism?

· Do emerging markets suffer of fear of floating and if so why?

· Should the IFIs maintain their preferred creditor status?

· Is unilateral dollarization the way of the future?

· Are monetary unions feasible without political unions?

· Is sterilization of excessive capital inflows feasible and desirable?

· Is Asia on a new Dollar Standard?

· What is the desirable reform of the international financial architecture?

Sources of International Macro Interdependence:

“Macroeconomics” is international given the increasing economic interdependence among countries and globalization of trade and financial links.

· Trade links:

o Income effects on imports and exports of goods and services

o Exchange rate effects on trade

· Financial links:

o Assets/Liabilities traded internationally:

§ Stocks

§ Bonds

§ Derivative instruments

o International financial markets/intermediaries:

§ Banks

§ Capital markets (stock/bond/money markets)

§ Foreign exchange markets

§ Commodities markets

· Common sectoral shocks

o Tech sector technology shock in the mid 1990s and bust in 2000-2001

o Housing bubbles in the US and other countries; and bust in 2006-2007?

· Foreign Direct Investment (FDI)/ Multinational Corporations (MNCs):

o Real investment (FDI, M&A)

o Output/production location decisions

· Policy Links:

o Domestic effects of macro policies

o International effects of domestic policies if a country is large (US, Europe, Japan)

o International effects of domestic policies even if a country is small (international contagion):

§ Mexico Tequila effect

§ The Asian fever/flu

§ The Russian virus (contagion to emerging markets – Brazil, LatAm - and advanced markets – LTCM & US capital markets)

§ The Turkish influenza in 2001

§ The modest contagion from Argentina in 2001-2002

Financial Crises in Emerging Markets and Advanced Economies in the last two decades:

Currency/Financial Crises in Emerging Markets:

· 1980s debt crisis

· Mexico, Asia, Russia, Brazil in the 1990s; Turkey and Argentina in 2001; Uruguay in 2002; Brazil mini-crisis in 2002; Dominican Republic in 2003.

· Market turmoil (mini-crisis) in EMs in May-June 2006

Crises in Advanced Economies:

· S&L crisis in US in early 1990s

· Corporate/Banking crisis in Japan in 1990s after bursting of the 1980s asset price bubble

· EMS currency crisis in Europe in 1992-93

· Banking crisis in Finland and Sweden in early 1990s

· Bond market crash in the US in 1994 as the Fed unexpectedly tightened monetary policy.

· Sharp fall of the value of the US dollar in 1994-1995

· LTCM crisis in 1998 and seizure of U.S. capital markets

· Bursting of the US asset price bubble in equity markets in 2001-2002; IT and dot.com crash.

· US corporate and accounting scandals in 2002-2003

· What are the financial risks from a housing bust in the US?

Major macro and financial events of the last 15 years:

G-7:

1. 1987: Greenspan becomes chairman of the Fed. Stock market crash in the US in 1987.

2. S&L (Saving and Loans) financial crisis in the late 1980s; evidence of a “credit crunch” in the US.

3. US and global recession in 1990-91 during the Gulf War.

4. Persistent stagnation of Japanese economy in the 1990s (4 recessions in the last decade) after the bursting of the 1980s asset bubble

5. Currency crisis in the European Monetary System in1992-93

6. European Monetary Union (1999 introduction of Euro) and mediocre economic/growth performance of Europe in the 1990s

7. Large swings in the value of G3 currencies ($, Yen, Euro)

8. Global financial crisis in 1998 following Russian crisis and LTCM collapse

9. “New Economy”, internet and technology boom: the U.S. boom years (1995-2000): high growth, low inflation, high productivity growth, low unemployment rate, boom in equity markets, budget surpluses, strong dollar, large current account deficits.

10. Bust of the IT bubble in 2000-2001; sharp fall of investment leading to economic slowdown in the US.

11. The oil shock in 2000 contributing to the global slowdown

12. Fed tightening of monetary policy between mid 1999 and mid 2000 as the economy was “overheating”.

13. US slowdown and recession and global slowdown in 2001; it started before 9/11 but was exacerbated by it.

14. Third and final stage of EMU (“Euro” supplanting domestic currencies) started in 2002.

15. A de facto Bretton Woods II regime as China and Asia effectively pegged their exchange rates to the U.S. dollar through aggressive foreign exchange intervention.

16. Tentative U.S. and global economic recovery in early 2002 that slowed down in spring and in the fall. Slow growth in H1-2003 (given Iraq war uncertainty); U.S. and global recovery in second half of 2003 and Q1:2004 but with poor job growth (“jobless recovery”). Global growth “soft patch” in Q2:2004. Growth recovery in H1:2005 but slowdown in Q4 after the Katrina shock

17. China’s appreciation (2.1%) of its currency in July 2005: the beginning of the end of the Bretton Woods II regime?

18. Evidence of a bursting of the US housing bubble and a housing bust in mid 2006. Will this shock lead to a soft landing or hard landing for the US economy?

Emerging markets:

Financial and currency crises and volatile capital flows:

1. Latin American debt crisis (in the 1980s) and its solution (Brady Bonds) in the late 1980s and early 1990s

2. Large capital flows to emerging markets in the 1990-95 period.

3. Transition to a market economy in Central and East European countries.

4. Mexican currency crisis in 1994-95

5. Asian currency and financial crisis (Thailand, Indonesia, Korea, Malaysia) in 1997-98

6. Russian financial and currency crisis (8/98) and its contagion to emerging markets and advanced economies financial markets (LTCM)

7. Currency crisis in Brazil in 1/99

8. Financial turmoil and IMF rescue packages in Argentina and Turkey in November-December 2000

9. Sovereign debt restructurings after partial/full default in Ecuador, Russia, Ukraine and Pakistan in 2000-2001

10. Turkish currency and financial crisis in February 2001

11. Argentina currency and financial crisis and default of 2001-2002

12. Financial/currency crisis in Uruguay in 2002

13. Risk of a financial crisis in Brazil as October 2002 elections were looming. Financial recovery after the election. Weak economic performance of Latin America in 2003 with growth recovery in 2004-2005.

14. Accession of 10 emerging markets (mostly transition economies) to the European Union in 2004.

15. Rapid growth of emerging market economies in 2004-2006 on the back of macro/financial reforms and benign global conditions (high global growth, high commodity prices, low G7 interest rates). International investors rediscover emerging markets.

16. Boom in commodity prices exported by EMs.

17. Africa as the new EMs growth story and asset class?

18. Turmoil in EM financial markets in May-June 2006, especially for countries with external vulnerabilities: temporary shock or signal of worse times ahead?

Reform of the international financial architecture after the Asian and global crisis of 1997-98:

1. Crisis prevention:

a. Transparency and accountability of emerging markets, their economic agents, and the international financial institutions (such as the IMF), and greater disclosure and reporting by banks and other financial institutions in advanced economies.

b. Greater attention given by the IMF and emerging markets to indicators of vulnerability to crises.

c. Greater attention to national balance sheet analysis and risk management, especially liquidity and balance sheet risks.

d. Optimal public debt management to reduce liquidity risk, exchange rate risk and balance sheet risk.

e. Prudential regulation and supervision of financial systems in emerging markets.

f. Policies to maximize the benefits of international capital flows.

g. Work on highly leveraged institutions (including hedge funds).

h. Work on offshore financial centers, OFCs

i. Reform of the Basle capital adequacy standards.

j. Private contingent credit lines.

k. Implementation of international standards and codes.

l. Better governance of the financial and corporate systems.

m.Capital Controls

2. Crisis resolution:

a. Bail-Outs versus bail-ins

b. Burden sharing and private sector involvement in crisis resolution

c. An international sovereign bankruptcy regime (SDRM) versus collective action clauses (CAC)

3. IMF and World Bank reform. Reform of the governance of the IMF: the “chairs and shares” debate. First reform steps at the September 2006 meetings of the IMF in Singapore.

4. Exchange rate regimes for emerging markets

Currency regimes for emerging markets:

1. Disappearance of middle regimes:

a. Fixed but adjustable exchange rate regimes (Mexico, Korea, Thailand, Indonesia, Russia, Brazil, Uruguay)

b. Crawling pegs (Israel, Colombia, Turkey, Chile, Peru, the Slovak Republic and Poland).

c. Collapse of some currency boards (Argentina, Turkey)

2. Emergence of corner solution regimes:

a. Flexible exchange rates (Mexico, Korea, Thailand, Indonesia, Russia, Brazil, Turkey, Argentina, Uruguay Israel, Colombia, Turkey, Chile, Peru, the Slovak Republic and Poland).

b. Institutionalized fixed regimes:

i. Currency Boards (Hong Kong, Bulgaria, Estonia, Lithuania, Bosnia)

ii. Dollarization (Panama, Ecuador, El Salvador)

iii. Monetary Unions (EMU)

3. Can emerging market really live with flexible exchange rates?

4. Asian countries are again aggressively managing their currencies through forex intervention to prevent their appreciation relative to the US $. Are we back to an Asian Dollar Standard or to a revived Bretton Woods regime of fixed exchange rates? Is Latin America also a member of Bretton Woods 2?

5. Are currency boards (Hong Kong) sustainable?