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The Global Financial Crisis: Analysis and
Policy Implications
Dick K. Nanto, Coordinator
Specialist in Industry and Trade
October 2, 2009

Congressional Research Service
7-5700
www.crs.gov
RL34742

CRS Report for Congress
Prepared for Members and Committees of Congress

The Global Financial Crisis: Analysis and Policy Implications

Summary
The world is near the bottom of a global recession that is causing widespread business
contraction, increases in unemployment, and shrinking government revenues. Although recent
data indicate the large industrialized economies may have reached bottom and are beginning to
recover, for the most part, unemployment is still rising. Numerous small banks and households
still face huge problems in restoring their balance sheets, and unemployment has combined with
sub-prime loans to keep home foreclosures at a high rate. Nearly all industrialized countries and
many emerging and developing nations have announced economic stimulus and/or financial
sector rescue packages, such as the American Recovery and Reinvestment Act of 2009 (P.L. 1115). Several countries have resorted to borrowing from the International Monetary Fund as a last
resort. The crisis has exposed fundamental weaknesses in financial systems worldwide,
demonstrated how interconnected and interdependent economies are today, and has posed vexing
policy dilemmas.
The process for coping with the crisis by countries across the globe has been manifest in four
basic phases. The first has been intervention to contain the contagion and restore confidence in
the system. This has required extraordinary measures both in scope, cost, and extent of
government reach. The second has been coping with the secondary effects of the crisis,
particularly the global recession and flight of capital from countries in emerging markets and
elsewhere that have been affected by the crisis. The third phase of this process is to make changes
in the financial system to reduce risk and prevent future crises. In order to give these proposals
political backing, world leaders have called for international meetings to address changes in
policy, regulations, oversight, and enforcement. On September 24-25, 2009, heads of the G-20
nations met in Pittsburgh to address the global financial crisis. The fourth phase of the process is
dealing with political, social, and security effects of the financial turmoil. One such effect is the
strengthened role of China in financial markets.
The role for Congress in this financial crisis is multifaceted. While the recent focus has been on
combating the recession, the ultimate issue perhaps is how to ensure the smooth and efficient
functioning of financial markets to promote the general well-being of the country while
protecting taxpayer interests and facilitating business operations without creating a moral hazard.
In addition to preventing future crises through legislative, oversight, and domestic regulatory
functions, On June 17, 2009, the Department of the Treasury presented the Obama Administration
proposal for financial regulatory reform. The proposal focuses on five areas and includes
establishing the Federal Reserve as a systemic risk regulator, creating a Council of Regulators,
regulating all financial derivatives, creating a Consumer Financial Protection Agency, improving
coordination and oversight of international financial markets, and other provisions. Treasury also
has submitted to Congress proposed legislation to implement the reforms. The reform agenda
now has moved to Congress. Legislation in Congress addresses many of the issues in the
Treasury plan but also may focus on other financial issues. Congress also plays a role in measures
to reform and recapitalize the International Monetary Fund, the World Bank, and regional
development banks.

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The Global Financial Crisis: Analysis and Policy Implications

Contents
Recent Developments and Analysis .............................................................................................1
The Global Financial Crisis and U.S. Interests.............................................................................2
Policy and Legislation...........................................................................................................4
Four Phases of the Global Financial Crisis .......................................................................... 10
Contain the Contagion and Strengthen Financial Sectors ............................................... 10
Coping with Macroeconomic Effects............................................................................. 12
Regulatory and Financial Market Reform...................................................................... 14
Dealing with Political, Social, and Security Effects ....................................................... 17
New Challenges and Policy in Managing Financial Risk ........................................................... 23
The Challenges ................................................................................................................... 23
Summary of Policy Targets and Options .............................................................................. 27
Origins, Contagion, and Risk .................................................................................................... 30
Risk .................................................................................................................................... 34
The Downward Slide .......................................................................................................... 35
Effects on Emerging Markets .................................................................................................... 40
Latin America ..................................................................................................................... 47
Mexico ......................................................................................................................... 50
Brazil............................................................................................................................ 51
Argentina ...................................................................................................................... 53
Russia and the Financial Crisis............................................................................................ 54
Effects on Europe and The European Response ......................................................................... 56
The “European Framework for Action” ............................................................................... 60
The de Larosiere Report and the European Plan for Recovery.............................................. 63
The de Larosiere Report................................................................................................ 63
Driving European Recovery .......................................................................................... 65
The British Rescue Plan ...................................................................................................... 66
Collapse of Iceland’s Banking Sector .................................................................................. 67
Impact on Asia and the Asian Response..................................................................................... 69
Asian Reserves and Their Impact ........................................................................................ 71
National Responses ............................................................................................................. 73
Japan ............................................................................................................................ 73
China ............................................................................................................................ 74
South Korea .................................................................................................................. 78
Pakistan ........................................................................................................................ 79
International Policy Issues................................................................................................... 80
Bretton Woods II........................................................................................................... 81
G-20 Meetings .............................................................................................................. 81
The International Monetary Fund .................................................................................. 86
Changes in U.S. Regulations and Regulatory Structure.................................................. 89

Figures
Figure 1. Quarterly (Annualized) Economic Growth Rates for Selected Countries ..................... 13

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The Global Financial Crisis: Analysis and Policy Implications

Figure 2. Origins of the Financial Crisis: The Rise and Fall of Risky Mortgage and Other
Debt....................................................................................................................................... 32
Figure 3. Selected Stock Market Indices for the United States, U.K., Japan, and Russia ............ 36
Figure 4. Exchange Rate Values for Selected Currencies Relative to the U.S. Dollar.................. 38
Figure 5. Current Account Balances (as a percentage of GDP)................................................... 42
Figure 6. Global Foreign Exchange Reserves ............................................................................ 43
Figure 7. Capital Flows to Latin America (in percent of GDP)................................................... 45
Figure 8. Capital Flows to Developing Asia (in percent of GDP) ............................................... 45
Figure 9. Capital Flows to Central and Eastern Europe (in percent of GDP)............................... 46
Figure 10. Asian Current Account Balances are Mostly Healthy ................................................ 70
Figure 11. Monthly Change in Chinese FDI and Trade: April 2008-May 2009 ........................... 75

Tables
Table 1. Problems, Targets of Policy, and Actions Taken or Possibly to Take in Response
to the Global Financial Crisis ................................................................................................. 27
Table 2. Stimulus Packages by Selected Countries..................................................................... 39
Table 3.China’s Central Government November 2008 Domestic Stimulus Package.................... 76

Appendixes
Appendix A. Major Recent Actions and Events of the International Financial Crisis .................. 90
Appendix B. Stimulus Packages Announced by Governments ................................................. 142
Appendix C. Comparison of Selected Financial Regulatory Reform Proposals ........................ 145
Appendix D. British, U.S., and European Central Bank Operations, April to Mid-October
2008 .................................................................................................................................... 149

Contacts
Author Contact Information .................................................................................................... 151

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Recent Developments and Analysis1
September 24-25. At the Group of 20 Summit held in Pittsburgh, world leaders agreed to make
the G-20 the leading forum for coordinating global economic policy; not to withdraw stimulus
measures until a durable recovery is in place; to co-ordinate their exit strategies from the stimulus
measures; to harmonize macroeconomic policies to avoid imbalances (America’s deficits and
Asia’s savings glut) that worsened the financial crisis; and to eliminate subsidies on fossil fuels
(only in the medium term). In trade, there was only a weak commitment to get the Doha round of
multilateral trade negotiations at the World Trade Organizations back on track by 2010, and for
the International Monetary Fund, the leaders pledged to provide the “under-represented” mostly
developing countries at least 5% more of the voting rights by 2011. The other large institutional
change was the ascension of the Financial Stability Board, a group of central bankers and
financial regulators, to take a lead role in coordinating and monitoring tougher financial
regulations and serve, along with the International Monetary Fund, as an early-warning system
for emerging risks.
September 18. According to the Economist Intelligence Unit, the aggressive measures that
governments have taken to counter the financial crisis have not only helped to prevent a more
severe downturn but are now setting the stage for a recovery, albeit a weak one. However, the
world economy could weaken again once the stimulus wears off, mainly because government
debt has increased dramatically in many countries—eliciting rising concerns about the solvency
of the state. This has made current levels of stimulus through government spending not
sustainable.
September 16. Investors turned bearish on the U.S. dollar as signs of a recovery in the global
economy reduced demand for the currency as a refuge.
September 14. President Obama pushed for financial interests and lawmakers to act on proposals
to reshape financial regulation to protect the nation from a repeat of the excesses that drove
Lehman Brothers into bankruptcy and wreaked havoc on the global economy last year.
August 27. The Federal Deposit Insurance Corporation revealed that the number of U.S. banks at
risk of failing reached 416 during the second quarter 2009.
***********
The Great Recession that began in 2007 appears to be bottoming out, although unemployment
continues to increase. Numerous small banks and households still face huge problems in restoring
their balance sheets, and unemployment has combined with sub-prime loans to keep home
foreclosures at a high rate. The U.S. economy shrank by 1.0% in the second quarter, much less
than the 6.4% decline in the first quarter. Modest growth is expected in the second half of the
year. Inventory reduction has been a drag on growth, but foreign trade has been a large plus.
Revised data show a real GDP decline of 3.9% over the past four quarters, the steepest peak-totrough decline in postwar history.

1

For a more complete list of major developments and actions, see Appendix A.

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The Global Financial Crisis and U.S. Interests2
Policymaking to deal with the global financial crisis and ensuing global recession has now moved
from containing the contagion to specific actions aimed at promoting recovery and changing
regulations to prevent a reoccurrence of the problem. Other issues, such as health care and the
war in Afghanistan, also are competing for attention. Some have expressed concern that the
improving economic and financial outlook may cause regulatory reform of the financial system to
lose some traction in the crowded policy agenda. This report provides an overview of the global
aspects of the financial crisis, how it developed, proposals for regulatory change, and a review of
how the crisis is affecting other regions of the world.
The role for Congress in this financial crisis is multifaceted. The overall issue seems to be how to
ensure the smooth and efficient functioning of financial markets to promote the general wellbeing of the country while protecting taxpayer interests and facilitating business operations
without creating a moral hazard.3 In addition to preventing future crises through legislative,
oversight, and domestic regulatory functions, Congress has been providing funds and ground
rules for economic stabilization and rescue packages and informing the public through hearings
and other means. Congress also plays a role in measures to reform the international financial
system, in recapitalizing international financial institutions, such as the International Monetary
Fund, and in replenishing funds for poverty reduction arms of the World Bank (International
Development Association) and regional development banks.
What began as a bursting of the U.S. housing market bubble and a rise in foreclosures has
ballooned into a global financial and economic crisis. Some of the largest and most venerable
banks, investment houses, and insurance companies have either declared bankruptcy or have had
to be rescued financially. In October 2008, credit flows froze, lender confidence dropped, and one
after another the economies of countries around the world dipped toward recession. The crisis
exposed fundamental weaknesses in financial systems worldwide, and despite coordinated easing
of monetary policy by governments, trillions of dollars in intervention by central banks and
governments, and large fiscal stimulus packages, the crisis seems far from over.
This financial crisis which began in industrialized countries quickly spread to emerging market
and developing economies. Investors pulled capital from countries, even those with small levels
of perceived risk, and caused values of stocks and domestic currencies to plunge. Also, slumping
exports and commodity prices have added to the woes and pushed economies world wide either
into recession or into a period of slower economic growth. The global crisis now seems to be
played out on two levels. The first is among the industrialized nations of the world where most of
the losses from subprime mortgage debt, excessive leveraging of investments, and inadequate
capital backing credit default swaps (insurance against defaults and bankruptcy) have occurred.
The second level of the crisis is among emerging market and other economies who may be
“innocent bystanders” to the crisis but who also may have less resilient economic systems that
can often be whipsawed by actions in global markets. Most industrialized countries (except for
Iceland) have been able to finance their own rescue packages by borrowing domestically and in
2

Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division.

3

A moral hazard is created if a government rescue of private companies encourages those companies and others to
engage in comparable risky behavior in the future, since the perception arises that they will again be rescued if
necessary and not have to carry the full burden of their losses.

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international capital markets, but many emerging market and developing economies have
insufficient sources of capital and have turned to help from the International Monetary Fund
(IMF), World Bank, or from capital surplus nations, such as Japan, and the European Union.
For the United States, the financial turmoil touches on the fundamental national interest of
protecting the economic security of Americans. It also is affecting the United States in achieving
national foreign policy goals, such as maintaining political stability and cooperative relations with
other nations and supporting a financial infrastructure that allows for the smooth functioning of
the international economy. Reverberations from the financial crisis, moreover, are not only being
felt on Wall Street and Main Street but are being manifest in world flows of exports and imports,
rates of growth and unemployment, government revenues and expenditures, and in political risk
in some countries. The simultaneous slowdown in economic activity around the globe indicates
that emerging market and developing economies have not decoupled from industrialized
countries and governments cannot depend on exports to pull them out of these recessionary
conditions.
This global financial and economic crisis has brought to the public consciousness several arcane
financial terms usually confined to the domain of regulators and Wall Street investors. These
terms lie at the heart of both understanding and resolving this financial crisis and include:
•

Systemic risk: The risk that the failure of one or a set of market participants, such
as core banks, will reverberate through a financial system and cause severe
problems for participants in other sectors. Because of systemic risk, the scope of
regulatory agencies may have to be expanded to cover a wider range of
institutions and markets.4

•

Deleveraging: The unwinding of debt. Companies borrow to buy assets that
increase their growth potential or increase returns on investments. Deleveraging
lowers the risk of default on debt and mitigates losses, but if it is done by selling
assets at a discount, it may depress security and asset prices and lead to large
losses. Hedge funds tend to be highly leveraged.

•

Procyclicality: The tendency for market players to take actions over a business
cycle that increase the boom-and-bust effects, e.g. borrowing extensively during
upturns and deleveraging during downturns. Changing regulations to dampen
procyclical effects would be extremely challenging.5

•

Preferred equity: A cross between common stock and debt. It gives the holder a
claim, prior to that of common stockholders, on earnings and on assets in the
event of liquidation. Most preferred stock pays a fixed dividend. As a result of
the stress tests in early 2009, some banks may increase their capital base by
converting preferred equity to common stock.

•

Collateralized debt obligations (CDOs): a type of structured asset-backed
security whose value and payments are derived from a portfolio of fixed-income
underlying assets. CDOs based on sub-prime mortgages have been at the heart of

4

International Monetary Fund, 2009 Global Financial Stability Report: Responding to the Financial Crisis and
Measuring systemic Risks, Summary Version, Washington, DC, April 2009, p. 1ff.
5
See Jochen Andritzky, John Kiff, Laura Kodres, Pamela Madrid, and Andrea Maechler, Policies to Mitigate
Procyclicality, International Monetary Fund, IMF Staff Position Note SPN/09/09, Washington, DC, May 7, 2009.

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the global financial crisis. CDOs are assigned different risk classes or tranches,
with “senior” tranches considered to be the safest. Since interest and principal
payments are made in order of seniority, junior tranches offer higher coupon
payments (and interest rates) or lower prices to compensate for additional default
risk. Investors, pension funds, and insurance companies buy CDOs.
•

Credit default swap (CDS): a credit derivative contract between two
counterparties in which the buyer makes periodic payments to the seller and in
return receives a sum of money if a certain credit event occurs (such as a default
in an underlying financial instrument). Payoffs and collateral calls on CDSs
issued on sub-prime mortgage CDOs have been a primary cause of the problems
of AIG and other companies.

The global financial crisis has brought home an important point: the United States is still a major
center of the financial world. Regional financial crises (such as the Asian financial crisis, Japan’s
banking crisis, or the Latin American debt crisis) can occur without seriously infecting the rest of
the global financial system. But when the U.S. financial system stumbles, it may bring major
parts of the rest of the world down with it.6 The reason is that the United States is the main
guarantor of the international financial system, the provider of dollars widely used as currency
reserves and as an international medium of exchange, and a contributor to much of the financial
capital that sloshes around the world seeking higher yields. The rest of the world may not
appreciate it, but a financial crisis in the United States often takes on a global hue.

Policy and Legislation7
Early U.S. policy was aimed at containing the contagion and in dealing with the ensuing
recession. The two largest legislative actions were the Troubled Asset Relief Program aimed at
providing support for financial institutions8 and the American Recovery and Reinvestment Act of
2009 aimed at providing stimulus to the economy. 9
Policy proposals to change specific regulations as well as the structure of regulation and
supervision at both the domestic and international levels have been coming forth through the
legislative process, from the Administration, and from recommendations by international
organizations such as the International Monetary Fund, 10 Bank for International Settlements,11
and Financial Stability Board (Forum).12 On June 17, 2009, the Obama administration announced
6
See, for example, Friedman, George and Peter Zeihan. “The United States, Europe and Bretton Woods II.” A Strafor
Geopolitical Intelligence Report, October 20, 2008.
7
Also see the section entitled Regulatory and Financial Market Reform in this report.
8
CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel
and Edward V. Murphy.
9
CRS Report R40537, American Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative
History, by Clinton T. Brass et al.
10
For analysis and recommendations by the International Monetary Fund, see “Global Financial Stability Report,
Financial Stress and Deleveraging, Macro-Financial Implications and Policy,” October 2008. 246 p.
11
For information on Basel II, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable
Framework, by Walter W. Eubanks.
12
Now called the Financial Stability Board. For recommendations by the Financial Stability Forum, see “Report of the
Financial Stability Forum on Enhancing Market and Institutional Resilience, Follow-up on Implementation,” October
10, 2008. 39 p.

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its plan for regulatory reform of the U.S. financial system. 13 In Congress, numerous bills have
been introduced that deal with issues such as establishing a commission/select committee to
investigate causes of the financial crisis, provide oversight and greater accountability of Federal
Reserve and Treasury lending activity, deal with problems in the housing and mortgage markets,
provide funding for the International Monetary Fund, address problems with consumer credit
cards, provide for improved oversight for financial and commodities markets, deal with the U.S.
national debt, and establish a systemic risk monitor.
The United States, however, cannot be a regulatory island among competing nations of the world.
In an international marketplace of multinational corporations, instant transfers of wealth,
lightning fast communications, and globalized trading systems for equities and securities, if U.S.
regulations are anomalous or significantly more “burdensome” than those in other industrialized
nations, business and transactions could migrate toward other markets. Hence, many have
emphasized the need to coordinate regulatory changes among nations. The vehicle for forming an
international consensus on measures to be taken by individual countries is the G-20 along with
the International Monetary Fund and new Financial Stability Board14 (based in Switzerland),
although some developing nations prefer the more inclusive G-30. The next G-20 Summit is to be
held in Pittsburgh on September 24-25, 2009. World leaders there are expected to focus on
tougher regulation of the financial sector, including limits on bonus payments for bankers, and
decide what comes next, now that there are tentative signs of recovery. Among the issues
reportedly on the U.S. agenda are measures to ease global economic imbalances to prevent a
repeat of financial crises through a process of regular consultations and increased cooperation on
policies that will ensure a rebalancing of world growth.
The April 2009 G-20 London Summit called for a greater role for the IMF and for it to
collaborate with the new Financial Stability Board to provide early warning of macroeconomic
and financial risks and actions needed to address them. 15 The leaders also agreed that national
financial supervisors should establish Colleges of Supervisors consisting of national financial
supervisory agencies that oversee globally active financial institutions. (See “G-20 Meetings”
section of this report.) Still, work at the international level remains advisory.

13

U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation: Rebuilding Financial
Supervision and Regulation, Washington, DC, June 2009, 85 p.
14
The following countries and territories are represented on the Financial Stability Board: Argentina, Australia, Brazil,
China, Canada, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands,
Russia, Saudi Arabia, Singapore, South Africa, Spain, Switzerland, Turkey, the United Kingdom, and the United
States. The following institutions, standard-setting bodies and other groupings are also members of the FSB: the Bank
for International Settlements, European Central Bank, European Commission, International Monetary Fund,
Organisation for Economic Co-operation and Development, World Bank, Basel Committee on Banking Supervision,
International Accounting Standards Board, International Association of Insurance Supervisors, International
Organization of Securities Commissions, Committee on the Global Financial System, and Committee on Payment and
Settlement Systems.
15
In addition to the mandate of the Financial Stability Forum (to assess vulnerabilities affecting the financial system,
identify and oversee action needed to address them, and promote coordination and information exchange among
authorities responsible for financial stability), the Financial Stability Board is to (1) monitor and advise on market
developments and their implications for regulatory policy; (2) advise on and monitor best practice in meeting
regulatory standards; (3) undertake joint strategic reviews of the policy development work of the international standard
setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps; (4) set guidelines
for and support the establishment of supervisory colleges; (5) manage contingency planning for cross-border crisis
management, particularly with respect to systemically important firms; and (6) collaborate with the IMF to conduct
Early Warning Exercises.

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At the April 2009 G-20 London Summit, a schism arose between the United States and the U.K.,
who were arguing for large and coordinated stimulus packages, and Germany and France, who
considered their automatic stabilizers (increases in government expenditures for items such as
unemployment insurance that are triggered any time the economy slows) plus existing stimulus
programs as sufficient. In the communiqué, the G-20 leaders decided to add $1.1 trillion in
resources to the international financial institutions, including $750 billion for the International
Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral development
banks. On June 24, 2009, President Obama signed H.R. 2346 into law (P.L. 111-32). This
increased the U.S. quota in the International Monetary Fund by 4.5 billion SDRs ($7.69 billion),
provided loans to the IMF of up to an additional 75 billion SDRs ($116.01 billion), and
authorized the United States Executive Director of the IMF to vote to approve the sale of up to
12,965,649 ounces of the Fund’s gold. 16
On June 17, 2009, the Department of the Treasury presented the Obama Administration proposal
for financial regulatory reform. This was followed by twelve titles of proposed legislation to
implement the reforms. The proposals focus on five areas (and proposed legislation) as indicated
below. Legislation in Congress also addresses these issues.
1. Promote robust supervision and regulation of financial firms.
a. A new Financial Services Oversight Council to identify emerging systemic
risks and improve interagency cooperation (chaired by Treasury and
including the heads of the principal federal financial regulators as
members).17
b. New authority for the Federal Reserve to supervise all firms that could
pose a threat to financial stability, even those that do not own banks.18
c. Stronger capital and other prudential standards for all financial firms,
and even higher standards for large, interconnected firms. 19
d. A new National Bank Supervisor (a single agency with separate status in
Treasury to supervise all federally chartered banks).20
e. Elimination of the federal thrift charter and other loopholes that allowed
some depository institutions to avoid bank holding company regulation by
the Federal Reserve.21

16

An SDR is a Special Drawing Right, a type of international currency created by the IMF that can be converted into a
national currency for use. One SDR currently is worth about $1.55 dollars.
17
Title I of proposed legislation, Financial Services Oversight Council Act of 2009, submitted by Treasury; see
http://www.financialstability.gov/docs/regulatoryreform/07222009/titleI.pdf.
18
Title II of proposed legislation, “Bank Holding Company Modernization Act of 2009, submitted by Treasury; see
http://www.financialstability.gov/docs/regulatoryreform/07222009/titleII.pdf.
19
Title VI of proposed legislation submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/
07222009/titleVI.pdf.
20
Title III of proposed legislation, Federal Depository Institutions Supervision and Regulation Improvements Act of
2009, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-BankSupervisor_072309.pdf.
21
Title III of proposed legislation, “Federal Depository Institutions Supervision and Regulation Improvements Act of
2009,” submitted by Treasury, see http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-BankSupervisor_072309.pdf.

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f.

The registration of advisers of hedge funds and other private pools of
capital with the SEC.22

2. Establish comprehensive supervision of financial markets.
a. Enhanced regulation of securitization markets, including new
requirements for market transparency, stronger regulation of credit rating
agencies, and a requirement that issuers and originators retain a financial
interest in securitized loans. 23
b. Comprehensive regulation of all over-the-counter derivatives.24
c. New authority for the Federal Reserve to oversee payment, clearing, and
settlement systems.25
3. Protect consumers and investors from financial abuse.
a. A new Consumer Financial Protection Agency (an independent entity) to
protect consumers across the financial sector from unfair, deceptive, and
abusive practices. 26
b. Stronger regulations to improve the transparency, fairness, and
appropriateness of consumer and investor products and services.27
c. A level playing field and higher standards for providers of consumer
financial products and services, whether or not they are part of a bank.28
4. Provide the government with the tools it needs to manage financial crises.
a. A new regime to resolve nonbank financial institutions whose failure
could have serious systemic effects.29
22

Title IV of proposed legislation, Private Fund Investment Advisers Registration Act of 2009, submitted by Treasury,
see http://www.treas.gov/press/releases/reports/
title%20iv%20reg%20advisers%20priv%20funds%207%2015%2009%20fnl.pdf.
23
Title IX, Subtitle C of proposed legislation, “Investor Protection Act of 2009, Subtitle C—Improvements to the
Regulation of Credit Rating Agencies,” submitted by Treasury; see http://www.financialstability.gov/docs/
regulatoryreform/titleIX_subtC.pdf and Subtitle E—Improvements to the Asset-Backed Securitization Process; see
http://www.financialstability.gov/docs/regulatoryreform/07222009/titleIX.pdf.
24
Title VII of proposed legislation, “Over-the-Counter Derivatives Markets Act of 2009,” submitted by Treasury, see
http://www.financialstability.gov/docs/regulatoryreform/titleVII.pdf.
25
Title VIII of proposed legislation, “Payment, Clearing, and Settlement Supervision Act of 2009,” submitted by
Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-VIII_payments_072209.pdf. Title IX,
Subtitle D, “Investor Protection Act of 2009,”.Subtitle D—Executive Compensation, submitted by Treasury; see
http://www.treas.gov/press/releases/docs/tg_218IX.pdf.
26
Title X of proposed legislation, “Consumer Financial Protection Agency Act of 2009,”submitted by Treasury; see
http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-Bank-Supervisor_072309.pdf and Title X1,
Improvements to the Federal Trade Commission Act,” submitted by Treasury; see http://www.financialstability.gov/
docs/TITLE-XI.pdf.
27
Title IX of proposed legislation, “Investor Protection Act of 2009,” submitted by Treasury; see http://www.treas.gov/
press/releases/docs/tg205071009.pdf.
28
Title X of proposed legislation, “Consumer Financial Protection Agency Act of 2009,”submitted by Treasury; see
http://www.financialstability.gov/docs/regulatoryreform/title-III_Natl-Bank-Supervisor_072309.pdf and Title X1,
Improvements to the Federal Trade Commission Act,” submitted by Treasury; see http://www.financialstability.gov/
docs/TITLE-XI.pdf.
29
Title XII of proposed legislation, “Resolution Authority for Large, Interconnected Financial Companies Act of
2009”, submitted by Treasury; see http://www.financialstability.gov/docs/regulatoryreform/title-XII_resolution(continued...)

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b. Revisions to the Federal Reserve’s emergency lending authority to
improve accountability.30
5. Raise international regulatory standards and improve international
cooperation. Treasury proposed international reforms to support U.S. efforts,
including strengthening the capital framework; improving oversight of global
financial markets; coordinating supervision of internationally active firms; and
enhancing crisis management tools.
Treasury also proposed the creation of an Office of National Insurance within the Department of
the Treasury.31
With respect to macro-prudential supervision and systemic risk, the Treasury Plan proposed that
the U.S. Federal Reserve serve as a systemic regulator. Also, in Congress, H.R. 1754/S. 664
would create a systemic risk monitor for the financial system of the United States, to oversee
financial regulatory activities of the federal government, and for other purposes.32 Among its
provisions are to establish an independent Financial Stability Council, to require the Federal
Reserve to promulgate rules to deal with systemic risk, and to transfer authorities and functions of
the Office of Thrift Supervision to the Comptroller of the Currency. (The Treasury Plan would
call this combined agency the National Bank Supervisor.)
Other countries have addressed their own versions of the systemic risk problem. The United
Kingdom, for example, created a tripartite regulatory and oversight system consisting of the Bank
of England, H.M. Treasury, and a Financial Services Agency (a national regulatory agency for all
financial services). Australia and the Netherlands have created systems in which one financial
regulatory agency is responsible for prudential regulation of relevant financial institutions and a
separate and distinct regulatory agency is responsible for business conduct and consumer
protection.33 The European Union is considering the creation of a new European Systemic Risk
Council and European System of Financial Supervisors composed of new European Supervisory
Authorities. 34
In Congress, several bills deal with concerns over the perceived failures of credit rating agencies35
in assigning ratings to derivatives and other financial products. These include H.R. 74, H.R. 1181,
H.R. 1445, S. 927, and S. 1073. The issue of regulation of over-the-counter derivatives is
addressed in CRS Report R40646, Derivatives Regulation in the 111th Congress.

(...continued)
authority_072309.pdf.
30
Title XII of proposed legislation, “Additional Improvements for Financial Crisis Management,” submitted by
Treasury; see http://www.financialstability.gov/docs/regulatoryreform/07222009/titleXIII.pdf.
31
Title V of proposed legislation, “Office of National Insurance Act of 2009,” submitted by Treasury, see
http://www.financialstability.gov/docs/regulatoryreform/07222009/title%20V%20Ofc%20Natl%20Ins%207-222009%20fnl.pdf.
32
For discussion, see CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E.
Getter.
33
U.S. Department of the Treasury. The Department of the Treasury Blueprint for a Modernized Financial Regulatory
Structure. March 2008. 217 p.
34
EUROPA, Financial Services: Commissioni proposes stronger financial supervision in Europe, Press release
IP/90/836, Brussels, Belgium, May 27, 2009.
35
See CRS Report R40613, Credit Rating Agencies and Their Regulation, by Gary Shorter and Michael V. Seitzinger

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Other bills have been introduced that would provide for the establishment of commissions or
special committees to study the causes of the financial crisis. S. 386 (P.L. 111-21, Section 5)
establishes a 10-member Financial Crisis Inquiry Commission in the legislative branch to
examine the causes of the current U.S. financial and economic crisis, taking into account fraud
and abuse in the financial sector and other specified factors. It authorizes $5 million for the
Commission and requires the Commission to submit a final report on its findings to the President
and Congress on December 15, 2010, requires the Commission chairperson to appear before the
House Committee on Financial Services and the Senate Committee on Banking, Housing, and
Urban Affairs within 120 days after the submission of such report, and terminates the
Commission 60 days after the submission of such report. It also requires Republican approval
before the commission could issue subpoenas. Other bills related to commissions or special
committees include H.Res. 345/S.Res. 62, H.R. 74, H.R. 768, H.R. 2111, H.R. 2253/S. 298, and
S. 400.
Numerous bills have been introduced related to the housing market, mortgages, and foreclosures.
They address issues such as: the Troubled Assets Relief Program and its operation36 and
foreclosure prevention initiatives.37 For details, see the CRS reports cited in the footnote below.
The protection of consumers from allegedly unscrupulous practices in mortgage, credit card,
other financial markets also has risen as a priority issue with the Obama Administration. On July
15, 2009, H.R. 3126 was introduced. 38 It would establish the Consumer Financial Protection
Agency as an independent executive agency to regulate the provision of consumer financial
products or services. Its stated mission would be to promote access and protect consumers from
such unscrupulous practices across financial markets. This proposed agency would implement
and enforce the Credit Card Act of 2009 (H.R. 627, P.L. 111-24) and would have powers to write
and enforce consumer protection rules for banks, mortgage lenders, and other financial
institutions, and could cover credit cards, mortgages, checking and savings accounts, and pay-day
loans. The plan would move responsibility for consumer protection from the current bank
regulators to the new agency.39 Also, S. 386 (P.L. 111-21) extends the prohibition against making
false statements in a mortgage application to employees and agents of a mortgage lending
business.
Several bills would provide for oversight, reports, or other investigations into activities related to
the financial crisis. In the 110th Congress, P.L. 110-343 (§125(b)(1)(B)) established the
Congressional Oversight Panel and provides for monthly reports on the Troubled Asset Relief
Program (TARP).40 H.R. 2424, the Federal Reserve Credit Facility Review Act of 2009, would
36
CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by Baird Webel
and Edward V. Murphy. CRS Report R40224, Troubled Asset Relief Program and Foreclosures, by N. Eric Weiss et
al.
37
CRS Report R40210, Preserving Homeownership: Foreclosure Prevention Initiatives, by Katie Jones. CRS Report
R40498, Overview of the Securities Act of 1933 as Applied to Private Label Mortgage-Backed Securities, by Kathleen
Ann Ruane. CRS Report RL33879, Housing Issues in the 110th Congress, coordinated by Libby Perl.
38

CRS Report R40696, Financial Regulatory Reform: Analysis of the Consumer Financial Protection Agency (CFPA)
as Proposed by the Obama Administration and H.R. 3126, by David H. Carpenter and Mark Jickling.
39
U.S. Department of the Treasury, Administration’s Regulatory Reform Agenda Moves Forward: Legislation for
Strengthening Consumer Protection Delivered To Capitol Hill, Press Release TG-189, Washington, DC, June 30, 2009.
Karey Wutkowski, “Consumer agency to slim regulatory burden: U.S. watchdog,” Reuters, June 30, 2009,
http://www.Reuters.com.
40
The reports are at http://tarptracker.org/cop.

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authorize reviews by the Comptroller General of the United States of any credit facility
established by the Board of Governors of the Federal Reserve System or any federal reserve bank
during the current financial crisis, and for other purposes. H.R. 1207 would reform the manner in
which the Board of Governors of the Federal Reserve System is audited by the Comptroller
General of the United States and the manner in which such audits are reported. S. 1223 would
require congressional approval before any Troubled Asset Relief Program (TARP) funds are
provided or obligated to any entity, on and after May 29, 2009, whose receipt of such funds
would result in federal government acquisition of its common or preferred stock.
The issue of compensation for executives of firms that have received government support during
the financial crisis. The American Recovery and Reinvestment Act of 2009 (Title VII of P.L. 1115) restricts the compensation of executives of companies during the period in which any
obligation arising from financial assistance provided under the Troubled Assets Relief Program
(TARP) remains outstanding and requires the Secretary of the Treasury to develop appropriate
standards for executive compensation.41 Some proposals, dubbed “say on pay,” would give
shareholders a greater voice in compensation and governance decisions. Among legislative
initiatives, S. 1074 would provide for greater influence by shareholders in selecting corporate
officers and H.R. 3269 (passed the House on July 31, 2009) would authorize federal regulators of
financial firms to prohibit incentive pay structures that are seen to encourage inappropriate risktaking and require them to adopt say on pay.
For legislation related to a fiscal stimulus and monetary policy, see CRS Report R40104,
Economic Stimulus: Issues and Policies, by Jane G. Gravelle, Thomas L. Hungerford, and Marc
Labonte and CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by
Marc Labonte.
For policy related to government sponsored enterprises, see CRS Report RS21663, GovernmentSponsored Enterprises (GSEs): An Institutional Overview, by Kevin R. Kosar.
For policy related to the International Monetary Fund, see CRS Report RS22976, The Global
Financial Crisis: The Role of the International Monetary Fund (IMF), by Martin A. Weiss.

Four Phases of the Global Financial Crisis
The global financial crisis as it has played out in countries across the globe has been manifest in
four overlapping phases. Although each phase has a policy focus, each phase of the crisis affects
the others, and, until the crisis has passed, no phase seems to have a clear end point.

Contain the Contagion and Strengthen Financial Sectors
The first phase has been intervention to contain the contagion and strengthen financial sectors in
countries.42 On a macroeconomic level, this has included policy actions such as lowering interest
rates, expanding the money supply, quantitative (monetary) easing, and actions to restart and
restore confidence in credit markets. On a microeconomic level, this has entailed actions to
41
CRS Report RS22583, Executive Compensation: SEC Regulations and Congressional Proposals, by Michael V.
Seitzinger.
42
See CRS Report RL34412, Containing Financial Crisis, by Mark Jickling.

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resolve immediate problems and effects of the crisis including financial rescue packages for
ailing firms, guaranteeing deposits at banks, injections of capital, disposing of toxic assets, and
restructuring debt. This has involved decisive (and, in cases, unprecedented) measures both in
scope, cost, and extent of government reach. Actions taken include the rescue of financial
institutions considered to be “too big to fail” and government takeovers of certain financial
institutions, government facilitation of mergers and acquisitions, and government purchases of
problem financial assets. Nearly every industrialized country and many developing and emerging
market countries have pursued some or all of these actions. Although the “panic” phase of
containing the contagion has passed, operations still are continuing, and the ultimate cost of the
actions are yet to be determined. (See Appendix D for early containment actions.)
In the United States, traditional monetary policy almost has reached its limit as the Federal
Reserve has lowered its discount rate to 0.5% and has a target rate for the federal funds rate of 0.0
to 0.25%. The Federal Reserve and Treasury, therefore, have turned toward quantitative monetary
easing (buying government securities and injecting more money into the economy) and dealing
directly with the toxic assets being held by banks. 43
What has been learned from previous financial crises is that without a resolution of underlying
problems with toxic assets and restoring health to the balance sheet of banks and other financial
institutions, financial crises continue to drag on. This was particularly the case with Japan.44 Even
Sweden, often viewed as a successful model of how to cope with a financial crisis, had to take
decisive action to deal with the nonperforming assets of its banking system. 45
In the United States, the Treasury, Federal Reserve, Federal Deposit Insurance Corporation,
Office of Thrift Supervision, and Comptroller of the Currency have worked together to contain
the contagion. Under the $700 billion Troubled Asset Relief Program46 (TARP, H.R. 1424/P.L.
110-343), the Treasury has invested in dozens of banks, General Motors, Chrysler and the insurer
A.I.G. The investments are in the form of preferred stock that pays quarterly dividends. On March
23, 2009, The U.S. Treasury released the details of its $900 billion Public Private Partnership
Investment Program to address the challenge of toxic (legacy) assets being carried by the
financial system. 47
The U.S. Federal Reserve also has conducted about $1.2 trillion in emergency commitments to
stabilize the financial sector. Its interventions have included a safety net for commercial banks,
the rescue of Bear Stearns, a lending facility for investment banks and brokerages, loans for

43

See Board of Governors of the Federal Reserve System, Federal Reserve Press Release, March 18, 2009. U.S.
Department of the Treasury, U.S. Treasury and Federal Reserve Board Announce Launch of Term Asset-Backed
Securities Loan Facility (TALF), Press Release tg-45, March 3, 2009. CRS Report RL31416, Monetary Aggregates:
Their Use in the Conduct of Monetary Policy, by Marc Labonte.
44
Eric S. Rosengren, Addressing the Credit Crisis and Restructuring the Financial Regulatory System: Lessons from
Japan, Federal Reserve Bank of Boston, Paper given at the Institute of International Bankers Annual Washington
Conference, Boston, MA, March 2, 2009.
45
Thomas F. Cooley, “Swedish Banking Lessons,” Forbes.com, January 28, 209.
46

For details, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by
Baird Webel and Edward V. Murphy
47
U.S. Department of the Treasury, Treasury Department Releases Details on the Public Private Partnership
Investment Program, Press Release tg-65, March 23, 2009.

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money-market assets and commercial paper, and purchases of securitized loans and lending to
businesses and consumers for purchases of asset-backed securities. 48

Coping with Macroeconomic Effects
The second phase of this financial crisis is less uncommon except that the severity of the
macroeconomic downturn confronting countries around the world is the worst since the Great
Depression of the 1930s. The financial crisis soon spread to real sectors to negatively affect
whole economies, production, firms, investors, and households. Many of these countries,
particularly those with emerging and developing markets, have been pulled down by the ever
widening flight of capital from their economies and by falling exports and commodity prices. In
these cases, governments have turned to traditional monetary and fiscal policies to deal with
recessionary economic conditions, declining tax revenues, and rising unemployment.
Figure 1 shows the effect of the financial crisis on economic growth rates (annualized changes in
real GDP by quarter) in selected nations of the world. The figure shows the difference between
the 2001 recession that was confined primarily to countries such as the United States, Mexico,
and Japan and the current financial crisis that is pulling down growth rates in a variety of
countries. The slowdown—recession for many countries—is global. The implication of this
synchronous drop in growth rates is that the United States and other nations may not be able to
export their way out of recession. Even China is experiencing a “growth recession.” There is no
major economy that can play the role of an economic engine to pull other countries out of their
economic doldrums.
In July-August 2009, there was a growing consensus among forecasters that the world had seen
the worst of the global recession and that economies would hit bottom in 2009 and begin a weak
recovery as early as the second half of 2009. On June 24, the Organization for Economic
Cooperation and Development revised its world economic outlook upwards for the first time in
two years. Most of this improved outlook, however, was in higher growth in China (7.7%) and
other developing countries and less negative growth in the United States (-2.8%) for 2009. The
outlook for the Eurozone (-4.8%) and Japan (-6.8%) for 2009 was slightly worse. The OECD
reported that housing prices were falling in all OECD countries except for Switzerland. 49

48

For details, see CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte.
“The Fed’s Trillion,” The Washington Post, May 5, 2009, p. A14.
49
Norma Cohen, “OECD Sees Strongest Outlook since 2007,” Financial Times, June 24, 2009, FT.com.

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Figure 1. Quarterly (Annualized) Economic Growth Rates for Selected Countries
20

Percent Growth in GDP
Actual

15

2001
Recession

Forecast

China

Global
Financial
Crisis

10

5

0
U.S.
Japan
Germ any
S. Korea
M exico
Brazil
U.K.

-5

-10
United States
China

Mexico
Japan

Germany
South Korea

United Kingdom
Brazil

Russia

-15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Year (4th quarter)
Source: Congressional Research Service. Data and forecasts (August 15) by Global Insight.

In response to the recession or slowdown in economic growth, many countries have adopted
fiscal stimulus packages designed to induce economic recovery or at least keep conditions from
worsening. These are summarized in Table 2 and Appendix B and include packages by China
($586 billion), the European Union ($256 billion), Japan ($396 billion), Mexico ($54 billion), and
South Korea ($52.5 billion).The global total for stimulus packages now exceeds $2 trillion, but
some of the packages include measures that extend into subsequent years, so the total does not
imply that the entire amount will translate into immediate government spending. The stimulus
packages by definition are to be fiscal measures (government spending or tax cuts) but some
packages include measures aimed at stabilizing banks and other financial institutions that usually
are categorized as bank rescue or financial assistance packages. The $2 trillion total in stimulus
packages amounts to approximately 3% of world gross domestic product, an amount that exceeds
the call by the International Monetary Fund for fiscal stimulus totaling 2% of global GDP to
counter worsening economic conditions world wide. 50 If only new fiscal stimulus measures to be
done in 2009 are counted, however, the total and the percent of global GDP figures would be
considerably lower. An analysis of the stimulus measures by the European Community for 2009
found that such measures amount to an estimated 1.32% of European Community GDP.51 The
50

Camilla Anderson, IMF Spells Out Need for Global Fiscal Stimulus, International Monetary Fund, IMF Survey
Magazine: Interview, Washington, DC, December 28, 2008.
51
David Saha and Jakob von Weizsäcker, Estimating the size of the European stimulus packages for 2009, Brugel,
(continued...)

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IMF estimated that as of January 2009, the U.S. fiscal stimulus packages as a percent of GDP in
2009 would amount to 1.9%, for the euro area 0.9%, for Japan 1.4%, for Asia excluding Japan
1.5%, and for the rest of the G-20 countries 1.1%.52
At the G-20 London Summit, a schism arose between the United States and the U.K., who were
arguing for large and coordinated stimulus packages, and Germany and France, who considered
their automatic stabilizers (increases in government expenditures for items such as unemployment
insurance that are triggered any time the economy slows) plus existing stimulus programs as
sufficient. In their communiqué, the leaders noted that $5 trillion will have been devoted to fiscal
expansion by the end of 2010 and committed themselves to “deliver the scale of sustained fiscal
effort necessary to restore growth.” In the communiqué, the G-20 leaders decided to add $1.1
trillion in resources to the international financial institutions, including $750 billion more for the
International Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral
development banks.
The additional lending by the international financial institutions would be in addition to national
fiscal stimulus efforts and could be targeted to those countries most in need. Several countries
have borrowed heavily in international markets and carry debt denominated in euros or dollars.
As their currencies have depreciated, the local currency cost of this debt has skyrocketed. Other
countries have banks with debt exposure almost as large as national GDP. Some observers have
raised the possibility of a sovereign debt crisis53 (countries defaulting on government guaranteed
debt) or as in the case of Iceland having to nationalize its banks and assume liabilities greater than
the size of the national economy.
Since November 1, 2008, the IMF, under its Stand-By Arrangement facility, has provided or is in
the process of providing financial support packages for Iceland ($2.1 billion), Ukraine ($16.4
billion), Hungary ($25.1 billion), Pakistan ($7.6 billion), Belarus ($2.46 billion), Serbia ($530.3
million), Armenia ($540 million), El Salvador ($800 million), Latvia ($2.4 billion), Seychelles
($26.6 million), Mongolia ($229.2 million), Costa Rica ($735 million), Guatemala ($935
million), and Romania ($17.1 billion). The IMF also created a Flexible Credit Line for countries
with strong fundamentals, policies, and track records of policy implementation. Once approved,
these loans can be disbursed when the need arises rather than being conditioned on compliance
with policy targets as in traditional IMF-supported programs. Under this facility, the IMF board
has approved Mexico ($47 billion), Poland ($20.5 billion), and Columbia ($10.5 billion).54

Regulatory and Financial Market Reform
The third phase of the global financial crisis—to decide what changes may be needed in the
financial system—also is underway. In order to coordinate reforms in national regulatory systems
and give such proposals political backing, world leaders began a series of international meetings
(...continued)
JVW/ DS, 12 December 2008.
52
Charles Freedman, Michael Kumhof, Douglas Laxton, and Jaewoo Lee, The Case for Global Fiscal Stimulus,
International Monetary Fund, IMF Staff Position Note SPN/09/03, March 6, 2009.
53
Steven Pearlstein, “Asia, Europe Find Their Supply Chains Yanked. Beware the Backlash,” The Washington Post,
February 20, 2009, pp. D1, D3.
54
International Monetary Fund, IMF Financial Activities—Update June 18, 2009, Washington, DC, June 18, 2009,
http://www.imf.org/external/np/tre/activity/2009/061809.htm.

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to address changes in policy, regulations, oversight, and enforcement. Some are characterizing
these meetings as Bretton Woods II.55 The G-20 leaders’ Summit on Financial Markets and the
World Economy that met on November 15, 2008, in Washington, DC, was the first of a series of
summits to address these issues. The second was the G-20 Leader’s Summit on April 2, 2009, in
London,56 and the third was the Pittsburgh Summit on September 24-25, 2009, with President
Obama as the host.57
In this third phase, the immediate issues to be addressed by the United States and other nations
center on “fixing the system” and preventing future crises from occurring. Much of this involves
the technicalities of regulation and oversight of financial markets, derivatives, and hedging
activity, as well as standards for capital adequacy and a schema for funding and conducting future
financial interventions, if necessary. In the November 2008 G-20 Summit, the leaders approved
an Action Plan that sets forth a comprehensive work plan.
The leaders instructed finance ministers to make specific recommendations in the following
areas:
•

Avoiding regulatory policies that exacerbate the ups and downs of the business
cycle;

•

Reviewing and aligning global accounting standards, particularly for complex
securities in times of stress;

•

Strengthening transparency of credit derivatives markets and reducing their
systemic risks;

•

Reviewing incentives for risk-taking and innovation reflected in compensation
practices; and

•

Reviewing the mandates, governance, and resource requirements of the
International Financial Institutions.

Most of the technical details of this work plan have been referred to existing international
standards setting organizations or the National Finance Ministers and Central Bank Governors.
These organizations include the International Accounting Standards Board, the Financial
Accounting Standards Board, Basel Committee on Banking Supervision, the International
Organization of Securities Commissions, and the Financial Stability Forum (Board).
At the London Summit, the leaders addressed the issue of coordination and oversight of the
international financial system by establishing a new Financial Stability Board (FSB) with a
strengthened mandate as a successor to the Financial Stability Forum with membership to include
all G-20 countries, Financial Stability Forum members, Spain, and the European Commission.
The FSB is to collaborate with the IMF to provide early warning of macroeconomic and financial
risks and the actions needed to address them. The Summit left it to individual countries to reshape
regulatory systems to identify and take account of macro-prudential (systemic) risks, but agreed

55
The Bretton Woods Agreements in 1944 established the basic rules for commercial and financial relations among the
world’s major industrial states and also established what has become the World Bank and International Monetary Fund.
56
Information on the London G-20 Summit is available at http://www.londonsummit.gov.uk/en/.
57
For details, see http://www.pittsburghsummit.gov/.

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to regulate hedge funds and Credit Rating Agencies.58 The results of the Pittsburgh Summit are
summarized in the G-20 section of this report.
For the United States, the fundamental issues may be the degree to which U.S. laws and
regulations are to be altered to conform to recommendations from the new Financial Stability
Board and what authority the Board and IMF will have relative to member nations. Although the
London Summit strengthened regulations and the IMF, it did not result in a “new international
financial architecture.” The question still is out as to whether the Bretton Woods system should be
changed from one in which the United States is the buttress of the international financial
architecture to one in which the United States remains the buttress but its financial markets are
more “Europeanized” (more in accord with Europe’s practices) and more constrained by the
broader international financial order? Should the international financial architecture be merely
strengthened or include more control, and if more control, then by whom?59 What is the time
frame for a new architecture that may take years to materialize?
For the United States, some of these issues are being addressed by the President’s Working Group
on Financial Markets (consisting of the U.S. Treasury Secretary, Chairs of the Federal Reserve
Board, the Securities and Exchange Commission, and the Commodity Futures Trading
Commission) in cooperation with international financial organizations. Appendix C lists the
major regulatory reform proposals and indicates whether they have been put forward by various
U.S. and international organizations. Those that have been proposed by both the U.S. Treasury
and the G-20 include the following:
•

Systemic Risk: All systemically important financial institutions should be
subject to an appropriate degree of regulation. Use of stress testing by financial
institutions should be more rigorous.

•

Capital Standards: Large complex systemically-important financial institutions
should be subject to more stringent capital regulation than other firms. Capital
decisions by regulators and firms should make greater provision against liquidity
risk.

•

Hedge Funds: Hedge funds should be required to register with a national
securities regulator. Systemically-important hedge funds should be subject to
prudential regulation. Hedge funds should provide information on a confidential
basis to regulators about their strategies and positions.

•

Over-the-Counter Derivatives: Credit default swaps should be processed
through a regulated centralized counterparty (CCP) or clearing house.

•

Tax Havens: Minimum international standards—a regulatory floor—should
apply in all countries, including tax havens and offshore banking centers.

Among the proposals put forward by the Treasury but not mentioned by the G-20 included
creating a single regulator with responsibility over all systemically important financial institutions
with power for prompt corrective action, strengthening regulation of critical payment systems,
processing all standardized over-the-counter derivatives through a regulated clearing house and
58

: Group of Twenty Nations. “London Summit – Leaders’ Statement,” 2 April 2009 http://www.londonsummit.gov.uk/
resources/en/PDF/final-communique
59
Friedman, George and Peter Zeihan. “The United States, Europe and Bretton Woods II.” A Strafor Geopolitical
Intelligence Report, October 20, 2008.

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subjecting them to a strong regulatory regime, and providing authority for a government agency
to take over a failing, systemically important non-bank institution and place it in conservatorship
or receivership outside the bankruptcy system. (For the June 17, 2009, Obama Administration
proposal for financial market regulation, see the “Policy” section of this report.)

Dealing with Political, Social, and Security Effects60
The fourth phase of the financial crisis is in dealing with political, social, and security effects of
the financial turmoil. These are secondary impacts that relate to the role of the United States on
the world stage, its leadership position relative to other countries, and the political and social
impact within countries affected by the crisis. For example, on February 12, 2009, the U.S.
Director of National Intelligence, Dennis Blair, told Congress that instability in countries around
the world caused by the global economic crisis and its geopolitical implications, rather than
terrorism, is the primary near-term security threat to the United States.61

Political Leadership and Regimes
The financial crisis works on political leadership and regimes within countries through two major
mechanisms. The first is the discontent from citizens who are losing jobs, seeing businesses go
bankrupt, losing wealth both in financial and real assets, and facing declining prices for their
products. In democracies, this discontent often results in public opposition to the existing
establishment or ruling regime. In some cases it can foment extremist movements, particularly in
poorer countries where large numbers of unemployed young people may become susceptible to
religious radicalism that demonizes Western industrialized society and encourages terrorist
activity.
The precipitous drop in the price of oil holds important implications for countries, such as Russia,
Mexico, Venezuela, Yemen, and other petroleum exporters, who were counting on oil revenues to
continue to pour into their coffers to fund activities considered to be essential to their interests.
While moderating oil prices may be a positive development for the U.S. consumer and for the
U.S. balance of trade, it also may affect the political stability of certain petroleum exporting
countries. The concomitant drop in prices of commodities such as rubber, copper ore, iron ore,
beef, rice, coffee, and tea also carries dire consequences for exporter countries in Africa, Latin
America, and Asia.62
In Pakistan, a particular security problem exacerbated by the financial crisis could be developing.
The IMF has approved a $7.6 billion loan package for Pakistan, but the country faces serious
economic problems at a time when it is dealing with challenges from suspected al Qaeda and
Taliban sympathizers, when citizen objections are rising to U.S. missile strikes on suspected

60

See CRS Report R40496, The Global Financial Crisis: Foreign and Trade Policy Effects, coordinated by Dick K.
Nanto.
61
Dennis C. Blair, Annual Threat Assessment of the Intelligence Community for the Senate Select Committee on
Intelligence, Director of National Intelligence, Washington, DC, February 12, 2009. See also, U.S. Senate, Committee
on Foreign Relations, “Foreign Policy Implications Of The Global Economic Crisis,” Roundtable before the Committee
On Foreign Relations, February 11, 2009.
62
Johnston, Tim. “Asia Nations Join to Prop Up Prices,” Washington Post, November 1, 2008, p. A10. “Record Fall in
NZ Commodity Price Gauge,” The National Business Review, November 5, 2008.

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terrorist targets in Pakistan, and the country faces a budget shortfall that may curtail the ability of
the government to continue its counterterror operations.63
The second way that the crisis works on ruling regimes is through the actions of existing
governments both to stay in power and to deal with the adverse effects of the crisis. Any crisis
generates centrifugal forces that tend to strengthen central government power. Most nations view
the current financial crisis as having been created by the financial elite in New York and London
in cooperation with their increasingly laissez faire governments. By blaming the industrialized
West, particularly the United States, for their economic woes, governments can stoke the fires of
nationalism and seek support for themselves. As nationalist sentiments rise and economic
conditions worsen, citizens look to governments as a rescuer of last resort. Political authorities
can take actions, ostensibly to counter the effects of the crisis, but often with the result that it
consolidates their power and preserves their own positions. Authoritarian regimes, in particular,
can take even more dictatorial actions to deal with financial and economic challenges.

Economic Philosophy, Protectionism, and State Capitalism
In the basic economic philosophies that guide policy, expediency seems to be trumping freemarket ideologies in many countries. The crisis may hasten the already declining economic
neoliberalism that began with President Ronald Reagan and British Prime Minister Margaret
Thatcher. Although the market-based structure of most of the world economies is likely to
continue, the basic philosophy of deregulation, non-governmental intervention in the private
sector, and free and open markets for goods, services, and capital, seems to be subsumed by the
need to increase regulation of new financial products, increased government intervention, and
some pull-back from further reductions in trade barriers. Emerging market countries, particularly
those in Eastern Europe, moreover, may be questioning their shift toward the capitalist model
away from the socialist model of their past.
State capitalism in which governments either nationalize or own shares of companies and
intervene to direct parts of their operations is rising not only in countries such as Russia, where a
history of command economics predisposes governments toward state ownership of the means of
production, but in the United States, Europe, and Asia. Nationalization of banks, insurance
companies, and other financial institutions, as well as government capital injections and loans to
private corporations have become parts of rescue and stimulus packages and have brought
politicians and bureaucrats directly into economic decision-making at the company level.
While state ownership of enterprises may affect the efficiency and profitability of the operation, it
also raises questions of equity (government favoring one company over another) and the use of
scarce government resources in oversight and management of companies. When taxpayer funds
have been used to invest in a company, the public then has an interest in its operations, but
protecting that interest takes time and resources. This has already been illustrated in the United
States by the attention devoted to executive compensation and bonuses of companies receiving
government loans or capital injections and by the threatened bankruptcy of Chrysler and General

63

Joby Warrick, “Experts See Security Risks in Downturn, Global Financial Crisis May Fuel Instability and Weaken
U.S. Defenses,” Washington Post, November 15, 2008. P. A01. Bokhari, Farhan, “Pakistan’s War On Terror Hits
Roadblock, Global Economic Crisis Prompts Military To Consider Spending Cutbacks,” CBS News (online version),
October 28, 2008.

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Motors. The ideological debate over the role of the government in the economy also has been
manifest in public opposition to a larger government role in health care.64
In the G-20 and other meetings, world representatives have been vocal in calling for countries to
avoid resorting to protectionism as they try to stimulate their own economies. Still, whether it be
provisions to buy domestic products instead of imports, financial assistance to domestic
producers, or export incentives, countries have been attempting to protect national companies
often at the expense of those foreign. Overt attempts to restrict imports, promote exports, or
impose restrictions on trade are limited by the rules of the World Trade Organization (WTO), but
there is ample scope for increases in trade barriers that are consistent with the rules and
obligations of the WTO. These include raising applied tariffs to higher bound levels as well as
actions to impose countervailing duties or to take antidumping measures. Certain sectors also are
excluded from trade agreements for national security or other reasons. Moreover, there are
opportunities to favor domestic producers at the expense of foreign producers through industryspecific relief or subsidy programs, broad fiscal stimulus programs, buy-domestic provisions, or
currency depreciation.
Several countries have imposed trade related measures that tend to protect or assist domestic
industries. In July, 2009, the WTO reported that in the previous three-month period, there had
been “further slippage towards more trade-restricting and distorting policies” but resort to high
intensity protectionist measures had been contained overall. There also had been some tradeliberalizing and facilitating measures, but there had been no general indication of governments
unwinding or removing the measures that were taken early on in the crisis. The WTO also noted
that a variety of new trade-restricting and distorting measures had been introduced, including a
further increase in the initiation of trade remedy investigations (anti-dumping and safeguards) and
an increase in the number of new tariffs and new non-tariff measures (non-automatic licenses,
reference prices, etc.) affecting merchandise trade. The WTO also compiled a list of new trade
and trade-related policy measures that had been taken since September 2008. These included
increases in steel tariffs by India, increases in tariffs on 940 imported products by Ecuador,
restrictions on ports of entry for imports of certain consumer goods by Indonesia, imposition of
non-automatic licensing requirements on products considered as sensitive by Argentina, increase
in tariffs on imports of crude oil by South Korea, re-introduction of export subsidies for certain
dairy products by the European Commission, and a rise in import duties on cars and trucks by
Russia.65
China has announced a number of policy responses to deal with the crisis, including a pledge to
spend $586 billion to boost domestic spending. However, China has also announced rebates of
value added taxes for exports of certain products (such as steel, petrochemicals, information
technology products, textiles, and clothing) and “Buy Chinese” for its stimulus package
spending. 66 Also, despite calls to allow its currency to appreciate, the Chinese government has
depreciated its currency vis-à-vis the dollar in recent months arguably to help its export
industries.
64

David M. Herszenhorn and Sheryl G. Stolberg, “Health Plan Opponents Make Their Voices Heard,” The New York
Times, August 4, 2009, p. A12.
65
World Trade Organization, Director-General, Report to the TPRB from the Director-General on the Financial and
Economic Crisis and Trade-Related Developments, Report No. WT/TPR/OV/W/2, July 15, 2009.
66
World Trade Organization, Director-General, Report to the TPRB from the Director-General on the Financial and
Economic Crisis and Trade-Related Developments, Report No. WT/TPR/OV/W/2, July 15, 2009, p. 60.

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In the United States, the Buy America provision in the February 2009 stimulus package67 has
been widely criticized. Even though the provision applies only to steel, iron, and manufactured
goods used in government funded construction projects and language was included that the
provision “shall be applied in a manner consistent with United States obligations under
international agreements,” many nations have protested the Buy America language as
“protectionist” 68 and as possibly starting down a slippery slope that could lead to WTOinconsistent protectionism by countries.
A concern also is rising among developing nations that a type of “financial protectionism” may
arise. Governments may direct banks that have received capital injections to lend more
domestically rather than overseas. Borrowing by the U.S. Treasury to finance the growing U.S.
budget deficit also pulls in funds from around the world and could crowd out borrowers from
countries also seeking to cover their deficits. Also of concern to countries such as Vietnam,
China, and other exporters of foreign brand name exports is that private flows of investment
capital may decline as producers face rising inventories and excess production capacity. Why
build another factory when existing ones sit idle?

U.S. Leadership Position
Another issue raised by the global financial crisis has been the role of the United States on the
world stage and the U.S. leadership position relative to other countries. How this will play out
with the Obama Administration is yet to be seen, but the rest of the world seems to be expressing
ambivalent feelings about the United States. On one hand, many blame the United States for the
crisis and see it as yet another of the excesses of a country that had emerged as the sole
superpower in a unipolar world following the end of the Cold War. Although not always explicit,
their willingness to follow the U.S. lead appears to have diminished. On the other hand, countries
recognize that the United States is still one of a scant few that can bring other nations along and
induce them to take actions outside of their political comfort zone. The combination of U.S.
military power, extensive economic and financial clout, its diplomatic clout, and its veto power in
the IMF put the United States at the center of any resolution to the global financial turmoil.
During the early phase of the crisis, European leaders (particularly British Prime Minister Gordon
Brown, French President Nicolas Sarkozy, and German Chancellor Angela Merkel) played a
major role and were influential in crafting international mechanisms and policies to deal with
initial adverse effects of the crisis as well as proposing long-term solutions. Also, dealing with the
financial crisis has enabled countries with rich currency reserves, such as China, Russia, and
Japan, to assume higher political profiles in world financial circles. If China 69 helps to finance the
various rescue measures in the United States, Washington may lose some leverage with Beijing in
pursuing human and labor rights, product safety, and other pertinent issues. Also, the inclusion of
China, India, and Brazil in the G-20 Summits rather than just the G-7 or G-8 countries as
67

H.R. 1 (P.L. 111-5) Sec. 1605 provides that none of the funds appropriated or otherwise made available by the act
may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work
unless all of the iron, steel, and manufactured goods used in the project are produced in the United States provided that
such action would not be inconsistent with the public interest, such products are not produced in the United States, and
would not increase the cost of the overall project by more than 25%.
68
“Europe Warns against ‘Buy American’ Clause,” Spiegel Online International, February 3, 2009, Internet edition.
69
For details, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by
Wayne M. Morrison and Marc Labonte.

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originally proposed, seems to indicate the growing influence of the non-industrialized nations in
addressing global financial issues.70 However, as the crisis has played out and with rising
approval of the Obama Administration abroad, it appears that U.S. leadership still plays a central
role. According to a July 2009 Pew Research poll, the image of the United States (a key factor in
the ability to sway world opinion) has improved markedly in most parts of the world.
Improvements in the U.S. image were most pronounced in Western Europe, where favorable
ratings for both the nation and the American people have soared, but opinions of America have
also become more positive in key countries in Latin America, Africa, and Asia.71

International Financial Organizations
The financial crisis has brought international financial organizations and institutions into the
spotlight. These include the International Monetary Fund, the Financial Stability Board (an
enlarged Financial Stability Forum), the Group of Twenty (G-20), the Bank for International
Settlements, the World Bank, the Group of 7 (G-7), and other organizations that play a role in
coordinating policy among nations, provide early warning of impending crises, or assist countries
as a lender of last resort. The precise architecture of any international financial structure and
whether it is to have powers of oversight, regulatory, or supervisory authority is yet to be
determined. However, the interconnectedness of global financial and economic markets has
highlighted the need for stronger institutions to coordinate regulatory policy across nations,
provide early warning of dangers caused by systemic, cyclical, or macroprudential risks72 and
induce corrective actions by national governments. A fundamental question in this process,
however, rests on sovereignty: how much power and authority should an international
organization wield relative to national authorities?
As a result of the global financial crisis, the IMF has expanded its activities along several
dimensions. The first is its role as lender of last resort for countries less able to access
international capital markets. It also is attempting to become a lender of “not-last” resort by
offering flexible credit lines for countries with strong economic fundamentals and a sustained
track record of implementing sound economic policies. The second area of expansion by the IMF
has been in oversight of the international economy and in monitoring systemic risk across
borders. The IMF also tracks world economic and financial developments more closely and
provides countries with the forecasts and analysis of developments in financial markets. It
additionally provides policy advice to countries and regions and is assisting the G-20 with
recommendations to reshape the system of international regulation and governance. Although the
London Summit provided for more funding for the IMF and international development banks,
some larger issues, such as governance of and reform of the IMF are now being determined. (For
further discussion of the IMF, see sections below on “The Challenges” and “International Policy
Issues.”
On June 24, 2009. President Obama signed H.R. 2346 into law (P.L. 111-32). This increased the
U.S. quota in the International Monetary Fund by 4.5 billion SDRs ($7.69 billion), provided loans
70

The G-7 includes Canada, France, Germany, Italy, Japan, United Kingdom, and the United States. The G-8 is the G-7
plus Russia. The G-20 adds Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa,
South Korea, and Turkey.
71
Pew Research Center, Confidence in Obama Lifts U.S. Image Around the World, A Pew Global Attitudes Project,
Washington, DC, July 23, 2009, http://pewglobal.org/reports/display.php?ReportID=264.
72
See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter.

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to the IMF of up to an additional 75 billion SDRs ($116.01 billion), and authorized the United
States Executive Director of the IMF to vote to approve the sale of up to 12,965,649 ounces of the
Fund’s gold. H.R. 2346 was the $105.9 billion war supplemental spending bill that mainly funds
military operations in Iraq and Afghanistan but also included the IMF provisions. On June 26, the
President released a signing statement that included:
However, provisions of this bill within sections 1110 to 1112 of title XI, and sections 1403
and 1404 of title XIV, would interfere with my constitutional authority to conduct foreign
relations by directing the Executive to take certain positions in negotiations or discussions
with international organizations and foreign governments, or by requiring consultation with
the Congress prior to such negotiations or discussions. I will not treat these provisions as
limiting my ability to engage in foreign diplomacy or negotiations.73
This signing statement has been addressed in H.Amdt. 311 to H.R. 3081, the Fiscal 2010 StateForeign Operations spending bill passed on July 7, 2009.

The Washington Action Plan from the G-20 Leader’s Summit in November 2008 contained
specific policy changes that were addressed in the April 2, 2009 Summit in London. The
regulatory and other specific changes have been assigned to existing international organizations
such as the Financial Stability Forum (now Financial Stability Board) and Bank for International
Settlements, as well as international standard setting bodies such as the Basel Committee on
Banking Supervision, International Accounting Standards Board, International Organization of
Securities Commissions, and International Association of Insurance Supervisors.74

Effects on Poverty and Flows of Aid Resources
The global crisis is causing huge losses and dislocation in the industrialized countries of the
world, but in many of the developing countries it is pushing people deep into poverty. The crisis
is being transmitted to the poorer countries through declining exports, falling commodity prices,
reverse migration, and shrinking remittances from citizens working overseas. This could have
major effects in countries which provide large numbers of migrant workers, including Mexico,
Guatemala, El Salvador, India, Bangladesh, and the Philippines.
The decline in tax revenues caused by the slowdown in economic activity also is increasing
competition within countries for scarce budget funds and affecting decisions about the allocation
of national resources. This budget constraint relates directly to the ability to finance official
development assistance to poorer nations and other programs aimed at alleviating poverty.
In the United States, the economic downturn and the vast resources being committed to provide
stimulus to the U.S. economy and rescue trouble financial institutions could clash with some
policy priorities of the new Administration. In foreign policy, President Obama and top officials
in his Administration—including Secretary of State Clinton and Secretary of Defense Gates—
have pledged to increase the capacity of civilian foreign policy institutions and levels of U.S.
73

White House, Office of the Secretary, Below is a statement from the President upon signing H.R. 2346 on June 24,
2009:, Washington, DC, June 26, 2009, http://www.whitehouse.gov/the_press_office/Statement-from-the-Presidentupon-signing-HR-2346/.
74
Progress on these items as of mid-March 2009 is summarized in: U.K. Chair of the G20, Progress Report on the
Immediate Actions of the Washington Action Plan, Annex to the G20 Finance Ministers’ and Central Bank Governors’
Communique - 14 March, London, March 14, 2009.

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foreign assistance. However, financial constraints could impose difficult choices between foreign
policy priorities—for example, between boosting levels of non-military aid to Afghanistan and
increasing global health programs–or changes to planned levels of increases across the board. The
global reach of the economic downturn further complicates the resource problem, as it both limits
what other countries can do to address common international challenges and potentially
exacerbates the scale of need in conflict areas and the developing world.

New Challenges and Policy in Managing Financial
Risk75
The Challenges
The actions of the United States and other nations in coping with the global financial crisis first
aimed to contain the contagion, minimize losses to society, restore confidence in financial
institutions and instruments, and lubricate the economic system in order for it to return to full
operation. Attention now is focused on stimulating the economy and stemming the downturn in
macroeconomic conditions that is increasing unemployment and forcing many companies into
bankruptcy. As of early 2009, as much as 40% of the world’s wealth may have been destroyed
since the crisis began,76 although equity markets have recovered somewhat since then. There still
is uncertainty, however, over whether the nascent economic recovery will fade once the
government stimulus measures end. It also is unknown whether the current crisis is an aberration
that can be fixed by tweaking the system, or whether it reflects systemic problems that require
major surgery. What has become evident is that entrenched interests are so strong that even
relatively “small” changes in, for example, the structure of financial regulation in the United
States, is difficult. The world now is working its way through the third phase of the crisis. The
goal is to change the regulatory structure and regulations, the global financial architecture, and
some of the imbalances in trade and capital flows to ensure that future crises do not occur or, at
least, to mitigate their effects.
Judging from policy proposals to cope with the financial crisis in both the United States and in
Europe, it appears that solutions are taking a multipronged approach. They are being aimed at the
different levels in which financial markets operate: globally, nationally, and by specific financial
sector.
On the global side, there exists no international architecture capable of coping with and
preventing global crises from erupting. The financial space above nations basically is anarchic
with no supranational authority with firm oversight, regulatory, and enforcement powers. Since
financial crises occur even in relatively tightly regulated economies, the likelihood that a
supranational authority could prevent an international crisis from occurring is questionable.
International norms and guidelines for financial institutions exist, but most are voluntary, and
countries are slow to incorporate them into domestic law. 77 As such, the system operates largely
75

Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division.

76

Edmund Conway, “WEF 2009: Global crisis ‘has destroyed 40pc of world wealth’,” Telegraph.co.uk, January 29,
2009, Internet edition.
77
For example, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable Framework, by
Walter W. Eubanks.

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on trust and confidence and by hedging financial bets. The financial crisis has been a “wake-up
call” for investors who had confidence in, for example, credit ratings placed on securities by
credit rating agencies operating under what some have referred to as “perverse incentives and
conflicts of interest.”
The financial crisis crossed national boundaries and spread from individual financial institutions
to the wider economy. Not only did countries of the world not directly complicit in the original
financial problems suffer “collateral damage,” but the ensuing downturn in economic activity
affected millions of “innocent bystanders” because of their being connected through trade,
financial, and investment flows. To some extent, the International Monetary Fund, World Bank,
or the Organization for Economic Cooperation and Development monitored the global economy,
but they tended to focus on macroeconomic flows and not on macroprudential regulation.
The global financial crisis resulted from a confluence of factors and processes at both the macrofinancial level (across financial sectors) and at the micro-financial level (the behavior of
individual institutions and the functioning of specific market segments). This joint influence of
both macro and micro factors resulted in market excesses and the emergence of systemic risks of
unprecedented magnitude and complexity. 78 In the United States, regulation tends to be by
function. There has been no macroprudential or systemic regulation and oversight. 79 Separate
regulatory agencies oversee each line of financial service: banking, insurance, securities, and
futures. This is microprudential regulation under which no single regulator possesses all of the
information and authority necessary to monitor systemic and synergistic risk or the potential that
seemingly isolated events could lead to broad dislocation and a financial crisis so widespread that
it affects the real economy. 80 Also no single regulator can take coordinated action throughout the
financial system.
In a report on systemic regulation, the Council on Foreign Relations explained the problem as
follows:
One regulatory organization in each country should be responsible for overseeing the health
and stability of the overall financial system. The role of the systemic regulator should
include gathering, analyzing, and reporting information about significant interactions
between and risks among financial institutions; designing and implementing systemically
sensitive regulations, including capital requirements; and coordinating with the fiscal
authorities and other government agencies in managing systemic crises. We argue below that
the central bank should be charged with this important new responsibility.81

Analysis by the European Central Bank suggests three main considerations on the way in which
systemic risks should be monitored and analyzed. First, macroprudential analysis needs to capture
all components of financial systems and how they interact. This would include all intermediaries,
markets, and infrastructures underpinning them. Second, macroprudential risk assessment should
cover the interactions between the financial system and the economy at large. Third, financial
78

Lucas Papademos, “Strengthening macro-prudential supervision in Europe,” Speech by Lucas Papademos, Vice
President of the ECB, Brussels, Belgium, March 24, 2009.
79
See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter.
80

See CRS Report R40249, Who Regulates Whom? An Overview of U.S. Financial Supervision, by Mark Jickling and
Edward V. Murphy
81
Squam Lake Working Group on Financial Regulation, A Systemic Regulator for Financial Markets, Council on
Foreign Relations, Center for Geoeconomic Studies, Working Paper, May 2009, p. 2.

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markets are not static and are continuously evolving as a result of innovation and international
integration. Several financial crises in history have resulted from financial liberalizations or
innovations that were neither sufficiently understood nor managed.82
A related consideration in policymaking is that centers of financial activity, such as New York,
London, and Tokyo, compete with each other, and multinational firms can choose where to
conduct particular financial transactions. Unless the regulatory framework and the supervisory
arrangements in the United States, Europe, and other large financial centers are broadly
compatible with each other, business may flow from the United States to the area of minimal
regulation and supervision. The interconnectedness of financial centers across the world also
implies that systemic risk can be amplified because of actions occurring in different countries,
often out of sight or reach of national regulators.
One challenge is that the world economy depends greatly on large financial (and other)
institutions that may be deemed “too large to fail.” If an institution is considered to be “too big to
fail,” its bankruptcy would pose a significant risk to the system as a whole. Yet, if there is an
implicit promise of governmental support in case of failure, the government may create a moral
hazard, which is the incentive for an entity to engage in risky behavior knowing that the
government will rescue it if it fails. Another challenge is that innovative financial instruments
may not be well understood or regulated. Some of the early proposals have been designed to
bring hedge funds, off-balance sheet financial entities, and, perhaps, credit default swaps under
regulatory authority.
A further challenge is that existing micro-prudential regulation, by and large, did not identify the
nature and size of accumulating financial and systemic risks and impose appropriate remedial
actions. Even though some analysts and institutions were sounding alarms before the crisis
erupted, there were few regulatory tools available to cope with the accumulation of risk in the
system as a whole or the risks being imposed by other firms either in the same or different
sectors. There also seemed to be insufficient response to these risks either by market participants
or by the authorities responsible for the oversight of individual financial institutions or specific
market segments.
Under a free-enterprise system, a fundamental assumption is that markets will self-correct, and
that individuals, in pursuing their own financial interests, like an “invisible hand,” tend also to
promote the good of the global community. If losses occur, investors and institutions naturally
become more prudent in the future. A complex challenge remains to determine how much further
regulation and oversight is necessary to moderate behavior by institutions that may be in their
own financial interest but may pose excessive risk to the system as a whole. Also, how can
supervisory authorities preclude a repeat of the same mistakes in the future as personnel and firms
change and as memories of financial crises become distant? Also, how should the system be
improved to fill gaps in information and technical expertise in order to compensate for faulty or
incomplete methods of modeling risk or to provide more resilience in the system to offset human
error?
For other nations of the world, what has become clear from the crisis is that U.S. financial
ailments can be highly contagious. Foreign financial institutions are not immune to ill health in
82

Lorenzo Bini Smaghi, “Lorenzo Bini Smaghi: Going forward – regulation and supervision after the financial
turmoil,” Bank for International Settlements, BIS Review, 77, 2009.

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American banks, brokerage houses, and insurance companies. The financial services industry
links together investors and financial institutions in disparate countries around the world.
Investors seek higher risk-adjusted returns in any market. In financial markets, moreover,
innovations in one market quickly spread to another, and sellers in one country often seek buyers
in another. AIG insurance, for example, appears to have been brought down primarily by its
Financial Products subsidiary based in London, an operation that engaged heavily in credit
default swaps.83 The revolution in communications, moreover, works both ways. It allows for
instant access to information and remote access to market activity, but it also feeds the herd
instinct and is susceptible to being used to spread biased or incomplete information.
The linking of economies also transcends financial networks.84 Flows of international trade both
in goods and services are affected directly by macroeconomic conditions in the countries
involved. In the second phase of the financial crisis, markets all over the world have been
experiencing historic declines. Precipitous drops in stock market values have been mirrored in
currency and commodity markets.
Another issue is the mismatch between regulators and those being regulated. The policymakers
can be divided between those of national governments and, to an extent, those of international
institutions, but the resulting policy implementation, oversight, and regulation almost all rest in
national governments (as well as sub-national governments such as states, e.g. New York, for
insurance regulation). Yet many of the financial and other institutions that are the object of new
oversight or regulatory activity may themselves be international in presence. They tend to operate
in all major markets and congregate around world financial centers (i.e., London, New York,
Zurich, Hong Kong, Singapore, Tokyo, and Shanghai) where client portfolios often are based and
where institutions and qualified professionals exist to support their activities. The major market
for derivatives, for example, is London, even though a sizable proportion of the derivatives,
themselves, may be issued by U.S. companies based on U.S. assets.
A further issue is to what extent the U.S. government and Federal Reserve as “domestic lenders of
last resort” should intervene in the day-to-day activities of corporations that have received federal
support funds. Traditionally, financial regulations have been aimed at ensuring financial stability,
transparency, and equity. Financial institutions have traded the promise of a governmental safety
net for government rules that attempt to ensure that a safety net is not necessary. Issues such as
executive compensation and bonuses, 85 or, in the case of General Motors, whether executives
travel by private jet, traditionally have not been subject to regulation. Yet once the government
provides public support for companies, public pressure rises to intervene in such matters.
A fundamental issue deals with the nature of regulation and supervision. Banking regulation tends
to be specific and detailed and places requirements and limits on bank behavior. Federal securities
regulation, however, is based primarily on disclosure. Registration with the Securities and
Exchange Commission is required, but that registration does not imply that an investment is safe,
only that the risks have been fully disclosed. The SEC has no authority to prevent excessive risk
83

Morgenson, Gretchen, “Behind Insurer’s Crisis, Blind Eye to a Web of Risk,” The New York Times (Internet edition),
September 27, 2008.
84
For an analysis of global production networks, see CRS Report R40167, Globalized Supply Chains and U.S. Policy,
by Dick K. Nanto.
85
CRS Report RS22583, Executive Compensation: SEC Regulations and Congressional Proposals, by Michael V.
Seitzinger.

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taking. Likewise, derivatives trading is supervised by the Commodity Futures Trading
Commission, but the futures exchanges and the over-the-counter markets on which they trade are
largely unregulated. 86

Summary of Policy Targets and Options
Table 1 lists the major problems raised by the crisis, the targets of policy, and the policies already
being taken or possibly to take by various entities in response to the global financial crisis. The
long-term policies listed in the table essentially center on issues of transparency, disclosure, risk
management, creating buffers to make the system more resilient, dealing with the secondary
effects of the crisis, and the interface between domestic and international financial institutions.
The length and breadth of the list indicates the extent that the financial crisis has required diverse
and draconian action. The number of policies or actions not yet taken and being considered
(marked by a “?” in the table) indicate that policymakers may still have a long way to go to
rebuild the financial system that has been at the heart of the economic strength of the world.
Many of these items are discussed in later sections of this report and are addressed in separate
CRS reports.87
Table 1. Problems,Targets of Policy, and Actions Taken or Possibly to Take in
Response to the Global Financial Crisis

Problem

Targets of Policy

Actions Taken or Possibly To
Take

Containing the Contagion and Restoring Market Operations
Bankruptcy of financial institutions

Financial institution, Financial sector

—Capital injection through loans or
stock purchases—Increase capital
requirements
—Takeover of company by
government or other company
—Allow to go bankrupt

Excess toxic debt

Capital base of debt holding
institution

—Write-off of debt by holding
institution
—Purchase of toxic debt through
Public Private Partnership Investment
Program government at a discount
(March 23, 2009, Treasury
announcement)
—Ease mark-to-market accounting
requirements (April 2, 2009,
Financial Accounting Standards

86

CRS Report R40249, Who Regulates Whom? An Overview of U.S. Financial Supervision, by Mark Jickling and
Edward V. Murphy
87
See, for example, CRS Report RL34412, Containing Financial Crisis, by Mark Jickling; CRS Report RL33775,
Alternative Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the Subprime and Alt-A
Markets, by Edward V. Murphy; CRS Report RL34657, Financial Institution Insolvency: Federal Authority over
Fannie Mae, Freddie Mac, and Depository Institutions, by David H. Carpenter and M. Maureen Murphy; CRS Report
RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte; CRS Report RS22099, Regulation
of Naked Short Selling, by Mark Jickling; and CRS Report RS22932, Credit Default Swaps: Frequently Asked
Questions, by Edward V. Murphy.

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Problem

Targets of Policy

Actions Taken or Possibly To
Take
Board)
—Restructure mortgages
—Nationalize debt holding
institutions?

Credit market freeze

Lending institutions

—Coordinated lowering of interest
rates by central banks/Federal
Reserve
—Guarantee short-term,
uncollateralized business lending
—Capital injection through loans or
stock purchases

Consumer runs on deposits in banks
and money market funds

Banks
Brokerage houses

—Guarantee bank deposits
—Guarantee money market
accounts
—Buy underlying money market
securities to cover redemptions

Declining stock markets

Investors
Short sellers

—Temporary ban on short sales of
stock
—Government purchases of stock?

Global recession, rising
unemployment, decreasing tax
revenues, declining exports

National governments

—Stimulative monetary and fiscal
policies
—Increased lending by International
Financial Institutions (April 2009 G20 declaration to increase IMF
funding)
—Trade policy?
—Support for unemployed
—Cash for Clunkers rebates for
buying new cars with better gas
mileage (June 2009)

Coping with Long-Term, Systemic Problems
Poor underwriting standards
Overly high ratings of collateralized
debt obligations by rating companies
Lack of transparency in ratings

Credit rating agencies
Bundlers of collateralized debt
obligations
Corporate leveraged lenders

—More transparency in factors
behind credit ratings and better
models to assess risk?
—Regulation of Credit Rating
Agencies (April 2, 2009 London
Summit)
—Changes to the IOSCO Code of
Conduct for Credit Rating Agencies?
—Strengthen oversight of lenders?
—Strengthen disclosure requirements to make information more
easily accessible and usable?

Incentive distortions for originators
of mortgages (no penalty for
mortgage defaults due to faulty
lending practices)

Mortgage originators
Fannie Mae/Freddie Mac
All participants in the originate-todistribute chain

—Require loan originators and
bundlers to provide initial and
ongoing information on the quality
and performance of securitized
assets or to retain a 5% interest in
the security (June 17 Treasury Plan)
—Strengthened oversight of
mortgage originators (June 17
Treasury Plan)
—Penalties for malfeasance by

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Problem

Targets of Policy

Actions Taken or Possibly To
Take
originators?

Shortcomings in risk management
practices
Severe underestimation of
risks in the tails of default
distributions and insufficient regard
for systemic risk
Risk models that encourage procyclical risk taking

Investors
Banks, securities companies

Banks had weak controls over offbalance sheet risks

Bank structured investment vehicles
Bank sponsored conduits

Regulatory agencies

Regulatory agencies

—More prudent oversight of capital,
liquidity, and risk management?
—Raise capital requirements for
complex structured credit products
and to account for liquidity risk (June
17 Treasury Plan)
—Strengthen authorities’
responsiveness to risk?
—Set stricter capital and liquidity
buffers for financial institutions (June
17 Treasury Plan)
—Strengthen accounting and
regulatory practices?
—Raise capital requirements for offbalance sheet investment vehicles?

Regulators are “stove piped.” Do not
deal adequately with large complex
financial institutions

Financial intermediaries engaged in a
combination of banking, securities,
futures, or insurance

—create an independent agency to
monitor systemic risk (March 20 and
June 17, 2009 Treasury
Announcements and plans)
—Create a Financial Services
Oversight Council or other
organization to improve interagency
coordination and cooperation (June
17,2009 Treasury plan)

Hedge funds and private equity are
largely unregulated
Information on Credit Default Swaps
not public

Regulatory agencies

—extend regulation and oversight to
hedge funds and private equity (April
2, 2009, London Summit, June 17,
2009 Treasury Plan)
—create clearing counterparty for
credit default swaps (March 26, 2009
Treasury Announcement)

Consumers being “victimized” in
credit card, mortgage, and other
financial markets

Bank regulatory agencies

—create a Consumer Financial
Protection Agency (June 17, 2009
Treasury Plan)

Problems for International Policy
Lack of consistency in regulations
among nations and need for new
regulations to cope with new risks
and exposures

National regulatory and oversight
authorities
Bank for International Settlements
International Monetary Fund
Financial Stability Board (Financial
Stability Forum)

Congressional Research Service

—Implement G-20 Action Plan
(November 15, 2008 G-20 Summit)
—Implement Basel II (Bank for
International Settlements’ capital and
other requirements for banks) (in
process by countries)
—Bretton Woods II agreement?
—Greater role for the Financial
Stability Board/Forum and
International Monetary Fund (April 2,
2009 London Summit, June 17
Treasury Plan)
—Establish colleges of national
supervisors to oversee financial
sectors across boundaries
(November 15, 2008 G-20 Summit)

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The Global Financial Crisis: Analysis and Policy Implications

Actions Taken or Possibly To
Take

Problem

Targets of Policy

Countries unable to cope with
financial crisis

IMF, Development Banks
National monetary authorities and
governments

—Increased resources for the IMF
and World Bank (April 2, 2009
London Summit) (H.R. 2346,
provided for increase in quota and
loans to the IMF)
—Loans and swaps by capital surplus
countries
—Creation of long-term
international liquidity pools to
purchase assets?

Countries slow to recognize
emerging problems in financial
systems

National monetary and banking
authorities
Governments
IMF
Regional organizations

—Increased IMF and Financial
Stability Board/Forum
macroprudential/systemic oversight,
surveillance and consultations (April
2, 2009 London Summit, June 17
Treasury Plan)
—Build more resilience into the
system?
—Increase reporting requirements?
—Establish colleges of national
supervisors to oversee financial
sectors across national borders
(Nov. 15, 2008, G-20 Summit)

Lack of political support to
implement changes in policy

National political leaders

—G-20 international summit
meetings
—Bilateral and plurilateral meetings
and events

Source: Congressional Research Service
Notes: In the Actions to Take column, a “?” indicates that the action or policy has been proposed but is still in
development or not yet taken.

Origins, Contagion, and Risk88
Financial crises of some kind occur sporadically virtually every decade and in various locations
around the world. Financial meltdowns have occurred in countries ranging from Sweden to
Argentina, from Russia to Korea, from the United Kingdom to Indonesia, and from Japan to the
United States.89 As one observer noted: as each crisis arrives, policy makers express ritual shock,
then proceed to break every rule in the book. The alternative is unthinkable. When the worst is
passed, participants renounce crisis apostasy and pledge to hold firm next time. 90
Each financial crisis is unique, yet each bears some resemblance to others. In general, crises have
been generated by factors such as an overshooting of markets, excessive leveraging of debt, credit
88

Prepared by Dick K. Nanto. See also, CRS Report RL34730, Troubled Asset Relief Program: Legislation and
Treasury Implementation, by Baird Webel and Edward V. Murphy.
89
For a review of past financial crises, see Luc Laeven and Fabian Valencia. “Systemic Banking Crises: A New
Database,” International Monetary Fund Working Paper WP/08/224, October 2008. 80p.
90
Gelpern, Anna. “Emergency Rules,” The Record (Bergen-Hackensack, NJ), September 26, 2008.

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booms, miscalculations of risk, rapid outflows of capital from a country, mismatches between
asset types (e.g., short-term dollar debt used to fund long-term local currency loans),
unsustainable macroeconomic policies, off-balance sheet operations by banks, inexperience with
new financial instruments, and deregulation without sufficient market monitoring and oversight.
As shown in Figure 2, the current crisis harkens back to the 1997-98 Asian financial crisis in
which Thailand, Indonesia, and South Korea had to borrow from the International Monetary Fund
to service their short-term foreign debt and to cope with a dramatic drop in the values of their
currency and deteriorating financial condition. Determined not to be caught with insufficient
foreign exchange reserves, countries subsequently began to accumulate dollars, Euros, pounds,
and yen in record amounts. This was facilitated by the U.S. trade (current account) deficit and by
its low saving rate.91 By mid-2008, world currency reserves by governments had reached $4.4
trillion with China’s reserves alone approaching $2 trillion, Japan’s nearly $1 trillion, Russia’s
more than $500 billion, and India, South Korea, and Brazil each with more than $200 billion.92
The accumulation of hard currency assets was so great in some countries that they diverted some
of their reserves into sovereign wealth funds that were to invest in higher yielding assets than
U.S. Treasury and other government securities. 93

91

From 2005-2007, the U.S. current account deficit (balance of trade, services, and unilateral transfers) was a total of
$2.2 trillion.
92
Reuters. Factbox—Global foreign exchange reserves. October 12, 2008.
93
See CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A.
Weiss.

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Figure 2. Origins of the Financial Crisis:The Rise and Fall of Risky Mortgage and Other Debt

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The Global Financial Crisis: Analysis and Policy Implications

Following the Asian financial crisis, much of the world’s “hot money” began to flow into high
technology stocks. The so-called “dot-com boom” ended in the spring of 2000 as the value of
equities in many high-technology companies collapsed.
After the dot-com bust, more “hot investment capital” began to flow into housing markets—not
only in the United States but in other countries of the world. At the same time, China and other
countries invested much of their accumulations of foreign exchange into U.S. Treasury and other
securities. While this helped to keep U.S. interest rates low, it also tended to keep mortgage
interest rates at lower and attractive levels for prospective home buyers.94 This housing boom
coincided with greater popularity of the securitization of assets, particularly mortgage debt
(including subprime mortgages), into collateralized debt obligations (CDOs).95 A problem was
that the mortgage originators often were mortgage finance companies whose main purpose was to
write mortgages using funds provided by banks and other financial institutions or borrowed. They
were paid for each mortgage originated but had no responsibility for loans gone bad. Of course,
the incentive for them was to maximize the number of loans concluded. This coincided with
political pressures to enable more Americans to buy homes, although it appears that Fannie Mae
and Freddie Mac were not directly complicit in the loosening of lending standards and the rise of
subprime mortgages.96
In order to cover the risk of defaults on mortgages, particularly subprime mortgages, the holders
of CDOs purchased credit default swaps97 (CDSs). These are a type of insurance contract (a
financial derivative) that lenders purchase against the possibility of credit event (a default on a
debt obligation, bankruptcy, restructuring, or credit rating downgrade) associated with debt, a
borrowing institution, or other referenced entity. The purchaser of the CDS does not have to have
a financial interest in the referenced entity, so CDSs quickly became more of a speculative asset
than an insurance policy. As long as the credit events never occurred, issuers of CDSs could earn
huge amounts in fees relative to their capital base (since these were technically not insurance,
they did not fall under insurance regulations requiring sufficient capital to pay claims, although
credit derivatives requiring collateral became more and more common in recent years). The
94
See U.S. Joint Economic Committee, “Chinese FX Interventions Caused international Imbalances, Contributed to
U.S. Housing Bubble,” by Robert O’Quinn. March 2008.
95
For further analysis, see CRS Report RL34412, Containing Financial Crisis, by Mark Jickling, U.S. Joint Economic
Committee, “The U.S. Housing Bubble and the Global Financial Crisis: Vulnerabilities of the Alternative Financial
System,” by Robert O’Quinn. June 2008.
96
Fannie Mae (Federal National Mortgage Association) is a government-sponsored enterprise (GSE) chartered by
Congress in 1968 as a private shareholder-owned company with a mission to provide liquidity and stability to the U.S.
housing and mortgage markets. It operates in the U.S. secondary mortgage market and funds its mortgage investments
primarily by issuing debt securities in the domestic and international capital markets. Freddie Mac (Federal Home Loan
Mortgage Corp) is a stockholder-owned GSE chartered by Congress in 1970 as a competitor to Fannie Mae. It also
operates in the secondary mortgage market. It purchases, guarantees, and securitizes mortgages to form mortgagebacked securities. For an analysis of Fannie Mae and Freddie Mac’s role in the subprime crisis, see David Goldstein
and Kevin G. Hall, “Private sector loans, not Fannie or Freddie, triggered crisis,” McClatchy Newspapers, October 12,
2008.
97
A credit default swap is a credit derivative contract in which one party (protection buyer) pays a periodic fee to
another party (protection seller) in return for compensation for default (or similar credit event) by a reference entity.
The reference entity is not a party to the credit default swap. It is not necessary for the protection buyer to suffer an
actual loss to be eligible for compensation if a credit event occurs. The protection buyer gives up the risk of default by
the reference entity, and takes on the risk of simultaneous default by both the protection seller and the reference credit.
The protection seller takes on the default risk of the reference entity, similar to the risk of a direct loan to the reference
entity. See CRS Report RS22932, Credit Default Swaps: Frequently Asked Questions, by Edward V. Murphy.

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sellers of the CDSs that protected against defaults often covered their risk by turning around and
buying CDSs that paid in case of default. As the risk of defaults rose, the cost of the CDS
protection rose. Investors, therefore, could arbitrage between the lower and higher risk CDSs and
generate large income streams with what was perceived to be minimal risk.
In 2007, the notional value (face value of underlying assets) of credit default swaps had reached
$62 trillion, more than the combined gross domestic product of the entire world ($54 trillion),98
although the actual amount at risk was only a fraction of that amount (approximately 3.5%). By
July 2008, the notional value of CDSs had declined to $54.6 trillion and by October 2008 to an
estimated $46.95 trillion. 99 The system of CDSs generated large profits for the companies
involved until the default rate, particularly on subprime mortgages, and the number of
bankruptcies began to rise. Soon the leverage that generated outsized profits began to generate
outsized losses, and in October 2008, the exposures became too great for companies such as AIG..

Risk
The origins of the financial crisis point toward three developments that increased risk in financial
markets. The first was the originate-to-distribute model for mortgages. The originator of
mortgages passed them on to the provider of funds or to a bundler who then securitized them and
sold the collateralized debt obligation to investors. This recycled funds back to the mortgage
market and made mortgages more available. However, the originator was not penalized, for
example, for not ensuring that the borrower was actually qualified for the loan, and the buyer of
the securitized debt had little detailed information about the underlying quality of the loans.
Investors depended heavily on ratings by credit agencies.
The second development was a rise of perverse incentives and complexity for credit rating
agencies. Credit rating firms received fees to rate securities based on information provided by the
issuing firm using their models for determining risk. Credit raters, however, had little experience
with credit default swaps at the “systemic failure” tail of the probability distribution. The models
seemed to work under normal economic conditions but had not been tested in crisis conditions.
Credit rating agencies also may have advised clients on how to structure securities in order to
receive higher ratings. In addition, the large fees offered to credit rating firms for providing credit
ratings were difficult for them to refuse in spite of doubts they might have had about the
underlying quality of the securities. The perception existed that if one credit rating agency did not
do it, another would.
The third development was the blurring of lines between issuers of credit default swaps and
traditional insurers. In essence, financial entities were writing a type of insurance contract without
regard for insurance regulations and requirements for capital adequacy (hence, the use of the term
“credit default swaps” instead of “credit default insurance”). Much risk was hedged rather than
backed by sufficient capital to pay claims in case of default. Under a systemic crisis, hedges also
may fail. However, although the CDS market was largely unregulated by government, more than
850 institutions in 56 countries that deal in derivatives and swaps belong to the ISDA
(International Swaps and Derivatives Association). The ISDA members subscribe to a master
98

Notional value is the face value of bonds and loans on which participants have written protection. World GDP is
from World Bank. Development Indicators.
99
International Swaps and Derivatives Association, ISDA Applauds $25 Trn Reductions in CDS Notionals, Industry
Efforts to Improve CDS Operations. News Release, October 27, 2008.

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agreement and several protocols/amendments, some of which require that in certain
circumstances companies purchasing CDSs require counterparties (sellers) to post collateral to
back their exposures.100 It was this requirement to post collateral that pushed some companies
toward bankruptcy. The blurring of boundaries among banks, brokerage houses, and insurance
agencies also made regulation and information gathering difficult. Regulation in the United States
tends to be functional with separate government agencies regulating and overseeing banks,
securities, insurance, and futures. There was no suprafinancial authority.

The Downward Slide
The plunge downward into the global financial crisis did not take long. It was triggered by the
bursting of the housing bubble and the ensuing subprime mortgage crisis in the United States, but
other conditions have contributed to the severity of the situation. Banks, investment houses, and
consumers carried large amounts of leveraged debt. Certain countries incurred large deficits in
international trade and current accounts (particularly the United States), while other countries
accumulated large reserves of foreign exchange by running surpluses in those accounts. Investors
deployed “hot money” in world markets seeking higher rates of return. These were joined by a
huge run up in the price of commodities, rising interest rates to combat the threat of inflation, a
general slowdown in world economic growth rates, and increased globalization that allowed for
rapid communication, instant transfers of funds, and information networks that fed a herd instinct.
This brought greater uncertainty and changed expectations in a world economy that for a half
decade had been enjoying relative stability.
An immediate indicator of the rapidity and spread of the financial crisis has been in stock market
values. As shown in Figure 3, as values on the U.S. market plunged, those in other countries were
swept down in the undertow. By mid-October 2008, the stock indices for the United States, U.K.,
Japan, and Russia had fallen by nearly half or more relative to their levels on October 1, 2007.
The downward slide reached a bottom in mid-March 2009, although there still is concern that the
subsequent slow recovery in stock values has been a “bear market bounce” and that these stock
markets may again go into sustained decline. the close tracking of the equities markets in the
United States, Japan, and the U.K. provides further evidence of the global nature of capital
markets and the rapidity of international capital flows.

100
For information on the International Swaps and Derivatives Association, see http://www.isda.org. In 2008, credit
derivatives had collateralized exposure of 74%. See ISDA, Margin Survey 2008. Collateral calls have been a major
factor in the financial difficulties of AIG insurance.

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Figure 3. Selected Stock Market Indices for the United States, U.K., Japan,
and Russia

140

Stock Market Indices (1 Oct 2007 = 100)
Russian RTS

120
UK FTSE
100

100
80
60

Severe
Global
Contagion

Dow Jones Industrials
Japan’s Nikkei 225

40
Mild Global Contagion

20
7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 99
-0 v-0 c-0 n-0 b-0 r-0 r-0 y-0 n-0 l-0 g-0 p-0 t-0 v-0 c-0 n-0 b-0 r-0 r-0 y-0 n-0 l-0g-0
t
u
u
c
c
O -No -De -Ja -Fe -Ma -Ap -Ma -Ju 1-J -Au -Se -O -No -De -Ja -Fe -Ma -Ap -Ma -Ju 1-J-Au
31 30 31 31 29 31 30 30 30 3 29 30 31 28 31 30 27 31 30 29 30 318

Day/Month/Year
Source: Factiva database.

Declines in stock market values reflected huge changes in expectations and the flight of capital
from assets in countries deemed to have even small increases in risk. Many investors, who not too
long ago had heeded financial advisors who were touting the long term returns from investing in
the BRICs (Brazil, Russia, India, and China),101 pulled their money out nearly as fast as they had
put it in. Dramatic declines in stock values coincided with new accounting rules that required
financial institutions holding stock as part of their capital base to value that stock according to
market values (mark-to-market). Suddenly, the capital base of banks shrank and severely curtailed
their ability to make more loans (counted as assets) and still remain within required capital-asset
ratios. Insurance companies too found their capital reserves diminished right at the time they had
to pay buyers of or post collateral for credit default swaps. The rescue (establishment of a
conservatorship) for Fannie Mae and Freddie Mac in September 2008 potentially triggered credit
default swap contracts with notional value exceeding $1.2 trillion.
In addition, the rising rate of defaults and bankruptcies created the prospect that equities would
suddenly become valueless. The market price of stock in Freddie Mac plummeted from $63 on
October 8, 2007 to $0.88 on October 28, 2008. Hedge funds, whose “rocket scientist” analysts
claimed that they could make money whether markets rose or fell, lost vast sums of money. The
101

Thomas M. Anderson, “Best Ways to Invest in BRICs,” Kiplinger.com, October 18, 2007.

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prospect that even the most seemingly secure company could be bankrupt the next morning
caused credit markets to freeze. Lending is based on trust and confidence. Trust and confidence
evaporated as lenders reassessed lending practices and borrower risk.
One indicator of the trust among financial institutions is the Libor, the London Inter-Bank
Offered Rate. This is the interest rate banks charge for short-term loans to each other. Although it
is a composite of primarily European interest rates, it forms the basis for many financial contracts
world wide including U.S. home mortgages and student loans. During the worst of the financial
crisis in October 2008, this rate had doubled from 2.5% to 5.1%, and for a few days much
interbank lending actually had stopped. The rise in the Libor came at a time when the U.S.
monetary authorities were lowering interest rates to stimulate lending. The difference between
interest on Treasury bills (three month) and on the Libor (three month) is called the “Ted spread.”
This spread averaged 0.25 percentage points from 2002 to 2006, but in October 2008 exceeded
4.5 percentage points. By the end of December, it had fallen to about 1.5%. The greater the
spread, the greater the anxiety in the marketplace.102
As the crisis has moved to a global economic slowdown, many countries have pursued
expansionary monetary policy to stimulate economic activity. This has included lowering interest
rates and expanding the money supply.
Currency exchange rates serve both as a conduit of crisis conditions and an indicator of the
severity of the crisis. As the financial crisis hit, investors fled stocks and debt instruments for the
relative safety of cash—often held in the form of U.S. Treasury or other government securities.
That increased demand for dollars, decreased the U.S. interest rate needed to attract investors, and
caused a jump in inflows of liquid capital into the United States. For those countries deemed to be
vulnerable to the effects of the financial crisis, however, the effect was precisely the opposite.
Demand for their currencies fell and their interest rates rose.
Figure 4 shows indexes of the value of selected currencies relative to the dollar for countries in
which the effects of the financial crisis have been particularly severe. For much of 2007 and
2008, the Euro and other European currencies, including the Hungarian forint had been
appreciating in value relative to the dollar. Then the crisis broke. Other currencies, such as the
Korean won, Pakistani rupee, and Icelandic krona had been steadily weakening over the previous
year and experienced sharp declines as the crisis evolved. Recently, however, they have recovered
slightly.
For a country in crisis, a weak currency increases the local currency equivalents of any debt
denominated in dollars and exacerbates the difficulty of servicing that debt. The greater burden of
debt servicing usually has combined with a weakening capital base of banks because of declines
in stock market values to further add to the financial woes of countries. National governments
have had little choice but to take fairly draconian measures to cope with the threat of financial
collapse. As a last resort, some have turned to the International Monetary Fund for assistance.

102

For these and other indicators of the crisis in credit, see http://www.nytimes.com/interactive/2008/10/08/business/
economy/20081008-credit-chart-graphic.html.

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Figure 4. Exchange Rate Values for Selected Currencies Relative to the U.S. Dollar

140

Currency Exchange Rates in Dollars (Oct 1, 2007 = 100)
Hungarian Forint

120

Severe
Global
Contagion

Euro

100
80
Icelandic Krona

60

Pakistani Rupees
South Korean Won

40
Mild Global Contagion

20
7 7 7 8 8 8 8 8 8 8 8 8 8 8 8 9 9 9
00 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200 200
2
/
/
/ /
/
/
/
/
/
/
/
/
/ /
/
/
/ /
31 /30 /31 /31 /29 /31 /30 /30 /30 /31 /29 /30 /31 /28 /31 /30 /27 /31
/
10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3

Month/Day/Year
Source: Data from PACIFIC Exchange Rate Service, University of British Columbia.

As economies weakened, governments moved from shoring up their financial institutions to
coping with rapidly developing recessionary economic conditions. While actions to assist banks,
insurance companies, and securities firms recover or stave off bankruptcy continued, stimulus
packages became policy priorities. In the fourth quarter of 2008, economic growth rates dropped
in some countries at rates not seen in decades.(See Figure 1) China alone has estimated that 20
million workers have become unemployed. Table 2 shows stimulus packages by selected major
countries of the world. While the $787 billion package by the United States is the largest, China’s
$586 billion, the European Union’s $256 billion, and Japan’s $396 billion packages also are quite
large. Appendix A provides a more complete list of stimulus packages by country.

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Table 2. Stimulus Packages by Selected Countries
Date
Announced

Country

$Billion

Status, Package Contents

17-Feb-09

United
States

787.00

4-Feb-09

Canada

32.00

Two-year program. Infrastructure, tax relief, aid for sectors in peril.
Government to run an estimated $1.1 billion budget deficit in 2008 and $52
billion deficit in 2009.

7-Jan-09

Mexico

54.00

Infrastructure, a freeze on gasoline prices, reducing electricity rates, help for
poor families to replace old appliances, construction of low-income housing
and an oil refinery, rural development, increase government purchases from
small- and medium-sized companies. Paid for by taxes, oil revenues, and
borrowing.

12-Dec-08

European
Union

39.00

Total package of $256 billion called for states to increase budgets by $217
billion and for the EU to provide $39 billion to fund cross-border projects
including clean energy and upgraded telecommunications architecture.

13-Jan-09

Germany

65.00

Infrastructure, tax cuts, child bonus, increase in some social benefits, $3,250
incentive for trading in cars more than nine years old for a new or slightly
used car.

24-Nov-08

United
Kingdom

29.60

Proposed plan includes a 2.5% cut in the value added tax for 13 months, a
postponement of corporate tax increases, government guarantees for loans
to small and midsize businesses, spending on public works, including public
housing and energy efficiency. Plan includes an increase in income taxes on
those making more than $225,000 and increase National Insurance
contribution for all but the lowest income workers.

5-Nov-08

France

33.00

Public sector investments (road and rail construction, refurbishment and
improving ports and river infrastructure, building and renovating
universities, research centers, prisons, courts, and monuments) and loans
for carmakers. Does not include the previously planned $15 billion in
credits and tax breaks on investments by companies in 2009.

16-Nov-08

Italy

52.00

Three year program. Measures to spur consumer credit, provide loans to
companies, and rebuild infrastructure.

(3.56)

Infrastructure technology, tax cuts, education, transfers to states, energy,
nutrition, health, unemployment benefits. Budget in deficit.

Feb. 6, 2009, $2.56 billion stimulus package that is part of the three-year
program. Included payments of up to $1,950 for trading in an old car for a
new, less polluting one and 20% tax deductions for purchases of appliances
and furniture. Additional $1 billion allocated in March 2009 for building a
bridge and increasing welfare aid.

20-Nov-08

Russia

20.00

Cut in the corporate profit tax rate, a new depreciation mechanism for
businesses, to be funded by Russia’s foreign exchange reserves and rainy day
fund.

10-Nov-08

China

586.00

Low-income housing, electricity, water, rural infrastructure, projects aimed
at environmental protection and technological innovation, tax deduction for
capital spending by companies, and spending for health care and social
welfare.

13-Dec-08

Japan

250.00

6-Apr-09

Japan

146.00

Increase in government spending, funds to stabilize the financial system
(prop up troubled banks and ease a credit crunch by purchasing commercial
paper), tax cuts for homeowners and companies that build or purchase new
factories and equipment, and grants to local government. The April 2009
package included increasing the safety net for non-regular workers,
supporting small businesses, new car purchase subsidies, revitalizing regional
economies, promoting solar power and nursing and medical services.

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Date
Announced
3-Nov-08

Country
South
Korea

$Billion

Status, Package Contents

14.64

$11 billion for infrastructure (including roads, universities, schools, and
hospitals; funds for small- and medium-business, fishermen, and families with
low income) and tax cuts. Includes an October 2008 stimulus package of
$3.64 billion to provide support for the construction industry.

9-Feb-09

South
Korea

37.87

The government announced its intention to invest $37.87 billion over the
next four years in eco-friendly projects including the construction of dams;
“green” transportation networks such as low-carbon emitting railways,
bicycle roads, and other public transportation systems; and expand existing
forest areas.

28-Nov-08

Taiwan

15.60

Shopping vouchers of $108 each for all citizens, construction projects to be
carried out over four years include expanding metro systems, rebuilding
bridges and classrooms, improving, railway and sewage systems, and renew
urban areas.

26-Jan-09

Australia

35.2

$7 billion stimulus package in October 2008 was cash handouts to low
income earners and pensioners. January’s $28.2 billion package includes
infrastructure, schools and housing, and cash payments to low- and middleincome earners. Budget is in deficit.

23-Dec-08

Brazil

5.00

Program established in 2007 to continue to 2010. Tax cuts (exempt capital
goods producers from the industrial and welfare taxes, increase the value of
personal computers exempted from taxes) and rebates. Funded by reducing
the government’s budget surplus.

Source: Congressional Research Service from various news articles and government press releases.
Notes: Currency conversions to U.S. dollars were either already done in the news articles or by CRS using
current exchange rates.

Effects on Emerging Markets103
The global credit crunch that began in August 2007 has led to a financial crisis in emerging
market countries (see box) that is being viewed as greater in both scope and effect than the East
Asian financial crisis of 1997-98 or the Latin American debt crisis of 2001-2002, although the
impact on individual countries may have been greater in previous crises. Of the emerging market
countries, those in Central and Eastern Europe appear, to date, to be the most impacted by the
financial crisis.
The ability of emerging market countries to borrow from global capital markets has allowed
many countries to experience incredibly high growth rates. For example, the Baltic countries of
Latvia, Estonia, and Lithuania experienced annual economic growth of nearly 10% in recent
years. However, since this economic expansion was predicated on the continued availability of
access to foreign credit, they were highly vulnerable to a financial crisis when credit lines dried
up.

103

Prepared by Martin A. Weiss, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.

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What are Emerging Market Countries?
There is no uniform definition of the term “emerging markets.” Originally conceived in the early 1980s, the term is
used loosely to define a wide range of countries that have undergone rapid economic change over the past two
decades. Broadly speaking, the term is used to distinguish these countries from the long-industrialized countries, on
one hand, and less-developed countries (such as those in Sub-Saharan Africa), on the other. Emerging market
countries are located primarily in Latin America, Central and Eastern Europe, and Asia.
Since 1999, the finance ministers of many of these emerging market countries began meeting with their peers from
the industrialized countries under the aegis of the G-20, an informal forum to discuss policy issues related to global
macroeconomic stability. The members of the G-20 are the European Union and 19 countries: Argentina, Australia,
Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South
Korea, Turkey, the United Kingdom and the United States.
For more information, see “When are Emerging Markets no Longer Emerging?, Knowledge@Wharton, available at
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1911.

Of all emerging market countries, Central and Eastern Europe appear to be the most vulnerable.
On a wide variety of economic indicators, such as the total amount of debt in the economy, the
size of current account deficits, dependence on foreign investment, and the level of indebtedness
in the domestic banking sector, countries such as Hungary, Ukraine, Bulgaria, Kazakhstan,
Kyrgyzstan, Latvia, Estonia, and Lithuania, rank among the highest of all emerging markets.
Throughout the region, the average current account deficit increased from 2% of GDP in 2000 to
9% in 2008. In some countries, however, the current account deficit is much higher. Latvia’s
estimated 2008 current account deficit is 22.9% of GDP and Bulgaria’s is 21.4%.104 The average
deficit for the region was greater than 6% in 2008 (Figure 5).

104

Mark Scott, “Economic Problems Threaten Central and Eastern Europe,” BusinessWeek, October 17, 2008.

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Figure 5. Current Account Balances (as a percentage of GDP)

Source: International Monetary Fund

Due to the impact of the financial crisis, several Central and Eastern European countries have
already sought emergency lending from the IMF to help finance their balance of payments. On
October 24, the IMF announced an initial agreement on a $2.1 billion two-year loan with Iceland
(approved on November 19). On October 26, the IMF announced a $16.5 billion agreement with
Ukraine. On October 28, the IMF announced a $15.7 billion package for Hungary. On November
3, a staff-level agreement on an IMF loan was reached with Kyrgyzstan,105 and on November 24,
the IMF approved a $7.6 billion stand-by arrangement for Pakistan to support the country’s
economic stabilization.106
The quickness with which the crisis has impacted emerging market economies has taken many
analysts by surprise. Since the Asian financial crisis, many Asian emerging market economies
enacted a policy of foreign reserve accumulation as a form of self-insurance in case they once
again faced a “sudden stop” of capital flows and the subsequent financial and balance of
payments crises that result from a rapid tightening of international credit flows.107 Two additional
factors motivated emerging market reserve accumulation. First, several countries have pursued an
export-led growth strategy targeted at the U.S. and other markets with which they have generated

105

Information on ongoing IMF negotiations is available at http://www.imf.org.
International Monetary Fund, “IMF Executive Board Approves Stand-by Arrangement for Pakistan.” Press Release
No. 08/303, November 24, 2008.
107
Reinhart, Carmen and Calvo, Guillermo (2000): When Capital Inflows Come to a Sudden Stop: Consequences and
Policy Options. Published in: in Peter Kenen and Alexandre Swoboda, eds. Reforming the International Monetary and
Financial System (Washington DC: International Monetary Fund, 2000) (2000): pp. 175-201.
106

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trade surpluses.108 Second, a sharp rise in the price of commodities from 2004 to the first quarter
of 2008 led many oil-exporting economies, and other commodity-based exporters, to report very
large current account surpluses. Figure 6 shows the rapid increase in foreign reserve
accumulation among these countries. These reserves provided a sense of financial security to EM
countries. Some countries, particularly China and certain oil exporters, also established sovereign
wealth funds that invested the foreign exchange reserves in assets that promised higher yields.109
Figure 6. Global Foreign Exchange Reserves
($ Trillion)

Source: IMF

While global trade and finance linkages between the emerging markets and the industrialized
countries have continued to deepen over the past decade, many analysts believed that emerging
markets had successfully “decoupled” their growth prospects from those of industrialized
countries. Proponents of the theory of decoupling argued that emerging market countries,
especially in Eastern Europe and Asia, have successfully developed their own economies and
intra-emerging market trade and finance to such an extent that a slowdown in the United States or
Europe would not have as dramatic an impact as it did a decade ago. A report by two economists
at the IMF found some evidence of this theory. The authors divided 105 countries into three
groups: developed countries, emerging countries, and developing countries and studied how
economic growth was correlated among the groups between 1960 and 2005. The authors found
that while economic growth was highly synchronized between developed and developing
108

“New paradigm changes currency rules,” Oxford Analytica, January 17, 2008.
See CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A.
Weiss.
109

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countries, the impact of developed countries on emerging countries has decreased over time,
especially during the past twenty years. According to the authors:
In particular, [emerging market] countries have diversified their economies, attained high
growth rates and increasingly become important players in the global economy. As a result,
the nature of economic interactions between [industrialized and emerging market] countries
has evolved from one of dependence to multidimensional interdependence.110

Despite efforts at self-insurance through reserve accumulation and evidence of economic
decoupling, the U.S. financial crisis, and the sharp contraction of credit and global capital flows
in October 2008 affected all emerging markets to a degree due to their continued dependence on
foreign capital flows. According to the Wall Street Journal, in the month of October, Brazil, India,
Mexico, and Russia drew down their reserves by more than $75 billion, in attempt to protect their
currencies from depreciating further against a newly resurgent U.S. dollar.111
A key to understanding why emerging market countries have been so affected by the crisis
(especially Central and Eastern Europe) is their high dependence on foreign capital flows to
finance their economic growth (Figures 7-8). Even though several emerging markets have been
able to reduce net capital inflows by investing overseas (through sovereign wealth funds) or by
tightening the conditions for foreign investment, the large amount of gross foreign capital flows
into emerging markets remained a key vulnerability for them. For countries such as those in
Central and Eastern Europe which have both high gross and net capital flows, vulnerability to
financial crisis is even higher.
Once the crisis occurred, it became much more difficult for emerging market countries to
continue to finance their foreign debt. According to Arvind Subramanian, an economist at the
Peterson Institute for International Economics, and formerly an official at the IMF:
If domestic banks or corporations fund themselves in foreign currency, they need to roll
these over as the obligations related to gross flows fall due. In an environment of across-theboard deleveraging and flight to safety, rolling over is far from easy, and uncertainty about
rolling over aggravates the loss in confidence.112

110
Cigdem Akin and M. Ayhan Kose, “Changing Nature of North-South Linkages: Stylized Facts and Explanations.”
International Monetary Fund Working Paper 07/280. Available at http://www.imf.org/external/pubs/ft/wp/2007/
wp07280.pdf.
111
Joanna Slater and Jon Hilsenrath, “Currency-Price Swings Disrupt Global Markets ,” Wall Street Journal, October
25, 2008.
112
Arvind Subramanian , “The Financial Crisis and Emerging Markets,” Peterson Institute for International Economics,
Realtime Economics Issue Watch, October 24, 2008.

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Figure 7. Capital Flows to Latin America (in percent of GDP)

Source: IMF

Figure 8. Capital Flows to Developing Asia (in percent of GDP)

Source: IMF

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Figure 9. Capital Flows to Central and Eastern Europe (in percent of GDP)

Source: IMF

As emerging markets have grown, Western financial institutions have increased their investments
in emerging markets. G-10113 financial institutions have a total of $4.7 trillion of exposure to
emerging markets with $1.6 trillion to Central and Eastern Europe, $1.5 trillion to emerging Asia,
and $1.0 trillion to Latin America. While industrialized nation bank debt to emerging markets
represents a relatively small percentage (13%) of total cross-border bank lending ($36.9 trillion as
of September 2008), this figure is disproportionately high for European financial institutions and
their lending to Central and Eastern Europe. For European and U.K. banks, cross-border lending
to emerging markets, primarily Central and Eastern Europe accounts for between 21% and 24%
of total lending. For U.S. and Japanese institutions, the figures are closer to 4% and 5%.114 The
heavy debt to Western financial institutions greatly increased central and Eastern Europe’s
vulnerability to contagion from the financial crisis.
In addition to the immediate impact on growth from the cessation of available credit, a downturn
in industrialized countries will likely affect emerging market countries through several other
channels. As industrial economies contract, demand for emerging market exports will slow down.
This will have an impact on a range of emerging and developing countries. For example, growth
in larger economies such as China and India will likely slow as their exports decrease. At the
same time, demand in China and India for raw natural resources (copper, oil, etc) from other
developing countries will also decrease, thus depressing growth in commodity-exporting
countries.115

113

The Group of Ten is made up of eleven industrial countries (Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, Switzerland, the United Kingdom, and the United States).
114
Stephen Jen and Spyros Andreopoulos, “Europe More Exposed to EM Bank Debt than the U.S. or Japan,” Morgan
Stanley Research Global, October 23, 2008.
115
Dirk Willem te Velde, “The Global Financial Crisis and Developing Countries,” Overseas Development Institute,
October 2008.

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Slower economic growth in the industrialized countries may also impact less developed countries
through lower future levels of bilateral foreign assistance. According to analysis by the Center for
Global Development’s David Roodman, foreign aid may drop precipitously over the next several
years. His research finds that after the Nordic crisis of 1991, Norway’s aid fell 10%, Sweden’s
17%, and Finland’s 62%. In Japan, foreign aid fell 44% between 1990 and 1996, and has never
returned to pre-crisis assistance levels.116

Latin America117
Financial crises are not new to Latin America, but the current one has two unusual dimensions.
First, as substantiated earlier in this report, it originated in the United States, with Latin America
suffering shocks created by collapses in the U.S. housing and credit markets, despite minimal
direct exposure to the “toxic” assets in question. Second, it spread to Latin America in spite of
recent strong economic growth and policy improvements that have generally increased economic
stability and reduced risk factors, particularly in the financial sector.118 Repercussions from the
global financial crisis have varied by country based in part on policy differences, but also on
exposure to two major risks, the degree of reliance on the U.S. economy, and/or dependence on
commodity exports. Investors, nonetheless, were initially very hard on the region as a whole,
perhaps historically conditioned to be leery of its capacity to weather short-term financial
contagion, let alone a protracted global recession.
A year after the crisis began, however, it appears that the financial and economic repercussions
have stabilized, and that in many Latin American countries, a return to growth is evident. While
the downturn was, and still is, very severe by many measures, relatively sound macroeconomic
fundamentals and policy responses by many Latin American countries and international financial
organizations may have ameliorated what could have been a deeper and longer regional decline.
Nonetheless, it is still early in the recovery process to predict an unencumbered reversal of
economic fortune and some countries face a steeper climb out of recession than others.
The economies of Latin America and the Caribbean grew at an average annual rate of nearly
5.5% for the five years 2004-2008, lending credence to the once prominent idea that they were
“decoupling” from slower growing developed economies, particularly the United States.119
Domestic policy reforms have been credited with achieving macroeconomic stability, stronger
fiscal positions, sounder banking systems, and lower sovereign debt risk levels. Others note,
however, that Latin America’s growth trend is easily explained by international economic
fundamentals, questioning the importance of the decoupling theory. The sharp rise in commodity
prices, supportive external financing conditions, and high levels of remittances contributed
greatly to the region’s improved economic welfare, reflecting gains from a strong global
116

David Roodman, “History Says Financial Crisis Will Suppress Aid,” Center for Global Development, October 13,
2008.
117
Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
118
United Nations. Economic Commission on Latin America and the Caribbean. Latin America and the Caribbean in
the World Economies, 2007. Trends 2008. Santiago: October 2008. p. 28.
119
Decoupling generally refers to economic growth trends in one part of the world, usually smaller emerging
economies, becoming less dependent (correlated) with trends in other parts of the world, usually developed economies.
See Rossi, Vanessa. Decoupling Debate Will Return: Emergers Dominate in Long Run. London: Chatham House,
2008. p. 5.

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economy. In addition, all three trends reversed even before the financial crisis began, suggesting
that Latin America remains very much tied to world markets and trends. 120
Latin America has experienced two levels of economic problems related to the crisis. First order
effects from financial contagion were initially evident in the high volatility of financial market
indicators. All major indicators fell sharply in the fourth quarter of 2008, as capital inflows
reversed direction, seeking safe haven in less risky assets, many of them, ironically, dollar
denominated. Regional stock indexes fell by over half from June to October 2008. Currencies
followed suit in many Latin American countries. They depreciated suddenly from investor flight
to the U.S. dollar reflecting a lack of confidence in local currencies, the rush to portfolio
rebalancing, and the fall in commodity import revenue related to sharply declining prices and
diminished global demand. In Mexico and Brazil, where firms took large speculative off-balance
sheet derivative positions in the currency markets, currency losses were compounded to a degree
requiring central bank intervention to ensure dollar availability.121
Debt markets followed in kind, as credit tightened and international lending contracted, even for
short-term needs such as inventory and trade finance. Borrowing became more expensive, as seen
in widening bond spreads. In 2008, bond spreads in the Emerging Market Bond Index (EMBI)
and corporate bond index for Latin America jumped by some 600 basis points, half occurring in
the fourth quarter. This trend suggests first, that Latin America was already beginning to
experience a slowdown prior to the financial crisis, and second, that the crisis itself was a sudden
subsequent shock to a deteriorating economic trend in the region. Some countries, including
Brazil, Mexico, and Colombia, had continued access to international debt markets. Many others,
however, have had to rely more heavily on domestic debt placements.
Signs of financial market stabilization appeared by the summer of 2009. Both regional stock and
currency indexes recovered 60% of their losses by September 2009, indicating renewed interest
and confidence in Latin America’s ability to weather the downturn and perhaps emerge from it
ahead of many developed economies, including the United States.122 Overall, after spiking in the
fall of 2008 at around 800 basis points, sovereign bond spreads have retreated to under 400 basis
points, still off the 200 basis point level prior to the crisis, but a significant trend reversal. The
exceptions are in Argentina, Ecuador, and Venezuela, all of which share a heavy dependence on
commodity exports and weak economic policy frameworks. In each of these countries, bond
spreads rose to over 1,500 basis points as the crisis unfolded, and although the spreads have
narrowed to a range of 750 to 950 basis points, the difference still reflects a lack of confidence in
their financials systems and their capacity to service debt.123
The more serious effects of the global crisis for Latin America appear in second order effects,
which point to a deterioration of broader economic fundamentals. These will take much longer to
recover than financial indicators. GDP growth for the region is expected to be a negative 2% in
2009, with an estimated growth of 3.4% in 2010.124 The fall in global demand, particularly for
120

Ocampo, Jose Antonio. The Latin American Boom is Over. REG Monitor. November 2, 2008.

121

International Monetary Fund. Global Markets Monitor, June 15, 2009, and Fidler, Stephen. Going South. Financial
Times. January 9, 2009. p. 7.
122
International Monetary Fund. Global Markets Monitor, September 18, 2009.
123
Ibid, and International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the
Global Financial Crisis. Washington, D.C. October 2008. pp. 7-10 and IMF. Global Markets Monitor, October 1,
2009.
124
United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin America
(continued...)

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Latin America’s commodity exports, has been a big factor, as seen in contracting export revenue.
Latin American exports are expected to fall by 11% in 2009, the largest decline since 1937.
Similarly, imports may fall by 14%, reflecting the decline in world demand in general. The trade
account, along with rising unemployment, point to the most severe aspects of the crisis for Latin
America.125 Remittances have also fallen, ranging between 10% and 20% by country. Although
still important financial inflows, the decline in remittances is expected to diminish family
incomes and fiscal balances, contributing to the regional slowdown.126 Public sector borrowing is
expected to rise and budget constraints may threaten spending on social programs in some cases,
with a predictably disproportional effect on the poor. Social effects are also seen in the rising
unemployment throughout the region.
Policy responses have materialized from many quarters, including multilateral organizations,
which have adopted programs to ameliorate the credit crisis and stimulate demand. The
International Monetary Fund (IMF), World Bank, Inter-American Development Bank (IDB),
Andean Development Corporation (CAF), and Latin American Reserve Fund (LARF) have all
increased lending to the region, particularly on an expedited and short-term basis. The goal is to
provide credit to the private sector and to support, in selective cases, bank recapitalization. Funds
will also be made available for public sector spending (infrastructure and social programs) as a
form of fiscal stimulus, primarily through the World Bank and IDB.
The United States took steps to provide dollar liquidity (reciprocal currency “swap” arrangement)
on a temporary bilateral basis to many central banks of “systemically important” countries with
sound banking systems. In Latin America, this group includes Mexico and Brazil, each of which
had access to a $30 billion currency swap reserve with the U.S. Federal Reserve System, initially
through April 30, 2009, but which was extended to February 1, 2010. The swap arrangement is
intended to ensure dollar availability in support of the large trade and investment transactions
conducted with the United States, and perhaps more importantly, reinforce confidence in the
financial systems of the two largest Latin American economies. 127
National governments are also relying on monetary, fiscal, and exchange rate policies to stimulate
their economies. The capacity to undertake any of these options varies tremendously among the
Latin American countries. Fiscal capacity is constrained in many countries by high debt levels, as
well as the recession itself. Among the countries adopting a fiscal stimulus, estimates of their size
range from 2.5% GDP in Mexico to 6.0% for Argentina and 8.5% for Brazil. Direct government
spending is the primary vehicle for fiscal stimulus, but Brazil has devoted 20% to tax cuts or
increased benefits (transfers).128
Many countries are also limited in their use of monetary policy to expand liquidity. In particular,
reducing interest rates is difficult for those experiencing significant currency depreciations, which
can increase inflationary pressures. Nonetheless, those countries with flexible exchange rates
(...continued)
and the Caribbean, 2008-2009. July 2009.
125
Ibid.
126
Orozco, Manual. Understanding the Continuing Effect of the Economic Crisis on Remittances to Latin America and
the Caribbean. Inter-American Development Bank. Washington, DC. August 10, 2009.
127
Board of Governors of the Federal Reserve System. Federal Reserve Press Release. October 29, 2008 and Minutes
of the Federal Open Market Committee April 28-29, 2009.
128
United Nations, ECLAC, Economic Survey of Latin America and the Caribbean 2008-2009, p. 38.

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have relied on currency depreciations to shoulder much of the adjustment process, without
experiencing severe financial instability.129 There has been some concern that countries may
eventually resort to nationalistic policies that will reduce the flows of goods, services, and capital,
but these types of policies have generally been avoided, and the risk of their use likely diminishes
as economies improve. The magnitude of the global economic downturn and adequacy of policy
responses vary by country, as illustrated by three examples discussed below.

Mexico
The Mexican economy contracted for four consecutive quarters beginning in the fourth quarter of
2008, and the government forecasts an economic decline of 7%-8% for 2009. This would be the
worst recession in six decades, making Mexico the hardest hit country in Latin America. Output
fell in both industry and service sectors, with the 13% decline in industrial production over the
past year the worst recorded since the 1995 “peso crisis.” Remittances, which amounted to $25
billion in 2008, may fall by 15% in 2009. Mexico faces a number of problems: heavy reliance on
the U.S. economy, falling foreign investment, and low (until recently) oil prices, and declining oil
output, the largest source of national revenue. The United States accounts for half of Mexico’s
imports, 80% of its exports, and most of its foreign investment and remittances income. 130
A nascent recovery was measurable by the summer of 2009, signaling for many analysts the
possibility of a solid turnaround in the downward trend. Analysts are forecasting a sharp increase
in economic growth in the second half of 2009, with an annual expansion in economic activity of
3.3% for 2010. The sustainability of such a trend will depend heavily on recovery of the U.S. and
global economies.131
The financial crisis hit Mexico hard and fast. At the outset, Mexico experienced a run on the peso,
which caused its value to fall at one point by 40% from its August 2008 high (currently down by
20% from September 2008). The decline was unrelated to investments in U.S. mortgage-backed
securities. Investor portfolio re-balancing away from emerging markets, the dramatic fall in
commodity prices, and decline in U.S. demand for Mexican exports were the main causes. The
peso also suffered from large private positions taken in the belief that the peso’s strength would
not be eroded by the U.S. financial crisis. Many firms had gone beyond hedging to taking large
derivative positions in the peso. As the peso began to depreciate, companies had to unwind these
off-balance-sheet positions quickly, accelerating its fall. One large firm had losses exceeding $1.4
billion and filed for bankruptcy, indicative of the severity of the problem. The Mexican
government responded by selling billions of dollars of reserves and using a temporary currency
swap arrangement with the U.S. Federal Reserve to assure dollar liquidity, but the peso remains
the hardest hit of all emerging market currencies.132
In the non-financial sectors, industrial production was severely hit by the fall in U.S. demand for
Mexican exports. The industrial sector, however, rebounded with 2.8% monthly growth in July
2009, and is expected to lead the recovery as it did the recession. Mexico’s long-term economic
129

International Monetary Fund. Regional Economic Outlook – Western Hemisphere: Stronger Fundamentals Pay Off.
Washington, D.C. May 2009. p. 18-22.
130
Global Outlook. Mexico. March 17, 2009 and International Monetary Fund, Global Markets Monitor, June 16, 2009.
131
IHS Global Insight. Mexico: Economic Recovery Gets Under Way in Mexico. September 30, 2009.
132
Ibid., and The Wall Street Journal. Mexico and Brazil Step In to Fight Currency Declines, October 24, 2008 and
Latin America Monitor: Mexico. December 2008.

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prospects, however, hinge on recovery of U.S. aggregate demand. Because Mexico’s trade is
poorly diversified, the effects of the U.S. downturn were particularly noticeable, with Mexican
exports to the United States on a monthly basis falling 37% from October 2008 to February 2009,
hitting the lowest level since January 2005. U.S. imports from Mexico began to recover in June
2009, and are up nearly 15% from February 2009, but stand at only 70% of the peak reached in
October 2007. The trade effect has been compounded by a nearly 20% annual decline in
remittances from Mexican workers living in the United States. Employment figures for the formal
economy at home are also registering large job losses.133
To date, the Mexican government has adopted supportive monetary and fiscal policies. The
central government has increased liquidity in the banking system, including multiple cuts in the
prime policy lending rate. It has also increased its credit lines with the World Bank, International
Monetary Fund, and Inter-American Development Bank. Mexico’s fiscal stimulus amounts to
2.5% of GDP and is targeted on infrastructure spending and subsidies for key goods of household
budgets, particularly those reducing energy costs. Government programs to support small and
medium-sized businesses, worker training, employment generation, and social safety nets have
been maintained and expanded in some cases.134
The costs of these responses has placed additional strain on Mexico’s public finances. The overall
fiscal deficit is expected to reach 3.5% of GDP for 2009 and 2010, estimated to be near the
maximum that Mexico can afford. Recent downward revisions of Mexico’s credit rating (still
investor grade) reflect growing concern over Mexico’s financial position in light of weak
economic fundamentals and Mexico’s recovery relying so heavily on a U.S. economic rebound.
Mexico appears to have reached the financial limits of its fiscal and monetary responses, but
some analysts speculate that at the margin, lagged effects of these policies may continue to
support Mexico’s nascent recovery. 135

Brazil
Brazil entered the financial crisis from a position of relative macroeconomic and fiscal strength,
and although it has not been immune to the global contraction, data suggest Brazil will experience
only a two-quarter recession, with recovery solidly in place by in the second half of 2009. The
economy grew by 5.1% in 2008 and is expected to contract by less than 1.0% over the full year
2009. Second quarter growth registered 1.9% on an annualized basis, indicating a technical end to
recession. Commodity price rebound has contributed to growth in Brazilian output and exports,
and industrial production has begun to rise as well. Still, a number of indicators in the real
economy remain weak and fiscal pressures from the stimulus package present a short-term
financial burden.136

133
CRS trade calculations based on U.S. Department of Commerce data. Latin American Newsletters. Latin American
Mexico and NAFTA Report, March 2009, p. 10 and United Nations. Economic Commission on Latin America and the
Caribbean, Economic Survey of Latin America and the Caribbean, 2008-2009, p. 38.
134
Ibid and United Nations. ECLAC. The Reactions of the Governments of the Americas to the International Crisis: An
Overview of Policy Measures up to 31 March 2009. April 2009.
135
Latin American Newsletters. Latin American Mexico and NAFTA Report, May 2009, p. 8-10 and IHS Global
Insight. Economic Recovery Gets Under Way in Mexico. September 30, 2009.
136
Business Monitor International. Latin American Monitor: Brazil. September 2009 and International Monetary Fund.
Global Markets Monitor, September 17, 2009.

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Financial repercussions sparked the crisis and affected Brazil in ways similar to Mexico. Brazil’s
stock market index tumbled by half in 2008 as investors fled both equities and the Brazilian
currency (the real). The Brazilian government sold billions of dollars to fight a rapidly
depreciating currency, which fell at one point by over 35% from its August 2008 high. Brazil, like
Mexico, also has a large currency derivatives market, where speculative trades contributed to the
real’s decline, although to a lesser degree than in Mexico. Brazil’s central bank agreed to the
temporary currency swap arrangement with the U.S. Federal Reserve. It also has some $200
billion in international reserves, which have served as an effective cushion against financial
retreat from the financial markets. Brazil also has a sound and well-regulated banking system and
experienced central bank leadership and staff that has helped maintain confidence in the financial
system in the face of rising defaults and declining balance sheet quality. 137
Financial indictors have all improved, reflecting a return to stability and portending a near-term
broader economic recovery. Brazil’s real has appreciated against the U.S. dollar, fully recovering
any losses over the past year. The stock index has recovered 17% from January 2009 and the
bond spreads on Brazilian debt are only 200 basis points above U.S. treasuries, reflecting
confidence in Brazil’s economic prospects. Brazilian government debt was upgraded from
speculative to investment grade by the major ratings agencies in late September, lending further
support for confidence in the country’s financial and economic outlook.138
The real (nonfinancial) economy faces deeper challenges. Domestic demand is still weak and the
unemployment rate has risen from 6.8% in December 2008 to an estimated 9.2%. July
employment figures, however, showed a net job increase of 292,000 across all sectors, indicating
the real economy is beginning to experience recovery as well. Although Brazil also experienced
declines in exports, the recovery of commodity prices and strong demand from China, now the
largest consumer of Brazil’s exports, have helped improve Brazil’s trade account. Capital inflows,
which were strong in 2008, have also slowed, despite Brazil’s recent solid macroeconomic
performance and its investment grade rating. As with other countries, the extent to which global
demand diminishes will ultimately affect all these variables. Brazil, however, has a large internal
market and is well-positioned on the macroeconomic front, which has helped soften the effects of
the global financial crisis.139
On the fiscal side, Brazil enacted a sizeable fiscal stimulus estimated at 8.5% of GDP. Tax cuts
and direct government spending have been credited with ameliorating the effects of the global
downturn. Brazil has maintained fiscal support for its social programs, expanded unemployment
insurance, and made provisions for low-income housing and other support. To accommodate its
increased fiscal commitments, it has reduced its primary fiscal surplus target from 3.8% to 2.5%
of GDP, and will likely see its deficit and debt positions deteriorate in the short term. Observers,
however, are beginning to raise concerns over Brazil’s growing deficit, and have suggested that
the government has reached the edge of its capacity for fiscal stimulus.140
137

Canuto, Otaviano. Emerging Markets and the Systemic Sudden Stop. RGE Monitor. November 12, 2008 and
Wheatley, Jonathan. Brazilian Economy Is the Real Lure for the Yield-Hungry. Financial Times. May 7, 2009.
138
International Monetary Fund. Global Markets Monitor, June 15, 2009 and Business Monitor International. Latin
American Monitor: Brazil. September 2009.
139
Business Monitor International. Latin American Monitor: Brazil. September 2009.
140
Business Monitor International. Latin American Monitor: Brazil. September 2009, Soliani, Andre and Iuri Dantas.
Brazil Freezes 37.2 Billion Reais of 2009 Budget. Bloomberg Press. January 27, 2009, and Brazil-U.S. Business
Council. Brazil Bulletin. September 28, 2009.

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In addition to a fiscal response, Brazil has emphasized enhancing financial sector liquidity
through monetary policy. The Central Bank has injected billions of dollars into the banking
system, lowered reserve requirements, and reduced the key short-term interest rate many times,
from 13.75% to 8.75%. The Brazilian government has authorized state-owned banks to purchase
private banks, approved stricter accounting rules for derivatives, extended credit directly to firms
through the National Development Bank (BNDES) and the Central Bank, and exempted foreign
investment firms from the financial transactions tax.141 Unibanco, one of Brazil’s largest banks,
has also procured a $60 million credit extension from the World Bank’s International Finance
Corporation to support trade financing.

Argentina
Argentina, because of its shaky economic and financial position at the outset of the crisis, has
been poorly positioned to deal with a protracted downturn compared to most other Latin
American countries. Although until recently it has experienced dramatic economic growth since
2002, this trend reflects a rebound from the previous severe 2001-2002 financial crisis and rise in
commodity prices that benefitted Argentina’s large agricultural sector. This trend ended when
Argentina experienced a contraction of -0.8% for the second quarter of 2009 (on an annualized
basis). The collapse of commodity prices in late 2008 diminished export and fiscal revenues and
Argentina is also experiencing declines in investment, domestic consumer demand, and industrial
production. Installed capacity utilization fell from 79% in October 2008 to 67.4% in January
2009, recovering to 74.6% by August 2009. Particularly hard hit were motor vehicles, metallurgy,
and textiles. Economists forecast the economy will contract by 2% to 4% in 2009 and recovery
will be slow with unemployment still rising to nearly 9.0% in the summer of 2009.142
Argentina has been financially isolated from global markets since its 2001 crisis and is also
hampered by a litany of questionable policy choices, which combined with the global recession
and a prolonged draught, has further diminished confidence in its financial system. Although the
banks remain liquid and solvent, the stock market fell at one point by 37% from last fall and the
peso has depreciated by 18%. Among the highly questionable policies that have diminished
confidence in the country is the 2002 historic sovereign debt default and failure to renegotiate
with Paris Club countries and private creditor holdouts. Others include government interference
in the supposedly independent government statistics office (particularly with respect to inflation
reporting), price controls, high export taxes, and nationalization of private pension funds to
bolster public finances.143 These policies have isolated the economy from international capital
markets despite the need to finance a growing debt burden and public and private sector
investments. Price controls and export restrictions (quotas and taxes) have led to market
distortions, protests over government policies, and declining consumer confidence.

141

United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin America
and the Caribbean, 2008-2009. July 2009.
142
Latin American Newsletters. Latin American Economy & Business, January 2009, pp. 10-11, Global Insight.
Argentina. June 12, 2009, and República Argentina. Instituto Nacional de Estadística y Censos. Utilización de la
Capacidad Instalada en la Industria. August 2009.
143
Benson, Drew and Bill Farles. Argentine Bonds, Stocks Tumble on Pension Fund Takeover Plan. Bloomberg.
October 21, 2008 and International Monetary Fund. Global Markets Monitor. March 17, 2009.

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Argentina’s exports declined by 21% year-over-year in the first six months of 2009.144 In response
to falling demand for Argentine exports and the government’s questionable financial policies and
position, Argentina’s currency has depreciated by 20% from September 2008, in spite of
exchange rate intervention. In recognition that industrial production and exports fell rapidly and
have stagnated until very recently, Argentina has also adopted administrative trade restrictions to
limit imports, some of which it has reversed rather than face disputes in the World Trade
Organization. These affected Brazilian goods in particular, including textiles and various
machinery exports, raising tensions between the two major trade partners of the regional customs
union, Mercosur.145
Risk assessment was swift and punishing. Bond ratings have fallen, yields on short-term public
debt exceeded 30%, and the interest rate spread on Argentina’s bonds rose to over 1,700 basis
points, but have since settled around 750-800 basis points, nearly four times higher than Mexico’s
or Brazil’s spreads. The interest rate spread on credit default swaps peaked at 4,500 basis points
in December 2008, indicating the high cost required to insure against bond defaults. All these
indicators point to a global perception of Argentina as a high-risk country, likely reinforcing its
ostracism from international capital markets.146
Argentina has adopted a number of policies to address the domestic effects of the global
economic crisis. The first initiative is a large fiscal stimulus equal to 9% of GDP focused almost
entirely on public works spending, exasperating fiscal problems in the short run. Given
Argentina’s large expected public spending outlays for the coming year, the high and growing
cost of its debt, falling revenues from imports, and its inability to access international credit
markets, it had to take dramatic action to finance these programs. It did so by nationalizing, with
the approval of the Congress, the private-sector pension system, effective January 1, 2009. The
pension system provided $29 billion in assets immediately and access to an estimated $4.6 billion
in annual pension contributions. In addition, Argentina has conducted two bond swaps (with
15.4% yields) for guaranteed loans maturing in 2009 to 2011.147 Although these two moves have
provided Argentina with increased fiscal capacity to meet short- and perhaps medium-term
financing needs, the costs entail increased fiscal outlays in the future and heightened investor
skepticism. Analysts estimate that Argentina has little room for additional fiscal expansion given
its history of fiscal largesse over the past six years, which could temper a budding recovery. 148

Russia and the Financial Crisis149
Russia tends to be in a category by itself. Although by some measures, it is an emerging market, it
also is highly industrialized. As the case with most of the world’s economies, the Russian
144

Latin American Monitor. Latin American Economy and Business. August 2009.
Global Insight. Argentina: S&P Lowers Argentina’s Rating to B-. November 3, 2008 and Latin America Weekly
Report. Lula May Accept Argentine Protectionism. March 12, 2009. p. 8.
146
International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the Global
Financial Crisis. Washington, DC. October 2008. p. 8, and IMF. Global Markets Monitor, October 1, 2009.
147
Ibid., Latin American Brazil & Southern Cone Report, January 2009, p. 10, IMF. Global Markets Monitor. March 2,
2009, and United Nations. Economic Commission on Latin American and the Caribbean. Economic Survey of Latin
America and the Caribbean, 2008-2009. July 2009.
148
IHS Global Insight. Argentine Economy Contracts 0.8% in Q2. October 1, 2009.
149
Prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
145

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economy has been hit hard by the global economic crisis and resulting recession, the effects of
which have been apparent since the last quarter of 2008. Even before the financial crisis, Russia
was showing signs of economic problems when world oil prices plummeted sharply around the
middle of 2008, diminishing a critical source of Russian export revenues and government
funding.
The crisis and other factors brought an abrupt end to a decade of impressive Russian economic
growth. In 2008, it faced a triple threat with the financial crisis coinciding with a rapid decline in
the price of oil and the aftermath of the country’s military confrontation in August 2008 with
Georgia over the break-away areas of South Ossetia and Abkhazia.150 These events exposed three
fundamental weaknesses in the Russian economy: substantial dependence on oil and gas sales for
export revenues and government revenues; a decline in investor confidence in the Russian
economy; and a weak banking system.
The rapid decline in world oil prices has been a major factor in the overall decline in Russia’s
economy. Russian government revenues have diminished because of the drop in oil revenues, but
also because of the decline in income tax revenues, which will cause the Russian government to
incur a budget deficit in 2009 for the first time in ten years, a deficit of perhaps 8% of GDP.151
Russia has also been adversely affected by the world-wide credit crunch that ostensibly began
with the proliferation of subprime mortgages in the United States and the subsequent burst of the
real estate bubble. Because low interest credit was not available domestically, many Russian
firms and banks depended on foreign loans to finance investments. As credit tightened, foreign
loans became harder to obtain.
The economic downturn has been showing up in Russia’s performance indicators. Although
Russia real GDP increased 5.6% in 2008 as a whole, it increased more slowly than it did in 2007
(8.1%) and grew only 1.2% in the fourth quarter of 2008.152 The economic slowdown has been
reflected in the Russian ruble exchange rate as well. The ruble has been declining in nominal
terms because foreign investors have been pulling capital out of the market to shore up domestic
reserves, putting downward pressure on the ruble. Russian official reserves have declined
substantially in part because of the Russian Central Bank has intervened to defend the ruble and
current account surpluses have shrunk. Russian official reserves declined from $597 billion at the
end of July 2008 to $384 billion at the end of February 2009, although they increased to $402
billion by the end of July 2009.153
The Russian government has responded to the crisis with various measures to prop up the stock
market and the banks. The packages, valued at around $180 billion, are proportionally larger in
terms of GDP than the U.S. package that Congress approved in September 2008.154 In midSeptember, the government made available $44 billion in funds to Russia’s three largest stateowned banks to boost lending and another $16 billion to the next 25 largest banks. It also lowered
taxes on oil exports to reduce costs to oil companies and made available $20 billion for the
government to purchase stocks on the stock market. In late September, the government
150

For more information on the conflict, see CRS Report RL34618, Russia-Georgia Conflict in August 2008: Context
and Implications for U.S. Interests, by Jim Nichol.
151
Economist Intelligence Unit. Country Report—Russia. June 2009. p. 3.
152
INS Global Insight. June 3, 2009.
153
Central Bank of Russia.
154
Ibid. 6-7.

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announced that an additional $50 billion would be available to banks and Russian companies to
pay off foreign debts coming due by the end of the year. On October 7, 2008, the government
announced another package of $36.4 billion in credits to banks. 155 In 2009, the government
changed strategies by focusing on macroeconomic measures rather than measures to assist
specific industries or firms. For example, the government reduced the corporate tax rate from
24% to 20% and the tax rate on small companies to try to stimulate investment.156 The
government expects to rein in expenditures as it anticipates lower revenues but still anticipates its
first budget deficit in 10 years, which the government will be able to finance at least for the timebeing from accumulated reserves.157 While cutting expenditures might be considered fiscally
responsible on the one hand, it could retard government investment in obsolete infrastructure and
expenditures on pensions and other social income transfers, contributing to a drag on the rest of
the economy.
What are the prospects for the Russian economy? The IMF projects that Russia’s real GDP will
decline over 6% in 2009.158 INS Global Insight, and the Economist Intelligence Unit (EIU), both
private economic forecasting firms, project Russia’s GDP to decline in 2009 by 4.7% and 5.0%,
respectively. 159 These forecasts are supported by data showing a continuing decline in both
domestic and external demand (exports), among other things, although the rates of decline have
slowed possibly indicating bottoming out, if not a full-fledged economic recovery. INS Global
Insight, Inc. and the EIU each forecast modest recoveries in 2010 of 1.5% and 2.3%, respectively.
Russia remains highly dependent on oil and natural gas exports as a source of income. If world oil
prices continue to be depressed, the Russian economy would likely experience slow growth, if
any. Many economists have argued that, in the long run, for Russia to achieve sustainable growth,
it must reduce its dependence on exports of oil, natural gas, and other commodities and diversify
into more stable production.

Effects on Europe and The European Response160
Some European countries161 initially viewed the financial crisis as a purely American
phenomenon. That view changed as economic activity Europe declined at a fast pace over a short
period of time. Making matters worse, global trade declined sharply, eroding prospects for
European exports providing a safety valve for domestic industries that are cutting output. In
addition, public protests, sparked by rising rates of unemployment and concerns over the growing
financial and economic turmoil, have increased the political stakes for European governments and
their leaders. The global economic crisis is straining the ties that bind together the members of the
European Union and has presented a significant challenge to the ideals of solidarity and common
interests. In addition, the longer the economic downturn persists, the greater the prospects are that
155

Economist Intelligence Unit. Country Report–Russia. October 2008. p. 6
Economist Intelligence Unit. Country Report—Russia. June 2009. p. 5.
157
Ibid. p. 6.
158
IMF. Statement of IMF Mission to the Russian Federation. June 1, 2009.
159
INS Global Insight. June 3, 2009. Economist Intelligence Unit. Country Report—Russia. June 2009. p.7.
156

160

Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
161
For additional information, see CRS Report R40415, The Financial Crisis: Impact on and Response by The
European Union, by James K. Jackson.

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international pressure will mount against those governments that are perceived as not carrying
their share of the responsibility for stimulating their economies to an extent that is commensurate
with the size of their economy.
Since the start of the financial crisis, the European Union has taken a number of steps to improve
supervision of financial markets. These actions include:
•

Strengthened the Committee of European Securities Regulators. The Committee
is an advisory body without any regulatory authority within the European
Commission. The January 23, 2009 Directive strengthened the Committee’s
authority to mediate and coordinate securities regulations between EU members.

•

Strengthened the Committee of European Banking Supervisors. The Committee
is an advisory body without any regulatory authority that coordinates on banking
supervision. The January 23, 2009 EU Directive broadened the role of the
Committee to include supervision of financial conglomerates.

•

Strengthened the Committee of European Insurance and Occupational Pensions
Supervisors. The Committee is an advisory body without any regulatory authority
within the European Commission in the areas of insurance, reinsurance, and
occupational pensions fields. The January 23, 2009 Directive authorizes the
Committee to coordinate policies among EU members and between the EU and
other national governments and bodies.

•

The European Parliament and the European Council approved on April 23, 2009,
new regulations on credit rating agencies that are expected to improve the quality
and transparency of the ratings agencies.

•

Approved direct funding by the European Union to the International Accounting
Standards Committee Foundation, the European Financial Reporting Advisory
Group, and the Public Interest Oversight Body.

•

The European Commission proposed a set of measures to register hedge fund
managers and managers of alternative investment funds and measures to regulate
executive compensation.

•

Expressed support for a new European Systemic Risk Council and a European
System of Financial Supervisors.

European countries have been concerned over the impact the financial crisis and the economic
recession are having on the economies of East Europe and prospects for political instability162 as
well as future prospects for market reforms. Worsening economic conditions in East European
countries are compounding the current problems facing financial institutions in the EU. Although
mutual necessity may eventually dictate a more unified position among EU members and
increased efforts to aid East European economies, some observers are concerned these actions
may come too late to forestall another blow to the European economies and to the United States.
Governments elsewhere in Europe, such as Iceland and Latvia, have collapsed as a result of
public protests over the way their governments have handled their economies during the crisis.

162

Pan, Phillip P., Economic Crisis Fuels Unrest in E. Europe, The Washington Post, January 26, 2009, p, A1.

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The crisis has underscored the growing interdependence between financial markets and between
the U.S. and European economies. As such, the synchronized nature of the current economic
downturn probably means that neither the United States nor Europe is likely to emerge from the
financial crisis or the economic downturn alone. The United States and Europe share a mutual
interest in developing a sound financial architecture to improve supervision and regulation of
individual institutions and of international markets. This issue includes developing the
organization and structures within national economies that can provide oversight of the different
segments of the highly complex financial system. This oversight is viewed by many as critical to
the future of the financial system because financial markets generally are considered to play an
indispensible role in allocating capital and facilitating economic activity.
Within Europe, national governments and private firms have taken noticeably varied responses to
the crisis, reflecting the unequal effects by country. While some have preferred to address the
crisis on a case-by-case basis, others have looked for a systemic approach that could alter the
drive within Europe toward greater economic integration. Great Britain proposed a plan to rescue
distressed banks by acquiring preferred stock temporarily. Iceland, on the other hand, had to take
over three of its largest banks in an effort to save its financial sector and its economy from
collapse. The Icelandic experience has raised important questions about how a nation can protect
its depositors from financial crisis elsewhere and about the level of financial sector debt that is
manageable without risking system-wide failure.
According to reports by the International Monetary Fund (IMF) and the European Central Bank
(ECB), many of the factors that led to the financial crisis in the United States created a similar
crisis in Europe.163 Essentially low interest rates and an expansion of financial and investment
opportunities that arose from aggressive credit expansion, growing complexity in mortgage
securitization, and loosening in underwriting standards combined with expanded linkages among
national financial centers to spur a broad expansion in credit and economic growth. This rapid
rate of growth pushed up the values of equities, commodities, and real estate. Over time, the
combination of higher commodity prices and rising housing costs pinched consumers’ budgets,
and they began reducing their expenditures. One consequence of this drop in consumer spending
was a slowdown in economic activity and, eventually, a contraction in the prices of housing. In
turn, the decline in the prices of housing led to a large-scale downgrade in the ratings of subprime
mortgage-backed securities and the closing of a number of hedge funds with subprime exposure.
Concerns over the pricing of risk in the market for subprime mortgage-backed securities spread to
other financial markets, including to structured securities more generally and the interbank money
market. Problems spread quickly throughout the financial sector to include financial guarantors as
the markets turned increasingly dysfunctional over fears of under-valued assets.
As creditworthiness problems in the United States began surfacing in the subprime mortgage
market in July 2007, the risk perception in European credit markets followed. The financial
turmoil quickly spread to Europe, although European mortgages initially remained unaffected by
the collapse in mortgage prices in the United States. Another factor in the spread of the financial
turmoil to Europe has been the linkages that have been formed between national credit markets
and the role played by international investors who react to economic or financial shocks by
rebalancing their portfolios in assets and markets that otherwise would seem to be unrelated. The
rise in uncertainty and the drop in confidence that arose from this rebalancing action undermined
163

Regional Economic Outlook: Europe, International Monetary Fund, April, 2008, p. 19-20; and EU Banking
Structures, European Central Bank, October 2008, p. 26.

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the confidence in major European banks and disrupted the interbank market, with money center
banks becoming unable to finance large securities portfolios in wholesale markets. The increased
international linkages between financial institutions and the spread of complex financial
instruments has meant that financial institutions in Europe and elsewhere have come to rely more
on short-term liquidity lines, such as the interbank lending facility, for their day-to-day
operations. This has made them especially vulnerable to any drawback in the interbank market.164
Estimates developed by the International Monetary Fund in January 2009 provide a rough
indicator of the impact the financial crisis and an economic recession are having on the
performance of major advanced countries. Economic growth in Europe is expected to slow by
nearly 2% in 2009 to post a 0.2% drop in the rate of economic growth, while the threat of
inflation is expected to lessen. Economic growth, as represented by gross domestic product
(GDP), is expected to register a negative 1.6% rate for the United States in 2009, while the euro
area countries could experience a combined negative rate of 2.0%, down from a projected rate of
growth of 1.2% in 2008. The drop in the prices of oil and other commodities from the highs
reached in summer 2008 may have helped improve the rate of economic growth, but the length
and depth of the economic downturn has challenged the ability of the IMF projections to
accurately estimate projected rates of economic growth. In mid-February, the European Union
announced that the rate of economic growth in the EU in the fourth quarter of 2008 had slowed to
an annual rate of negative 6%.165 By mid-summer 2009, the pace of economic growth had picked
up in both France and Germany.
Central banks in the United States, the Euro zone, the United Kingdom, Canada, Sweden, and
Switzerland staged a coordinated cut in interest rates on October 8, 2008, and announced they had
agreed on a plan of action to address the ever-widening financial crisis.166 The actions, however,
did little to stem the wide-spread concerns that were driving financial markets. Many Europeans
were surprised at the speed with which the financial crisis spread across national borders and the
extent to which it threatened to weaken economic growth in Europe. This crisis did not just
involve U.S. institutions. It has demonstrated the global economic and financial linkages that tie
national economies together in a way that may not have been imagined even a decade ago. At the
time, much of the substance of the European plan was provided by the British Prime Minister
Gordon Brown, 167 who announced a plan to provide guarantees and capital to shore up banks.
Eventually, the basic approach devised by the British arguably would influence actions taken by
other governments, including that of the United States.
On October 10, 2008, the G-7 finance ministers and central bankers,168 met in Washington, DC, to
provide a more coordinated approach to the crisis. At the Euro area summit on October 12, 2008,
Euro area countries along with the United Kingdom urged all European governments to adopt a

164

Frank, Nathaniel, Brenda Gonzalez-Hermosillo, and Heiko Hesse, Transmission of Liquidity Shocks: Evidence from
the 2007 Subprime Crisis, IMF Working Paper #WP/08/200, August 2008, the International Monetary Fund.
165
Flash Estimates for the Fourth Quarter of 2008, Eurostat news release, STAT/09/19, February 13, 2009.
166
Hilsenrath, Jon, Joellen Perry, and Sudeep Reddy, Central Banks Launch Coordinated Attack; Emergency Rate Cuts
Fail to Halt stock Slide; U.S. Treasury Considers Buying Stakes in Banks as Direct Move to Shore Up Capital, the Wall
Street Journal, October 8, 2008, p. A1.
167
Castle, Stephen, British Leader Wants Overhaul of Financial System, The New York Times, October 16, 2008.
168
The G-7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

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common set of principles to address the financial crisis.169 The measures the nations supported are
largely in line with those adopted by the U.K. and include:
•

Recapitalization: governments promised to provide funds to banks that might be
struggling to raise capital and pledged to pursue wide-ranging restructuring of the
leadership of those banks that are turning to the government for capital.

•

State ownership: governments indicated that they will buy shares in the banks
that are seeking recapitalization.

•

Government debt guarantees: guarantees offered for any new debts, including
inter-bank loans, issued by the banks in the Euro zone area.

•

Improved regulations: the governments agreed to encourage regulations to permit
assets to be valued on their risk of default instead of their current market price.

In addition to these measures, EU leaders agreed on October 16, 2008, to set up a crisis unit and
they agreed to a monthly meeting to improve financial oversight.170 Jose Manuel Barroso,
President of the European Commission, urged EU members to develop a “fully integrated
solution” to address the global financial crisis, consistent with France’s support for a strong
international organization to oversee the financial markets. The EU members expressed their
support for the current approach within the EU, which makes each EU member responsible for
developing and implementing its own national regulations regarding supervision over financial
institutions. The European Council stressed the need to strengthen the supervision of the
European financial sector. As a result, the EU statement urged the EU members to develop a
“coordinated supervision system at the European level.”171 This approach likely will be tested as a
result of failed talks with the credit derivatives industry in Europe. In early January 2009, an EUsponsored working group reported that it had failed to get a commitment from the credit
derivatives industry to use a central clearing house for credit default swaps. As an alternative, the
European Commission reportedly is considering adopting a set of rules for EU members that
would require banks and other users of the CDS markets to use a central clearing house within the
EU as a way of reducing risk.172

The “European Framework for Action”
On October 29, 2008, the European Commission released a “European Framework for Action” as
a way to coordinate the actions of the 27 member states of the European Union to address the
financial crisis.173 The EU also announced that on November 16, 2008, the Commission will
propose a more detailed plan that will bring together short-term goals to address the current
economic downturn with the longer-term goals on growth and jobs in the Lisbon Strategy.174 The
169

Summit of the Euro Area Countries: Declaration on a Concerted European Action Plan of the Euro Area Countries,
European union, October 12, 2008.
170
EU Sets up Crisis Unit to Boost Financial Oversight, Thompson Financial News, October 16, 2008.
171
Ibid.
172
Bradbury, Adam, EU Eyes Next Step on Clearing, The Wall Street Journal Europe, January 7, 2009. p. 21.
173
Communication From the Commission, From Financial Crisis to Recovery: A European Framework for Action,
European Commission, October 29, 2008.
174
The Lisbon Strategy was adopted by the EU member states at the Lisbon summit of the European Union in March
2001 and then recast in 2005 based on a consensus among EU member states to promote long-term economic growth
and development in Europe.

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short-term plan revolves around a three-part approach to an overall EU recovery action
plan/framework. The three parts to the EU framework are:
A new financial market architecture at the EU level. The basis of this architecture
involves implementing measures that member states have announced as well as providing for
(1) continued support for the financial system from the European Central Bank and other
central banks; (2) rapid and consistent implementation of the bank rescue plan that has been
established by the member states; and (3) decisive measures that are designed to contain the
crisis from spreading to all of the member states.
Dealing with the impact on the real economy. The policy instruments member states can
use to address the expected rise in unemployment and decline in economic growth as a
second-round effect of the financial crisis are in the hands of the individual member states.
The EU can assist by adding short-term actions to its structural reform agenda, while
investing in the future through: (1) increasing investment in R&D innovation and education;
(2) promoting flexicurity175 to protect and equip people rather than specific jobs; (3) freeing
up businesses to build markets at home and internationally; and (4) enhancing
competitiveness by promoting green technology, overcoming energy security constraints,
and achieving environmental goals. In addition, the Commission will explore a wide range of
ways in which EU members can increase their rate of economic growth.
A global response to the financial crisis. The financial crisis has demonstrated the growing
interaction between the financial sector and the goods-and services-producing sectors of
economies. As a result, the crisis has raised questions concerning global governance not only
relative to the financial sector, but the need to maintain open trade markets. The EU would
like to use the November 15, 2008 multi-nation G-20 economic summit in Washington, DC,
to promote a series of measures to reform the global financial architecture. The Commission
argues that the measures should include (1) strengthening international regulatory standards;
(2) strengthen international coordination among financial supervisors; (3) strengthening
measures to monitor and coordinate macroeconomic policies; and (4) developing the
capacity to address financial crises at the national regional and multilateral levels. Also, a
financial architecture plan should include three key principles: (1) efficiency; (2)
transparency and accountability; and (3) the inclusion of representation of key emerging
economies.

European leaders, meeting prior to the November 15, 2008 G-20 economic summit in
Washington, DC, agreed that the task of preventing future financial crisis should fall to the
International Monetary Fund, but they could not agree on precisely what that role should be. 176
The leaders set a 100-day deadline to draw up reforms for the international financial system.
British Prime Minister Gordon Brown reportedly urged other European leaders to back fiscal
stimulus measure to support the November 6, 2008 interest rate cuts by the European Central
Bank, the Bank of England, and other central banks. Reportedly, French Prime Minister Nicolas
Sarkozy argued that the role of the IMF and the World Bank needed to be rethought. French and
German officials have argued that the IMF should assume a larger role in financial market
regulation, acting as a global supervisor of regulators. Prime Minister Sarkozy also argued that
the IMF should “assess” the work of such international bodies as the Bank of International
Settlements. Other G-20 leaders, however, reportedly have disagreed with this proposal, agreeing
instead to make the IMF “the pivot of a renewed international system,” working alongside other
175

The combination of labor market flexibility and security for workers.
Hall, Ben, George Parker, and Nikki Tait, European Leaders Decide on Deadline for Reform Blueprint, Financial
Times, November 8, 2008, p. 7.
176

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bodies. Other Ministers also were apparently not enthusiastic toward a French proposal that
Europe should agree to a more formalized coordination of economic policy.
In an effort to confront worsening economic conditions, German Chancellor Angela Merkel
proposed a package of stimulus measures, including spending for large-scale infrastructure
projects, ranging from schools to communications. The stimulus package represents the second
multi-billion euro fiscal stimulus package Germany has adopted in less than three months. The
plan, announced on January13, 2009, reportedly was doubled from initial estimates to reach more
than 60 billion Euros177 (approximately $80 billion) over two years. The plan reportedly includes
a pledge by Germany’s largest companies to avoid mass job cuts in return for an increase in
government subsidies for employees placed temporarily on short work weeks or on lower
wages.178 Other reports indicate that Germany is considering an emergency fund of up to 100
billion Euros in state-backed loans or guarantees to aid companies having problems getting
credit.179
Overall, Germany’s response to the economic downturn changed markedly between December
2008 and January 2009 as economic conditions continued to worsen. In a December 2008 article,
German Finance Minister Peer Steinbruck defended Germany’s approach at the time. According
to Steinbruck, Germany disagreed with the EU plan to provide a broad economic stimulus plan,
because it favored an approach that is more closely tailored to the German economy. He argued
that Germany is providing a counter-cyclical stimulus program even though it is contrary to its
long-term goal of reducing its government budget deficit. Important to this program, however, are
such “automatic stabilizers” as unemployment benefits that automatically increase without
government action since such benefits play a larger role in the German economy than in other
economies. Steinbruck argued that, “our experience since the 1970s has shown that ... stimulus
programs fail to achieve the desired effect.... It is more likely that such large-scale stimulus
programs—and tax cuts as well—would not have any effects in real time. It is unclear whether
general tax cuts can significantly encourage consumption during a recession, when many
consumers are worried about losing their jobs. The history of the savings rate in Germany points
to the opposite.” 180
France, which has been leading efforts to develop a coordinated European response to the
financial crisis, has proposed a package of measures estimated to cost over $500 billion. The
French government is creating two state agencies that will provide funds to sectors where they are
needed. One entity will issue up to $480 billion in guarantees on inter-bank lending issued before
December 31, 2009, and would be valid for five years. The other entity will use a $60 billion fund
to recapitalize struggling companies by allowing the government to buy stakes in the firms. On
January 16, 2009, President Sarkozy announced that the French government would take a tougher
stance toward French banks that seek state aid. Up to that point, France had injected $15 billion in
the French banking system. In order to get additional aid, banks would be required to suspend
dividend payments to shareholders and bonuses to top management and to increase credit lines to

177

Benoit, Bernard, Germany Doubles Size of Stimulus, Financial Times, January 6, 2009, p. 10; Walker, Marcus,
Germany’s Big Spending Plans, The Wall Street Journal Europe, January 13, 2009, p. 3.
178
Benoit, Bernard, German Stimulus Offers Job Promise, Financial Times, December 16, 2008. p. 1.
179

Walker, Marcus, Germany Mulls $135 Billion in Rescue Loans, The Wall Street Journal Europe, January 8, 2009.
p. 1.
180
Steinbruck, Peer, Germany’s Way Out of the Crisis, The Wall Street Journal, December 22, 2008.

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such clients as exporters. France reportedly was preparing to inject more money into the banking
system. 181
On December 4, 2008, President Sarkozy announced a $33 billion (26 billion euros) package of
stimulus measures to accelerate planned public investments.182 The package is focused primarily
on infrastructure projects and investments by state-controlled firms, including a canal north of
Paris, renovation of university buildings, new metro cars, and construction of 70,000 new homes,
in addition to 30,000 unfinished homes the government has committed to buy in 2009. The plan
also includes a 200 Euro payment to low-income households. On December 15, 2008, France
agreed to provide the finance division of Renault and Peugeot $1.2 billion in credit guarantees
and an additional $250 million to support the car manufacturers’ consumer finance division.183 In
an interview on French TV on January 14, 2009, French Prime Minister Francois Fillon indicated
that the French government is considering an increase in aid to the French auto industry,
including Renault and Peugeot.184 The auto industry and its suppliers reportedly employ about
10% of France’s labor force.

The de Larosiere Report and the European Plan for Recovery
When the European Union released its “Framework for Action” in response to the immediate
needs of the financial crisis, it was moving to address the long-term requirements of the financial
system. As a key component of this approach, the EU commissioned a group within the EU to
assess the weaknesses of the existing EU financial architecture. It also charged this group with
developing proposals that could guide the EU in fashioning a system that would provide early
warning of areas of financial weakness and chart a way forward in erecting a stronger financial
system. As part of this way forward, the European Union issued two reports in the first quarter of
2009 that address the issue of supervision of financial markets. The first report,185 issued on
February 25, 2009 and commissioned by the European Union, was prepared by a High-Level
Group on financial supervision headed by former IMF Managing Director and ex-Bank of France
Governor Jacques de Larosiere and, therefore, is known as the de Larosiere Report. The second
report186 was published by the European Commission to chart the course ahead for the members
of the EU to reform the international financial governance system.

The de Larosiere Report
The de Larosiere Report focuses on four main issues: (1) causes of the financial crisis; (2)
organizing the supervision of financial institutions and markets in the EU; (3) strengthening
181

Parussini, Gabrielle, France to Give Banks Capital, With More Strings Attached, The Wall Street Journal Europe,
January 16, 2009, p. A17.
182
Gauthier-Villars, David, Leading News: France Sets Stimulus Plan, The Wall Street Journal Europe, December 5,
2008, p. 3.
183
Hall, Ben, France Gives Renault and Peugeot E.U.R 779m, Financial Times, December 16, 2008, p. 4.
184
Abboud, Leila, France Considers New Measures to Aid Auto Companies, The Wall Street Journal Europe, January
15, 2009, p. 4.
185
Report, The High-Level Group on Financial Supervision in the EU, Chaired by Jacques de Larosiere, February 25,
2009.
186
Driving European Recovery, Communication for the Spring European Council, Commission of the European
Communities, April 3, 2009.

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European cooperation on financial stability, oversight, early warning, and crisis mechanisms; and
(4) organizing EU supervisors to cooperate globally. The Report also proposes 31
recommendations on regulation and supervision of financial markets.
As the financial crisis unfolded, the de Larosiere Report concludes, the regulatory response by the
European Union and its members was weakened by, “an inadequate crisis management
infrastructure in the EU.” Furthermore, the Report emphasizes that an inconsistent set of rules
across the EU as a result of the closely guarded sovereignty of national financial regulators led to
a wide diversity of national regulations reflecting local traditions, legislation, and practices.
While micro-prudential supervision focused on limiting the distress of individual financial
institutions in order to protect the depositors, it neglected the broader objective of macroprudential supervision, which is aimed at limiting distress to the financial system as a whole in
order to protect the economy from significant losses in real output. In order to remedy this
obstacle, the Report offers a two-level approach to reforming financial market supervision in the
EU. This new approach would center around new oversight of broad, system-wide risks and a
higher-level of coordination among national supervisors involved in day-to-day oversight.
The de Larosiere Report recommends that the EU create a new macro-prudential level of
supervision called the European Systemic Risk Council (ESRC) chaired by the President of the
European Central Bank. A driving force behind creating the ESRC is that it would bring together
the central banks of all of the EU members with a clear mandate to preserve financial stability by
collectively forming judgments and making recommendations on macro-prudential policy. The
ESRC would also gather information on all macro-prudential risks in the EU, decide on macroprudential policy, provide early risk warning to EU supervisors, compare observations on
macroeconomic and prudential developments, and give direction on the aforementioned issues.
Next, the Report recommends that the EU create a new European System of Financial
Supervision (ESFS) to transform a group of EU committees known as L3 Committees187 into EU
Authorities. The three L3 Committees are: the Committee of European Securities Regulators
(CESR); the Committee of European Banking Supervisors (CEBS); and the Committee of
European Insurance and Occupational Pensions Supervisors (CEIOPS). The ESFS would
maintain the decentralized structure that characterizes the current system of national supervisors,
while the ESFS would coordinate the actions of the national authorities to maintain common high
level supervisory standards, guarantee strong cooperation with other supervisors, and guarantee
that the interests of the host supervisors are safeguarded.
The main tasks of the ESFS authorities would be to: provide legally binding mediation between
national supervisors; adopt binding supervisory standards; adopt binding technical decisions that
apply to individual institutions; provide oversight and coordination of colleges of supervisors;
license and supervise specific EU-wide institutions; provide binding cooperation with the ESRC
to ensure that there is adequate macro-prudential supervision; and assume a strong coordinating
role in crisis situations. The main mission of the national supervisors would be to oversee the
day-to-day operation of firms.

187

Level 3 committees represent the third level of the Lamfalussy process the EU uses to implement EU-wide policies.
At the third level, national regulators work on coordinating new regulations with other nations. and they may adopt
non-binding guidelines or common standards regarding matters not covered by EU legislation, as long as these
standards are compatible with the legislation adopted at Level 1 and Level 2.

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Driving European Recovery
“Driving European Recovery,” issued by the European Commission, presents a slightly different
approach to financial supervision and recovery than that proposed by the de Larosiere group,
although it accepts many of the recommendations offered by the group. The recommendations in
the report were intended to complement the economic stimulus measures that were adopted by the
EU on November 27, 2008, under the $256 billion Economic Recovery Plan188 that funds crossborder projects, including investments in clean energy and upgraded telecommunications
infrastructure. The plan is meant to ensure that, “all relevant actors and all types of financial
investments are subject to appropriate regulation and oversight.” In particular, the EC plan notes
that nation-based financial supervisory models are lagging behind the market reality of a large
number of financial institutions that operate across national borders.
The European Commission praised the de Larosiere report for contributing “to a growing
consensus about where changes are needed.” Of particular interest to the EC were the
recommendations to develop a harmonized core set of standards that can be applied throughout
the EU. The EC also supported the concept of a new European body similar to the proposed
European Systemic Risk Council to gather and assess information on all risks to the financial
sector as a whole, and it supported the concept of reforming the current system of EU
Committees that oversee the financial sector. The EU plan, however, would accelerate the plan
proposed by the de Larosiere group by combining the two phases outlined in the report. Using the
de Larosiere report as a basis, the EC is attempting to establish a new European financial
supervision system. These efforts to reform the EC’s financial supervision system would be based
on five key objectives:
•

First, provide the EU with a supervisory framework that detects potential risks
early, deals with them effectively before they have an impact, and meets the
challenge of complex international financial markets. At the end of May 2009 the
EC presented a European financial supervision package to the European Council
for its consideration. The package included two elements: measures to establish a
European supervision body to oversee the macro-prudential stability of the
financial system as a whole; and proposals on the architecture of a European
financial supervision system to undertake micro-prudential supervision.

•

Second, the EC will move to reform those areas where European or national
regulation is insufficient or incomplete by proposing: a comprehensive legislative
instrument that establishes regulatory and supervisory standards for hedge funds,
private equity and other systemically important market players; a White Paper on
the necessary tools for early intervention to prevent a similar crisis; measures to
increase transparency and ensure financial stability in the area of derivatives and
other complex structured products; legislative proposals to increase the quality
and quantity of prudential capital for trading book activities, complex
securitization, and to address liquidity risk and excessive leverage; and a program
of actions to establish a more consistent set of supervisory rules.

188

A European Economic Recovery Plan: Communication From the Commission to the European Council,
Commission of the European Communities, COM(2008) 800 final, November 26, 2008. The full report is available at
http://ec.europa.eu/commission_barroso/president/pdf/Comm_20081126.pdf.

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•

Third, to ensure European investors, consumers, and small and medium-size
enterprises can be confident about their savings, their access to credit and their
rights, the EC will: advance a Communication on retail investment products to
strengthen the effectiveness of marketing safeguards; provide additional
measures to reinforce the protection of bank depositors, investors, and insurance
policy holders; and provide measures on responsible lending and borrowing.

•

Fourth, in order to improve risk management in financial firms and align pay
incentives with sustainable performance, the EC intends to strengthen the 2004
Recommendation on the remuneration of directors; and bring forward a new
Recommendation on remuneration in the financial services sector followed by
legislative proposals to include remuneration schemes within the scope of
prudential oversight.

•

Fifth, to ensure more effective sanctions against market wrongdoing, the EC
intends to: review the Market Abuse Directive189 and make proposals on how
sanctions could be strengthened in a harmonized manner and better enforced.

The British Rescue Plan
On October 8, 2008, the British Government announced a $850 billion multi-part plan to rescue
its banking sector from the current financial crisis. Details of this plan are presented here to
illustrate the varied nature of the plan. The Stability and Reconstruction Plan followed a day
when British banks lost £17 billion on the London Stock Exchange. The biggest loser was the
Royal Bank of Scotland, whose shares fell 39%, or £10 billion, of its value. In the downturn,
other British banks lost substantial amounts of their value, including the Halifax Bank of Scotland
which was in the process of being acquired by Lloyds TSB.
The British plan included four parts:
•

A coordinated cut in key interest rates of 50 basis, or one-half of one percent
(0.5) between the Bank of England, the Federal Reserve, and the European
Central Bank.

•

An announcement of an investment facility of $87 billion implemented in two
stages to acquire the Tier 1 capital, or preferred stock, in “eligible” banks and
building societies (financial institutions that specialize on mortgage financing) in
order to recapitalize the firms. To qualify for the recapitalization plan, an
institution must be incorporated in the UK (including UK subsidiaries of foreign
institutions, which have a substantial business in the UK and building societies).
Tier 1 capital often is used as measure of the asset strength of a financial
institution.

•

The British Government agreed to make available to those institutions
participating in the recapitalization scheme up to $436 billion in guarantees on

189

The Market Abuse Directive was adopted by the European Commission in April 2004. The Directive is intended to
reinforce market integrity in the EU and contribute to the harmonization of the rules against market abuse and
establishing transparency and equal treatment of market participants in such areas as accepted market practices in the
context of market manipulation, the definition of inside information relative to derivatives on commodities, and the
notification of the relevant authorities of suspicious transactions.

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new short- and medium-term debt to assist in refinancing maturing funding
obligations as they fall due for terms up to three years.
•

The British Government announced that it would make available $352 billion
through the Special Liquidity Scheme to improve liquidity in the banking
industry. The Special Liquidity Scheme was launched by the Bank of England on
April 21, 2008 to allow banks to temporarily swap their high-quality mortgagebacked and other securities for UK Treasury bills. 190

On November 24, 2008, Britain’s majority Labor party presented a plan to Parliament to stimulate
the nation’s slowing economy by providing a range of tax cuts and government spending projects
totaling 20 billion pounds (about $30 billion). 191 The stimulus package includes a 2.5% cut in the
value added tax (VAT), or sales tax, for 13 months, a postponement of corporate tax increases,
and government guarantees for loans to small and midsize businesses. The plan also includes
government plans to spend 4.5 billion pounds on public works, such as public housing and energy
efficiency. Some estimates indicate that the additional spending required by the plan will push
Britain’s government budget deficit in 2009 to an amount equivalent to 8% of GDP. To pay for
the plan, the government would increase income taxes on those making more than 150,000
pounds (about $225,000) from 40% to 45% starting in April 2011. In addition, the British plan
would increase the National Insurance contributions for all but the lowest income workers.192
On January 14, 2009, British Business Secretary Lord Mandelson unveiled an additional package
of measures by the Labor government to provide credit to small and medium businesses that have
been hard pressed for credit as foreign financial firms have reduced their level of activity in the
UK. The three measures are: (1) a 10 billion pound (approximately $14 billion) Capital Working
Scheme to provide banks with guarantees to cover 50% of the risk on existing and new working
capital loans on condition that the banks must use money freed up by the guarantee to make new
loans; (2) a one billion pound Enterprise Finance Guarantee Scheme to assist small, credit-worthy
companies by providing guarantees to banks of up to 75% of loans to small businesses; and (3) a
75 million pound Capital for Enterprise Fund to convert debt to equity for small businesses.193 In
an effort to address the prospect that large banks or financial firms may become insolvent or fail
and thereby cause a major disruption to the financial system, the British Parliament in February
2009 passed the Banking Act of 2009. The act makes permanent a set of procedures the U.K.
government had developed to deal with troubled banks before they become insolvent or collapse.
Such procedures are being considered by other EU governments and others as they amend their
respective supervisory frameworks.

Collapse of Iceland’s Banking Sector
The failure of Iceland’s banks has raised some questions about bank supervision and crisis
management for governments in Europe and the United States. As Icelandic banks began to
190

The Bank of England, Financial Stability Report, April 2008, p. 10.

191

Scott, Mark, Is Britain’s Stimulus Plan a Wise Move? BusinessWeek, November 24, 2008; Werdigier, Julia, Britain
Offers $30 Billion Stimulus Plan, The New York Times, November 25, 2008.
192
Falloon, Matt, and Mike Peacock, UK Government to Borrow Record Sums to Revive Economy, The Washington
Post, November 24, 2008.
193
Real Help for Business, press release, Department for Business, Enterprise and Regulatory Reform, January 14,
2009; Mollenkamp, Carrick, Alistair MacDonald, and Sara Schaefer Munoz, Hurdles rise as U.K. Widens Stimulus
Plan, The Wall Street Journal Europe, January 14, 2009, p. 1.

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default, Britain used an anti-terrorism law to seize the deposits of the banks to prevent the banks
from shifting funds from Britain to Iceland.194 This incident raised questions about how national
governments should address the issue of supervising foreign financial firms that are operating
within their borders and whether they can prevent foreign-owned firms from withdrawing
deposits in one market to offset losses in another. In addition, the case of Iceland raises questions
about the cost and benefits of branch banking across national borders where banks can grow to be
so large that disruptions in the financial market can cause defaults that outstrip the resources of
national central banks to address.
On November 19, 2008, Iceland and the International Monetary Fund (IMF) finalized an
agreement on an economic stabilization program supported by a $2.1 billion two-year standby
arrangement from the IMF.195 Upon approval of the IMF’s Executive board, the IMF released
$827 million immediately to Iceland with the remainder to be paid in eight equal installments,
subject to quarterly reviews. As part of the agreement, Iceland has proposed a plan to restore
confidence in its banking system, to stabilize the exchange rate, and to improve the nation’s fiscal
position. Also as part of the plan, Iceland’s central bank raised its key interest rate by six
percentage points to 18% on October 29, 2008, to attract foreign investors and to shore up its
sagging currency. 196 The IMF’s Executive Board had postponed its decision on a loan to Iceland
three times, reportedly to give IMF officials more time to confirm loans made by other nations.
Other observers argued, however, that the delay reflected objections by British, Dutch, and
German officials over the disposition of deposit accounts operated by Icelandic banks in their
countries. Iceland reportedly smoothed the way by agreeing in principle to cover the deposits,
although the details had not be finalized. In a joint statement, Germany, Britain, and the
Netherlands said on November 20, 2008, that they would “work constructively in the continuing
discussions” to reach an agreement.197 Following the decision of IMF’s Executive Board,
Denmark, Finland, Norway, and Sweden agreed to provide an additional $2.5 billion in loans to
Iceland.
Between October 7 and 9, 2008, Iceland’s Financial Supervisory Authority (FSA), an independent
state authority with responsibilities to regulate and supervise Iceland’s credit, insurance,
securities, and pension markets took control, without actually nationalizing them, of three of
Iceland’s largest banks: Landsbanki, Glitnir Banki, and Kaupthing Bank prior to a scheduled vote
by shareholders to accept a government plan to purchase the shares of the banks in order to head
off the collapse of the banks. At the same time, Iceland suspended trading on its stock exchange
for two days. 198 In part, the takeover also attempted to quell a sharp depreciation in the exchange
value of the Icelandic krona.
The demise of Iceland’s three largest banks is attributed to an array of events, but primarily stems
from decisions by the banks themselves. Some observers argued that the collapse of Lehman
Brothers set in motion the events that finally led to the collapse of the banks,199 but this
194

Benoit, Bertrand, Tom Braithwaaite, Jimmy Burns, Jean Eaglesham, et. al., Iceland and UK clash on Crisis,
Financial Times, October 10, 2008, p. 1.
195
Anderson, Camilla, Iceland Gets Help to Recover From Historic Crisis, IMF Survey Magazine, November 19, 2008.
196
Iceland Raises Key Rate by 6 Percentage Points, The New York Times, October 29, 2008.
197
Jolly, David, Nordic Countries Add $2.5 Billion to Iceland’s Bailout, The New York Times, November 20, 2008.
198
Wardell, Jane, Iceland’s Financial Crisis Escalates, BusinessWeek, October 9, 2008; Pfanner, Eric, Meltdown of
Iceland’s Financial system Quickens, The New York Times, October 9, 2008.
199
Portes, Richard, The Shocking Errors Behind Iceland’s Meltdown, Financial Times, October 13, 2008, p. 15.

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conclusion is controversial. Some have argued that at the heart of Iceland’s banking crisis is a
flawed banking model that is based on an internationally active banking sector that is large
relative to the size of the home country’s GDP and to the fiscal capacity of the central bank.200 As
a result, a disruption in liquidity threatens the viability of the banks and overwhelms the ability of
the central bank to act as the lender of last resort, which undermines the solvency of the banking
system.
On October 15, 2008, the Central Bank of Iceland set up a temporary system of daily currency
auctions to facilitate international trade. Attempts by Iceland’s central bank to support the value
of the krona are at the heart of Iceland’s problems. Without a viable currency, there was no way to
support the banks, which have done the bulk of their business in foreign markets. The financial
crisis has also created problems with Great Britain because hundreds of thousands of Britons hold
accounts in online branches of the Icelandic banks, and they fear those accounts will default. The
government of British Prime minister Gordon Brown has used powers granted under antiterrorism laws to freeze British assets of Landsbanki until the situation is resolved.

Impact on Asia and the Asian Response201
Many Asian economies have been through wrenching financial crises in the past 10-15 years.
Although most observers say the region’s economic fundamentals have improved greatly in the
past decade, this crisis has provided a worrying sense of deja vu, and an illustration that Asian
policy changes in recent years—including Japan’s slow but comprehensive banking reforms,
Korea’s opening of its financial markets, China’s dramatic economic transformation, and the
enormous buildup of sovereign reserves across the region—have not fully insulated Asian
economies from global contagion.
However, in the second quarter of 2009, there were signs that many Asian economies were
rebounding sharply from the slowdowns and contractions they suffered in the previous months.
Many observers have attributed this recovery to the rapid implementation of large fiscal and
monetary stimulus programs that were possible because of the comparatively strong fiscal
positions that most Asian governments were in, and the fact that many Asian banking systems are
considered healthy. Still, Asian governments remain deeply concerned about the state of their
economies, and those in countries whose economies depend heavily on exports worry about the
sustainability of their recoveries if the United States and other developed economies recover more
slowly. This has been reflected in bilateral relations between the United States and some,
including China, whose officials are seen as increasingly assertive in their discussions with U.S.
economic officials on policies the United States should follow to emerge from the recession.
In the early months of the crisis, Asian nations did not have to deal with outright bankruptcies or
rescues of major financial institutions, as Western governments did. With only a few exceptions—
most notably in South Korea—leverage within Asian financial systems was comparatively low
and bank balance sheets were comparatively healthy at the outset of the crisis. Nearly all East
Asian nations run current account surpluses, a reversal from their state during the Asian financial
200

Buiter, Willem H., and Anne Sibert, The Icelandic Banking Crisis and What to Do About it: The Lender of Last
Resort Theory of Optimal Currency Areas. Policy Insight No. 26, Centre for Economic Policy Research, October 2008.
p. 2.
201
Prepared by Ben Dolven, Asia Section Research Manager, Foreign Affairs, Defense, and Trade Division.

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crisis of the late 1990s. These surpluses have been one reason for the buildup of enormous
government reserves in the region, including China’s $2.1 trillion and Japan’s $996 billion—the
two largest reserve stockpiles in the world. Such reserves have given Asian governments
resources to provide fiscal stimulus, inject capital into their financial systems, and provide
backstop guarantees for private financial transactions where needed. So overall, Asian economies
were much healthier at the outset of the current crisis than they were before the Asian Financial
Crisis of 1997-1998, when several Asian countries burned through their limited reserves quickly
trying to defend currencies from speculative selling.
Figure 10. Asian Current Account Balances are Mostly Healthy
% of GDP
20%

1997

2008

Korea

India

15%
2009 Estimate

10%

5%

Singapore

Malaysia

Hong Kong

China

Taiwan

Japan

Philippines

Thailand

Indonesia

-5%

U.S.A

0%

-10%

Source: International Monetary Fund. World Economic Outlook, October, 2009.

The initial stage of the crisis, which centered around losses directly from subprime assets in the
United States, gave way to a broader global crisis marked by slowing economies and dried-up
liquidity. Asia and the United States are deeply linked in many ways, including trade (primarily
Asian exports to the United States), U.S. investments in the region, and financial linkages that
entwine Asian banks, companies and governments with U.S. markets and financial institutions.
As a result, even though Asian banks disclosed relatively low direct exposures to failed
institutions and toxic assets in the United States and Europe, Asian economies were caught in a
second phase of the crisis. With Western economies slowing and global investors short of cash
and pulling back from any markets deemed risky, many Asian economies suffered sharp
slowdowns or dipped into recession in the fourth quarter of 2008 or the first quarter of 2009.
However, several Asian countries—including China, Japan, South Korea, Thailand, Malaysia,
Taiwan and Singapore—implemented large fiscal stimulus programs that have shown signs of
stimulating domestic investment and consumption. Japan announced several stimulus packages

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that amounted to 5% of the nation’s GDP, while China implemented a package worth 12% of
GDP. China also mandated an easing of lending by its state banks, opening up credit lines that
had been frozen in the crisis’s early stages. By early August, China, Indonesia, South Korea and
Singapore had each reported second quarter GDP growth of at least 2.5% over the previous
quarter.202 China’s rebound has been particularly striking. The country’s industrial production in
the January-July period was up 11% from the same period a year earlier.203 Stock markets around
the region are up, most by amounts larger than in the United States. Between January and July,
markets in China, Hong Kong, Taiwan, South Korea, Singapore, and Indonesia were each up by
more than 40%.
Still, in Asia, a belief that held sway in recent years that Asian economies were starting to
“decouple” from the United States and Europe, generating growth that didn’t depend on the rest
of the world, has given way to a realization that a crisis that originated in the West can sweep up
the region as well. Most Asian economies are showing signs of recovery, some of it based on
purely domestic conditions or trade within the region, but Asian officials continue to stress that
the strength of their economies is highly dependent on recoveries in the United States and
Western Europe.
One worrying development is that Pakistan, already coping with severe political instability, has
been forced to seek emergency loans from the IMF because of dwindling government reserves.
This points to the limits of bilateral solutions to the crisis: For much of October and early
November, Pakistan reportedly sought support from China, Saudi Arabia and other Middle
Eastern states before being forced to the IMF.204 On November 13, well into discussions with the
IMF, Pakistan officials announced they had received a $500 million aid package from Beijing, far
short of the $10 billion-$15 billion that Pakistani leaders say they need over the next two years.205
Then on November 15, Pakistani and IMF officials confirmed that Pakistan would receive $7.6
billion in emergency loans, including $4 billion immediately to avoid sovereign default. But this
remains short of what Pakistan says it needs. 206

Asian Reserves and Their Impact
Some analysts argue that substantial Asian reserves could be one source of relief for the global
economy. 207 Japan has contributed funding for the IMF support package of Iceland, and on
November 14, 2008, Prime Minister Taro Aso said Japan would lend the IMF $100 billion to
support further packages that might be needed before the IMF increases its capital in 2009.208
Many wonder if China and other reserve-rich developing nations will find ways to use those
reserves to support financially-strapped governments. As noted previously, Pakistan reportedly
approached China and several Gulf states for such support.
202

An Astonishing Rebound, The Economist, August 13, 2009.
Ibid.
204
Despite Ambivalence, Pakistan May Wrap Deal by Next Week, The Wall Street Journal, October 28, 2008.
205
IMF ‘Has Six Days to Save Pakistan,’ Financial Times, October 28, 2008.
206
Pakistan Says it will Need Financing Beyond IMF Deal, The Wall Street Journal, November 17, 2008.
203

207

See, for instance, Jeffrey Sachs, The Best Recipe for Avoiding a Global Recession, Financial Times, October 27,
2008.
208
The moved was announced in a November 14 opinion piece by Japanese Prime Minister Taro Aso, Restoring
Financial Stability, printed in The Wall Street Journal.

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One key question is whether Asian countries will seek to play a larger role in setting multilateral
moves to shore up regulation, and international support for troubled countries. Five Asian
countries—Japan, China, South Korea, India and Indonesia, were present at the G-20 summit. But
Asian approaches to multilateral regulation are still unclear. At an October 25-26 meeting of the
Asia Europe Forum (ASEM), Chinese Premier Wen Jiabao said China generally agrees with
many European governments which seek an expansion of multilateral regulations. “We need
financial innovation, but we need financial oversight even more,” Wen reportedly told a press
conference.209 In late January, speaking at an annual gathering of economic and political leaders
in Davos, Switzerland, Wen blamed the crisis on an “excessive expansion of financial institutions
in blind pursuit of profit,” a failure of government supervision in the financial sector, and an
“unsustainable model of development, characterized by prolonged low savings and high
consumption.”210 Many analysts saw this as a criticism of the United States, which has much
lower savings and higher consumption rates than China.
Previous Asian attempts to play a leadership role have been unsuccessful. In 1998, in the midst of
the Asian Financial Crisis, Japan and the Asian Development Bank proposed the creation of an
“Asian Monetary Fund” through which wealthier Asian governments could support economies in
financial distress. The proposal was successfully opposed by the U.S. Treasury Department,
which argued that it could be a way for countries to bypass the conditions that the IMF demands
of its borrowers and go straight to “easier” sources of credit.
Two years later, in 2000, Finance Ministers from the ASEAN+3 nations (the 10 members of the
Association of Southeast Asian Nations211, plus Japan, South Korea and China) announced the
Chiang Mai Initiative (CMI), whose primary measure was to provide a swap mechanism that
countries could tap to cover shortfalls of foreign reserves. This was a less aggressive proposal
than the Asian Monetary Fund. Although a small portion of the swap lines could be tapped in an
emergency, most would likely be subject to IMF conditions for recipients.212
On October 26, Japan, China, South Korea, and ASEAN members agreed to start an $80 billion
multilateral swap arrangement in 2009, which would allow countries with substantial balance of
payments problems to tap the reserves of larger economies. There remains, however,
disagreement within the region about whether the IMF should play an active role in setting
conditions for countries that use these swap lines.
Asian leaders have sought to start other regional discussions. On October 22, a Japanese
government official floated the idea of a pan-Asian financial stability forum, modeled after the
Financial Stability Forum at the BIS, which was discussed in May at a meeting of Finance
Ministers from Japan, South Korea and China.213 On December 13, the leaders of Japan, China,
and South Korea held a trilateral summit in Fukuoka, Japan, agreeing on bilateral swap lines
between South Korea and the two others – a new renminbi-won swap line worth the equivalent of

209

Leaders of Europe and Asia Call for Joint Economic Action, New York Times, October 25, 2008.
Chinese Premier Blames Recession on U.S. Actions, Wall Street Journal, January 29, 2009.
211
ASEAN’s members are Indonesia, Singapore, Malaysia, Thailand, the Philippines, Brunei, Vietnam, Cambodia,
Laos and Burma (Myanmar).
212
For a fuller discussion of the Chiang Mai Initiative, see East Asian Cooperation, Institute of International
Economics, http://www.iie.com/publications/chapters_preview/345/3iie3381.pdf.
213
Japan, China, S. Korea Eye Financial Stability Forum, Reuters, October 20, 2008.
210

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$28 billion and an expansion of an existing yen-won swap line to the equivalent of $20 billion. 214
Beyond this measure of support for South Korea, however, the summit did not provide broader
multilateral initiatives.

National Responses
So far, the national-level responses among Asian governments include the following:

Japan
Japan was part of the early moves among major economies to flood markets with liquidity, in the
“crisis containment” part of the global response, and the Bank of Japan has continued its
aggressive monetary stimulus in the months since. Alongside other major central banks, the Bank
of Japan pumped tens of billions of dollars into financial markets in late September and early
October. It followed these moves with an announcement on October 14 that it would offer an
unlimited amount of dollars to institutions operating in Japan, to ensure that Japanese interbank
credit markets continued to function. The BOJ did not lower interest rates in the crisis’s early
stages, but on October 31, it joined other global central banks, including the U.S. Federal
Reserve, by cutting a key short-term interest rate to 0.3%, from 0.5%, and on December 19 it cut
the rate to 0.1%.
For a time, Japan was considered relatively insulated, because of its well capitalized banks,
substantial reserves and current account surplus. Japan spent nearly $440 billion between 1998
and 2003 to assist and recapitalize its banking system, and most observers say Japan’s financial
system emerged from the experience fairly sound. Healthy capital positions helped Mitsubishi
UFG Group, Japan’s largest bank, and Nomura, the country’s largest brokerage, to buy pieces of
distressed U.S. investment banks as the crisis was deepening in October. Mitsubishi UFG bought
21% of Morgan Stanley for $9 billion, and Nomura purchased the Asian, European and Middle
Eastern operations of Lehman Brothers.
But as Western economies began to slow, Japan’s financial insulation thinned. The Japanese
economy is highly exposed to slowdowns in export markets, particularly in the U.S. and Europe.
The U.S. accounted for 20.1% of Japan’s exports in 2007. Japan has sought to provide fiscal
stimulus: The government unveiled a $107 billion stimulus package in August, and on January
27, the Japanese parliament passed a second package, valued at $54 billion. The package—and,
more broadly, Prime Minister Taro Aso’s response to the crisis—has been the subject of severe
infighting within Aso’s ruling Liberal Democratic Party. Aso’s government currently faces
extremely low support ratings of around 20%, and he now faces an August 30 Parliamentary
election in which the LDP could lose its hold on power, which it has held almost continuously
since the 1950s.215

214
215

Asian Leaders See Growth Driver, The Wall Street Journal, December 15, 2008.
Japan Passes Contentious Stimulus Budget, Associated Press, January 27, 2009.

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China216
Despite China’s large-scale holdings of U.S. securities, its exposure to the fallout from the U.S.
sub-prime mortgage crisis is believed to have been relatively small. China’s numerous restrictions
on capital flows to and from China limit the ability of individual Chinese citizens and many firms
to invest their savings overseas. Most of Chinese investment flows are controlled by government
entities, such as state-owned banks, State Administration of Foreign Exchange (which administers
China’s foreign exchange reserves), and the China Investment Corporation (a $200 billion
sovereign wealth fund created in 2007),217 and state-owned enterprises. Such entities have
maintained relatively conservative investment strategies.
The Chinese government generally does not release detailed information on the holdings of its
financial entities, although some of its banks have reported on their supposed level of exposure to
sub-prime U.S. mortgage securities. Such entities have generally reported that their exposure to
troubled sub-prime U.S. mortgages has been minor relative to their total investments, that they
have liquidated such assets or have written off losses, and that they continue to earn high profit
margins.218
However, China’s economy has not been immune to the effects of the global financial crisis,
given its heavy reliance on trade and foreign direct investment (FDI) for its economic growth.
Numerous sectors have been hard hit.219 To illustrate:
•

The real estate market in several Chinese cities has exhibited signs of a bubble
that is bursting, including a slowdown in construction, falling prices and growing
levels of unoccupied buildings. This has increased pressure on the banks to lower
interest rates further to stabilize the market.

•

China’s trade has plummeted seven straight months (December 2008-May 2009)
recent months (see Figure 11). For example, exports in May 2009 were down
26.4% on a year-on-year basis, the biggest monthly decline ever recorded (since
such data were collected).

•

The level of FDI flows to China has fallen eight months in a row (November
2008-May 2009). For example, FDI flows to China dropped by nearly a third in
January 2009 (year-on-year basis).

•

Numerous press reports indicate sharp reductions of production and employment
in China. The Chinese government in January 2009 estimated that 20 million
migrant workers had lost their jobs in 2008 because of the global economic
slowdown.

216
The section on China was prepared by Wayne M. Morrison, Specialist in Asian Trade and Finance, Foreign Affairs,
Defense, and Trade Division.
217
For an overview of the China Investment Corporation, see CRS Report RL34337, China’s Sovereign Wealth Fund,
by Michael F. Martin.
218
China’s holdings of Fannie Mae and Freddie Mac securities are likely to be more substantial, but less risky
(compared to other sub-prime securities), especially after these two institutions were placed in conservatorship by the
Federal Government in September 2008.
219
China’s economy was already slowing down before the global financial crisis hit. This was in large part the result of
government efforts to slow the rate of inflation. China’s real GDP growth fell from 13% in 2007 to 9% in 2008. The
global financial crisis has sharply diminished economic growth. Thus, the Chinese government has abandoned its antiinflation policies and instead has sought to stimulate the economy.

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•

Global Insight, an international forecasting firm, estimates that China’s real GDP
growth would slow to 6.9% in 2009.220 Some analysts contend annual economic
growth of less than 8% could lead to social unrest, given that every year there are
20 million new job seekers in China.221
Figure 11. Monthly Change in Chinese FDI and Trade: April 2008-May 2009
year-on-year basis

% Change

80
60
40
20
0
-20
-40
-60
May
Apr

Jul
Jun

Exports

Sep
Aug

Nov
Oct

Imports

Jan-09
Dec

Mar
Feb

May
Apr

FDI

Source: Global Insight and China’s Customs Administration.

China has responded to the crisis on a number of fronts. On September 27, 2008, Chinese Premier
Wen Jiabao reportedly stated in a speech that “What we can do now is to maintain the steady and
fast growth of the national economy and ensure that no major fluctuations will happen. That will
be our greatest contribution to the world economy under the current circumstances.” 222 On
October 8, 2008, China’s central bank announced plans to cut interest rates and the reserverequirement ratio in order to help stimulate the economy. The announcement coincided with
announcements by the U.S. Federal Reserve and other central banks of major economies around
the world to lower their benchmark interest rates, although, neither China’s central bank or the
media stated that these measures were taken in conjunction with the other major central banks.
On October 21, 2008, China’s State Council announced it was considering implementing a new
220

Global Insight, China, May 29, 2009.

221

According to Xinhua Net (March 9, 2008), China’s Labor and Social Security Minister Tian Chengping warned that
the employment situation in China in 2008 was expected to be “very severe,” noting that towns and cities would be
able to provide only 12 million new jobs.
222
Chinaview, September 27, 2008.

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economic stimulus package, which would include an acceleration of construction projects, new
export tax rebates, a reduction in the housing transaction tax, increased agriculture subsidies, and
expanding lending to small and medium enterprises.223 On November 9, 2008 the Chinese
government announced it would implement a two-year $586 billion stimulus package, mainly
dedicated to infrastructure projects. The package would finance programs in 10 major areas,
including affordable housing, rural infrastructure, water, electricity, transport, the environment,
technological innovation and rebuilding areas hit by disasters (especially, areas that were hit by
the May 12, 2998 earthquake).224 Table 3 provides a breakdown of China’s stimulus program
spending priorities.
Table 3.China’s Central Government November 2008 Domestic Stimulus Package
In Chinese Yuan
(billions)

In U.S. Dollars
(billions)

As a Percent of
Total Stimulus
Package

As a Percent of
China’s 2008 GDP

Transport
infrastructure
investment

1,500

220

37.5

5.0

Post-earthquake
reconstruction

1,000

146

25.0

3.3

Public housing

400

59

10.0

1.3

Rural infrastructure

370

54

9.3

1.2

Research and
development and
structural change

370

54

9.3

1.2

Environmental
development

210

31

5.3

0.7

Healthcare and
education

150

22

3.8

0.5

4,000

586

100.0

13.3

Totals
Source: Global Insight.

Notes: Ranked according to planned spending levels.

Analysts debate what role China might play in responding to the global financial crisis, given its
nearly $2 trillion in foreign exchange reserves. Some have speculated that China could use some
of these reserves to shore up troubled financial institutions and companies around the world, such
as in the United States. Others have contended that China could, in order to help stabilize its
largest export market (the United States), use its reserves to purchase some of the large amount of
U.S. debt securities that will need to be issued to help fund the hundreds of billions of dollars in
new federal spending on government purchases of troubled assets and programs to stimulate the
U.S. economy. 225

223

Global Insight, Country Intelligence Analysis, China, October 20, 2008.
China Xinhua News Agency, November 12, 2008.
225
Such a move would help keep U.S. interest rates relatively low. If China decided not to sharply increase its
purchases of U.S. securities, U.S. interest rates could go up.
224

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China already plays a major role in funding U.S. debt. China’s holdings of U.S. securities (which
include short term and long term Treasury securities, government agency debt, corporate debt,
and equities) are estimated to have totaled $1.4 trillion at the end of December 2008; this figure is
equivalent to over $1,000 per Chinese citizen. Over the past few years, China has been the single
largest foreign purchaser of U.S. Treasury securities, which are used to fund the federal budget
deficit. In September 2008, China overtook Japan to become the largest foreign holder of U.S.
Treasury securities, at $585 billion, and these holdings grew to $764 billion as of April 2009.226
At a press conference during her visit to China on February 21, 2009, Secretary of State Hillary
Rodham Clinton stated that she appreciated “greatly the Chinese government’s continuing
confidence in the United States Treasuries.”
There are a number of reasons why China might be reluctant to boost significantly its purchases
of U.S. assets. One concern would be whether increased Chinese investments in the U.S.
economy would produce long-term economic benefits for China. In March 2009, Chinese Premier
Wen Jiabao at a news conference stated: “We lent such huge fund [sic] to the United States and of
course we're concerned about the security of our assets and, to speak truthfully, I am a little bit
worried.” Many analysts (including some in China) have questioned the wisdom of China’s
policy of investing a large level of foreign exchange reserves in U.S. government securities,
which offer a relatively low rate of return, when China has such huge development needs. China’s
holding of U.S. Treasury securities fell by $4.4 billion from March-April 2009, leading some
analysts to speculate that China might move away from dollar assets. In addition, some Chinese
investments in U.S. financial companies have fared poorly, and Chinese officials might be
reluctant to put additional money into investments that were deemed to be too risky. A sharp
economic slowdown in the Chinese economy could increase pressure to invest money at home
rather than overseas. China may also be reluctant to boost investment in U.S. companies, due to
concerns that doing so would be risky or could come under unfavorable scrutiny by Congress.
Some U.S. policymakers have expressed concern that increased Chinese purchases of U.S. debt
could give it greater political leverage over the United States. They warn that this would
undermine the ability of the United States to press China to reform various aspects of its
economy, such as its currency policy. 227 Another major concern for U.S. officials is the extent
China may attempt to subsidize industries impacted by the global economic slowdown and
whether the pace of China’s economic reforms will be slowed. Many U.S. officials have urged
China not to try to export its way out of the crisis (especially through the use of subsidies, trade
barriers, or a depreciation of its currency), but instead focus on promoting increased domestic
consumption, further economic reforms, and continuing the appreciation of its currency (the
renminbi) so that greater domestic demand in China will result in higher Chinese demand for
imports. On February 19, 2008, the Chinese government stated that it would use its some of its
foreign exchange reserves to boost imports, stimulate the domestic economy, and to help Chinese
companies boost investment overseas.228 However, the government has also stated that it intends
to assist Chinese export industries as well. In June 2009, several media reports stated that the
Chinese government had recently implemented “Buy China” provisions to ensure that only

226

See CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M.
Morrison and Marc Labonte.
227
For additional information, see CRS Report RS22984, China and the Global Financial Crisis: Implications for the
United States, by Wayne M. Morrison.
228
People’s Daily Online, February 19, 2009.

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Chinese-made products are used for projects relating to the government’s stimulus package, even
though the government had pledged in February 2009 not to impose such restrictions. 229
There are some indicators that show the economy may be improving or has bottomed out. For
example, the value of China’s main stock market index, the Shanghai Stock Exchange Composite
Index, has risen by 48% in 2009 (through June 15). Industrial output in March, April, and May
2009 rose by 8.3%, 7.3%, and 8.9% respectively, on a year-on-year basis. Prices have also
stabilized in recent months. Retail sales of consumer goods rose by 15.2% from January-May on
a year-on-year basis, and total investment in fixed assets shot up by 32.9%. On the negative side,
China’s trade and FDI flows have showed no signs of improvement and continue to plummet.

South Korea
South Korea, Asia’s fourth largest economy, was deeply affected by the crisis, with both the
South Korean stock market and the won tumbling throughout the months, sometimes
precipitously. On October 28, the won reached its lowest point since 1998, when South Korea
was in the middle of its IMF support package. Oxford Analytica estimates that foreign investors
withdrew a net $25 billion from the Korean stock market between January and late September. 230
Experts say South Korean banks have large dollar-denominated debts, and therefore need to
protect their holdings of dollars. This has contributed to the won’s fall, and in early October,
President Lee Myung-bak invoked patriotism to encourage Korean banks to stop hoarding dollars
and buy won.231
South Korea has announced several packages to stimulate the economy and shore up the domestic
banking industry. The government announced a broad economic rescue package on October 19,
2008, promising to guarantee $100 billion in South Korean banks’ foreign-currency debt and
provide another $30 billion to directly support South Korean banks. (The total amount was
equivalent to 14% of the country’s GDP.) Struggling with its plunging stock market and currency,
President Lee’s government has also announced policies to spend up to $9.2 billion to support
real-estate developers struggling with unsold apartments, and to provide further financial support
to small businesses. On October 27, Korea’s central bank cut its prime interest rate by 0.75
percentage points to 4.25%, the largest cut it has made since it began setting base interest rates in
1999. The rate has since been cut two more times, to 3%. On December 17, the government said
it would launch a $15 billion fund to boost the capital of Korean banks.
South Korea has been an enormous economic success, and has bounced back strongly from the
Asian Financial Crisis that forced it to turn to the IMF for a $58 billion support package in
December 2007. After contracting by 6.9% in 1998, South Korea’s GDP bounced back by 9.5%
and 8.5% in the ensuing two years. Since 2002, GDP growth has been in the 3%-6% range.
However, President Lee has said the current situation is more severe than the 1997 crisis.
Economically, South Korea is an outlier within Asia. It is one of the few Asian countries that is
running a current account deficit ($12.6 billion in January-August 2008). Its banks are unusually

229

Financial Times, “Buy China Policy Set to Raise Tensions,” June 16, 2009.
SOUTH KOREA: Seoul Faces Growth and Liquidity Tests, Oxford Analytica, October 8, 2008.
231
Lee Warns Against Dollar Hoarding, Korea Times, October 8, 2008.
230

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leveraged, with loan-deposit ratios of more than 130%, higher than that in the United States and
the EU, and the only East Asian country over 100%.232

Pakistan
Pakistan’s economy went into a steady decline in 2008. After several years of strong and
comparatively stable growth, Pakistan quickly slid into a severe economic crisis in 2008.233
Growth in real GDP declined sharply from about 8% to 3-4%; inflation rose to nearly 24%; and
Pakistan’s rupee depreciated by over 23% against the U.S. dollar. Pakistan’s unemployment rate
rose, and the United Nations reported that 10 million Pakistanis were undernourished. In the
words of Pakistan President Asif Ali Zardari, “The greatest challenge this government faces is an
economic one.”234
Rising trade and current account deficits generated a “capital crisis” in the autumn of 2008.
Pakistan’s foreign reserves slid from $14.2 billion in October 2007 to $4.1 billion at the end of
October 2008. According to President Zardari’s chief economic advisor, Shaukat Tarin, Pakistan
needed $4 to $5 billion by the end of November 2008 to avoid defaulting on maturing sovereign
debt obligations. In addition, even if Pakistan does secure the money it needs by the end of
November, Tarin stated that Pakistan requires $10 to $15 billion in assistance over the next two to
three years to continue to service its account deficits and outstanding debt.235
Several factors, in addition to the current global financial crisis, are contributing to the recent
downturn in Pakistan’s economy. Pakistan’s continuing struggle against Islamist militancy in its
tribal areas along the border with Afghanistan has led to high federal deficits and uncertainty
about the stability of the Pakistan government. A recent escalation of bombings and violence in
Pakistan has raised the risk for and scared off many foreign investors and businesses. This has
worsened the nation’s capital shortage. In addition, the flight from risk that has followed the U.S.
financial crisis has apparently contributed to some capital flight from Pakistan, especially among
overseas Pakistanis and investors from the Middle East.
Pakistan has sought the required assistance from several countries (including China, Saudi
Arabia, and the United States), international financial institutions (including the Asian
Development Bank (ADB), the International Monetary Fund (IMF), the Islamic Development
Bank (IDB), and the World Bank), and an informal group of nations called the “Friends of
Pakistan.” Although the ADB, the World Bank and others did offer some support, the total
amount was insufficient to avoid the default risk. As a consequence, Pakistan reluctantly began
negotiating a loan with the IMF. On November 15, Tarin announced that Pakistan had reached a
tentative agreement with the IMF to borrow $7.6 billion over the next 23 months. 236 The first
installment of the loan—up to $4 billion—was expected by the end of November; Pakistan is to
repay the loan by 2016.237
232

See Merrill Lynch, “Asia: Risks Rising”, October 3, 2008.
For more information about Pakistan’s economic crisis, see CRS Report RS22983, Pakistan’s Capital Crisis:
Implications for U.S. Policy, by Michael F. Martin and K. Alan Kronstadt.
234
“Pakistan’s Zardari to Give Up Powers,” AFP, September 20, 2008.
235
Simon Cameron-Moore, “Pakistan Needs $10-15 Bln Fast, Says PM’s Adviser,” Reuters, October 21, 2008.
236
“IMF Okays $7.6 Bln Package for Pakistan: Tareen,” Associated Press of Pakistan, November 15, 2008.
237
Jamie Anderson, “Pakistan Turns to IMF for Financial Aid,” Money Times, November 16, 2008.
233

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Assuming Pakistan and the IMF formally conclude the agreement, the $7.6 billion loan is well
short of the estimated $10 billion to $15 billion Pakistan says it needs over the next two years to
avoid a financial crisis. Some observers speculate that the IMF agreement will spur help from
other potential donors, such as China, Saudi Arabia, and the United States. However, given the
continuing economic problems of the potential donor nations, Pakistan may not be able to secure
the full amount of assistance it says it needs. As a result, the IMF loan may end up being only a
short-term patch to a long-term economic problem.
In the meantime, Pakistan has announced some changes in economic policy designed to alleviate
their capital crisis. On September 19, 2008, acting finance minister Naveed Qamar released new
economic policies designed to bring about macroeconomic stability and avoid seeking IMF
assistance that included the elimination of fuel, electricity and food subsidies, and a reduction in
the government deficit.238 On November 3, 2008, Tarin announced reforms of Pakistan’s tax
system, including the politically sensitive taxation of large landowners, to reduce the incidence of
tax evasion. 239 There has also been talk of cutting Pakistan’s defense budget.
According to some analysts, the new economic policies may foster popular discontent and
threaten political stability. The elimination of fuel, electricity and food subsidies may cause
significant harm to Pakistan’s poor, many of whom are already undernourished. The tax on large
landowners may undermine support for Zardari’s Pakistan People’s Party among its party
members and its coalition partners. A cut in Pakistan’s defense budget also could harm its military
efforts against Islamist militants and weaken the military’s political support for the current
coalition government.

International Policy Issues
In making policy changes, Congress faces several fundamental issues. First is whether any longterm policies should be designed to restore confidence and induce return to the normal
functioning of a self-correcting system or whether the policies should be directed at changing a
system that may have become inherently unstable, a system that every decade or so creates
bubbles and then lurches into crisis. 240 For example, in Congressional testimony on October 23,
2008, former Federal Reserve Chairman Alan Greenspan stated that a “once-in-a-century credit
tsunami”‘ had engulfed financial markets, and he conceded that his free-market ideology
shunning regulation was flawed. 241 In a recent book, the financier George Soros stated that the
currently prevailing paradigm, that financial markets tend towards equilibrium, is both false and
misleading. He asserted that the world’s current financial troubles can be largely attributed to the
fact that the international financial system has been developed on the basis of that flawed
paradigm. 242 Could this crisis mark the beginning of the end of “free market capitalism?” On the
238

“Pakistan Unveils Package for Economic Stability,” Reuters, September 19, 2008.
Farhan Bokhari, “Pakistan Vows to Target Rich Tax Evaders as IMF Concludes Talks on Vital Loan,” Financial
Times, November 3, 2008.
240
For an analysis of bubbles, see CRS Report RL33666, Asset Bubbles: Economic Effects and Policy Options for the
Federal Reserve, by Marc Labonte.
241
Lanman, Scott and Steve Matthews. “Greenspan Concedes to ‘Flaw’ in His Market Ideology,” Bloomberg News
Service, October 23, 2008.
242
Soros, George. The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means
(PublicAffairs, 2008) p. i. Soros proposes a new paradigm that deals with the relationship between thinking and reality
and accounts for misconceptions and misinterpretations.
239

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other hand, the International Monetary Fund has observed that market discipline still works and
that the focus of new regulations should not be on eliminating risk but on improving market
discipline and addressing the tendency of market participants to underestimate the systemic
effects of their collective actions. 243
A second question deals with what level any new regulatory authority should reside. Should it
primarily be at the state, national, or international level? If the authority is kept at the national
level, how much power should an international authority have? Should the major role of the IMF,
for example, be informational, advisory, and technical, or should it have enforcement authority?
Should enforcement be done through a dispute resolution process similar to that in the World
Trade Organization, or should the IMF or other international institution be ceded oversight and
regulatory authority by national governments?
As of mid-2009, the primary role of the IMF in the financial crisis appears to be twofold. The first
is of lender of last resort, and the second is to provide analysis and advice to member countries.
The IMF has been tracking economic and financial developments worldwide in order to provide
policymakers with forecasts and analysis of developments in financial markets. It also is
providing policy advice to countries and regions and is assisting the Group of 20 and other
international organizations with recommendations to reshape the system of international
regulation and governance.
The June 17 Treasury proposal for financial regulation cedes no sovereignty to the IMF. It calls
for international reforms to support U.S. efforts. Even the IMF recognizes that its authority over
countries comes primarily through its advisory capacity and through the conditions it places on
loans to borrowing countries.

Bretton Woods II
The second question above is central for those calling for a new Bretton Woods conference. U.K.
Prime Minister Gordon Brown called for such a conference to have the specific objective of
remaking the international financial architecture.244 In the declaration of the G-20 Summit on
Financial Markets and the World Economy, world leaders stated:
We underscored that the Bretton Woods Institutions must be comprehensively reformed so that
they can more adequately reflect changing economic weights in the world economy and be more
responsive to future challenges. Emerging and developing economies should have greater voice
and representation in these institutions.

G-20 Meetings
The G-20 is an informal forum that promotes open and constructive discussion between industrial
and emerging-market countries on key issues related to global economic stability. The members
include the finance ministers and central bankers from the member nations. A G-20 leaders’
summit is a new development.
243
International Monetary Fund. “The Recent Financial Turmoil—Initial Assessment, Policy Lessons, and Implications
for Fund Surveillance,” April 9, 2008.
244
Gerstenzang, James. “Bush will Meet with G-20 After Election,” Los Angeles Times, October 23, 2008.

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On September 24-25, 2009, a G-20 Summit was held in Pittsburgh. At the summit, the G-20
members agreed to support six broad policy goals:
1. The new G-20 “Framework for Strong, Sustainable and Balanced Growth” will launch by
November 2009. This framework promotes shifting from public to private sources of demand,
establishing a pattern of growth that is sustainable and balanced, avoiding destabilizing booms
and busts in asset and credit prices, and adopting macroeconomic policies that are consistent with
stable prices. In order to achieve this framework, the G-20 members agreed to implement a
“cooperative process of mutual assessment.” This cooperative process is comprised of: shared
policy objectives; a medium-term policy framework and an assessment of the impact national
policies have on global economic growth and financial stability; and actions to meet common
objectives. Within this framework, the G-20 members agreed to:
•

implement responsible fiscal policies, attentive to short-term flexibility
considerations and longer-run sustainability requirements;

•

strengthen financial supervision to prevent the re-emergence in the financial
system of excess credit growth and excess leverage and undertake macro
prudential and regulatory policies to help prevent credit and asset price cycles
from becoming forces of destabilization;

•

promote more balanced current accounts and support open trade and investment
to advance global prosperity and growth sustainability, while actively rejecting
protectionist measures;

•

undertake monetary policies consistent with price stability in the context of
market oriented exchange rates that reflect underlying economic fundamentals;

•

undertake structural reforms to increase potential growth rates and, where
needed, to improve social safety nets; and

•

promote balanced and sustainable economic development in order to narrow
development imbalances and reduce poverty.

2. To strengthen the regulatory system for banks and other financial firms by raising
capital standards, implementing strong international compensation standards,
improving the over-the-counter derivatives market, and holding large global firms
accountable for their risks. As components of this process, the G-20 agree to:
building high quality bank capital and mitigating procyclical actions; reforming
compensation practices to strengthen financial stability; improving over-the-counter
derivatives markets; and addressing cross-border resolutions and systemically
important financial institutions. In addition, the G-20 leaders indicated their support
for efforts to improve the financial system by taking actions against non-cooperative
jurisdictions, including using “countermeasures against tax havens,” and by tasking
the Financial Action Task Force (FATF) to issue a list of high risk jurisdictions by
February 2010.
3. To modernize the global architecture by designating the G-20 as the premier forum for
international economic cooperation, by establishing the Financial Stability Board (FSB), by
having the FSB include major emerging economies, and by having the FSB coordinate and
monitor progress in strengthening financial regulation. Also, the G-20 agreed to shift the IMF
quota share to dynamic emerging markets and developing countries of at least 5%, using the
current IMF quota formula. The change in quotas is keyed to the IMF’s quota review that is

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scheduled to be completed by January 2010. In addition to reviewing the quotas, the G-20
indicated its support for reviewing the size of any increase in IMF quotas, the size and
composition of the Executive Board, ways of enhancing the Board’s effectiveness, the Fund
Governors’ involvement in the strategic oversight of the IMF, and the diversity of IMF staff, and
the appointment of department heads and senior leadership through an open, transparent and
merit-based process. The G-20 countries also agreed to contribute over $500 billion to a renewed
and expanded New Arrangements to Borrow facility in the IMF. Additional IMF funding will also
be available through gold sales and through additional Special Drawing Rights (SDRs). The G-20
also called for reforming the mission, mandate, and governance of the development banks,
including the IMF, which the G-20 indicated must play a “critical role in promoting global
financial stability and rebalancing growth.” They also called on the World Bank to play a leading
role in responding to problems whose nature requires globally coordinated action, such as climate
change and green technology, food security, human development, and private-sector led growth.
4. To take new steps to increase access to food, fuel, and finance among the world’s poorest
economies, while clamping down on illicit outflows. The G-20 also agreed to improve energy
market transparency and stability, and to improve regulatory oversight of energy markets.
5. To phase out and rationalize over the medium term inefficient fossil fuel subsidies while
providing targeted support for the poorest. Agreed to stimulate investment in clean and in
renewable energy and in energy efficiency, and to take steps to diffuse and transfer clean energy
technology.
6. To maintain openness and move toward greener, more sustainable growth.
In addition, the G-20 countries are addressing a number of issues related to correcting abuses in
the financial markets, particularly those involving non-bank financial institutions and complex
financial instruments. Analysts and policymakers generally agree that the lack of regulation of
new non-bank financial institutions, such as hedge funds and private equity firms, and the lack of
transparency of new complex financial instruments, such as derivatives, were key factors in the
current financial crisis.
The G-20 leaders also called for common principles for reforming financial markets. These
principles include: strengthening the transparency and accountability of firms and financial
products, extending regulation to all financial market institutions, promoting the integrity of
financial markets (such as bolstering consumer protection) and consistent regulations across
national borders, and reforming international financial institutions to better monitor the health of
the financial system. The G-20 London Summit reiterated the need for financial supervision,
regulation, and transparency of financial products.245
The role of the G-20 in dealing with the global financial crisis began on November 15, 2008, with
the G-20 Summit on Financial Markets and the World Economy that was held in Washington,
DC. This was billed as the first in a series of meetings to deal with the financial crisis, discuss
efforts to strengthen economic growth, and to lay the foundation to prevent future crises from
occurring. This summit included emerging market economies rather than the usual G-7 or G-8

245

G-20, Leaders' Statement: The Pittsburgh Summit, September 25, 2009,
http://www.pittsburghsummit.gov/mediacenter/129639.htm.

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nations that periodically meet to discuss economic issues. It was not apparent that the agenda of
the emerging market economies differed greatly from that of Europe, the United States, or Japan.
The G-20 Washington Declaration to address the current financial crisis was both a laundry list of
objectives and steps to be taken and a convergence of attitudes by national leaders that concrete
measures had to be implemented both to stabilize national economies and to reform financial
markets. The declaration established an Action Plan that included high priority actions to be
completed prior to March 31, 2009. Details are to be worked out by the G-20 finance ministers.
The declaration also called for a second G-20 summit that was held in London on April 2, 2009.
Since the attendees now include the Association for Southeast Asian Nations, the G-20 no longer
refers to just 20 nations.
At the April 2009 G-20 London Summit, leaders agreed on establishing a new Financial
Stability Board (incorporating the Financial Stability Forum) to work with the IMF to ensure
cooperation across borders; closer regulation of banks, hedge funds, and credit rating agencies;
and a crackdown on tax havens. The leaders could not agree on the need for additional stimulus
packages by nations, but they considered the additional funding for the IMF and multilateral
development banks as key stimulus directed at developing and emerging market economies. The
leaders reiterated their commitment to resist protectionism and promote global trade and
investment. 246
At the November G-20 summit, the leaders agreed on common principles to guide financial
market reform:
•

Strengthening transparency and accountability by enhancing required disclosure
on complex financial products; ensuring complete and accurate disclosure by
firms of their financial condition; and aligning incentives to avoid excessive risktaking.

•

Enhancing sound regulation by ensuring strong oversight of credit rating
agencies; prudent risk management; and oversight or regulation of all financial
markets, products, and participants as appropriate to their circumstances.

•

Promoting integrity in financial markets by preventing market manipulation and
fraud, helping avoid conflicts of interest, and protecting against use of the
financial system to support terrorism, drug trafficking, or other illegal activities.

•

Reinforcing international cooperation by making national laws and regulations
more consistent and encouraging regulators to enhance their coordination and
cooperation across all segments of financial markets.

•

Reforming international financial institutions (IFIs) by modernizing their
governance and membership so that emerging market economies and developing
countries have greater voice and representation, by working together to better
identify vulnerabilities and anticipate stresses, and by acting swiftly to play a key
role in crisis response.

246

G-20, Meeting of Finance Ministers and Central Bank Governors, United Kingdom, 14 March 2009, Communiqué,
March 14, 2009.

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At the London Summit, the leaders reviewed progress on the November G-20 Action Plan that set
forth a comprehensive work plan to implement the above principles. The Plan included
immediate actions to:
•

Address weaknesses in accounting and disclosure standards for off-balance sheet
vehicles;

•

Ensure that credit rating agencies meet the highest standards and avoid conflicts
of interest, provide greater disclosure to investors, and differentiate ratings for
complex products;

•

Ensure that firms maintain adequate capital, and set out strengthened capital
requirements for banks’ structured credit and securitization activities;

•

Develop enhanced guidance to strengthen banks’ risk management practices, and
ensure that firms develop processes that look at whether they are accumulating
too much risk;

•

Establish processes whereby national supervisors who oversee globally active
financial institutions meet together and share information; and

•

Expand the Financial Stability Forum to include a broader membership of
emerging economies.

The leaders instructed finance ministers to make specific recommendations in the following
areas:
•

Avoiding regulatory policies that exacerbate the ups and downs of the business
cycle;

•

Reviewing and aligning global accounting standards, particularly for complex
securities in times of stress;

•

Strengthening transparency of credit derivatives markets and reducing their
systemic risks;

•

Reviewing incentives for risk-taking and innovation reflected in compensation
practices; and

•

Reviewing the mandates, governance, and resource requirements of the
International Financial Institutions.

The leaders agreed that needed reforms will be successful only if they are grounded in a
commitment to free market principles, including the rule of law, respect for private property, open
trade and investment, competitive markets, and efficient, effectively-regulated financial systems.
The leaders further agreed to:
•

Reject protectionism, which exacerbates rather than mitigates financial and
economic challenges;

•

Strive to reach an agreement this year on modalities that leads to an ambitious
outcome to the Doha Round of World Trade Organization negotiations;

•

Refrain from imposing any new trade or investment barriers for the next 12
months; and

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•

Reaffirm development assistance commitments and urge both developed and
emerging economies to undertake commitments consistent with their capacities
and roles in the global economy.

The International Monetary Fund247
Policy proposals for changes in the international financial architecture have included a major role
for the IMF. As a lender of last resort, coordinator of financial assistance packages for countries,
monitor of macroeconomic conditions worldwide and within countries, and provider of technical
assistance, the IMF has played an important role during financial crises whether international or
confined to one member country.
The financial crisis has shown that the world could use a better early warning system that can
detect and do something about stresses and systemic problems developing in world financial
markets. It also may need some system of what is being called a macro-prudential framework for
assessing risks and promoting sound policies. This would not only include the regulation and
supervision of financial instruments and institutions but also would incorporate cyclical and other
macroeconomic considerations as well as vulnerabilities from increased banking concentration
and inter-linkages between different parts of the financial system. 248 In short, some institution
could be charged with monitoring synergistic conditions that arise because of interactions among
individual financial institutions or their macroeconomic setting.
However, the IMF’s current system of macroeconomic monitoring tends to focus on the risks to
currency stability, employment, inflation, government budgets, and other macroeconomic
variables. The IMF, jointly with the Financial Stability Board, has recently stepped up its work on
financial markets, macro-financial linkages, and spillovers across countries with the aim of
strengthening early warning systems. The IMF has not, however, traditionally pressed countries
to counter specific risks such as how macroeconomic variables, potential synergisms and blurring
of boundaries among regulated entities, and new investment vehicles affect prudential risk for
insurance, banking, and brokerage houses. The Bank for International Settlements makes
recommendations to countries on measures to be undertaken (such as Basel II) to ensure banking
stability and capital adequacy, but the financial crisis has shown that the focus on capital
adequacy has been insufficient to ensure stability when a financial crisis becomes systemic and
involves brokerage houses and insurance companies as well as banks.

247

Prepared by Dick K. Nanto and Martin A. Weiss. For further information see CRS Report RS22976, The Global
Financial Crisis: The Role of the International Monetary Fund (IMF), by Martin A. Weiss.
248
Lipsky, John. “Global Prospects and Policies,” Speech by John Lipsky, First Deputy Managing Director,
International Monetary Fund, at the Securities Industries and Financial Markets Association, New York, October 28,
2008. World Bank. “The Unfolding Crisis, Implications for Financial Systems and Their Oversight,” October 28, 2008.
p. 8.

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The International Monetary Fund
The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton
Woods, New Hampshire, agreed on a framework for international economic cooperation. The IMF came into
existence in December 1945 and now has membership of 185 countries.
The IMF performs three main activities:
•

monitoring national, global, and regional economic and financial developments and advising member
countries on their economic policies (surveillance);

•

lending members hard currencies to support policy programs designed to correct balance of payments
problems; and

•

offering technical assistance in its areas of expertise, as well as training for government and central bank
officials.

The financial crisis has created an opportunity for the IMF to reinvigorate itself and possibly play
a constructive role in resolving, or at the least mitigating, the effects of the global downturn. It
has been operating on two fronts: (1) through immediate crisis management, primarily balance of
payments support to emerging-market and less-developed countries, and (2) contributing to longterm systemic reform of the international financial system. 249 The IMF also has a wealth of
information and expertise available to help in resolving financial crises and has been providing
policy advice to member countries around the world.
IMF rules stipulate that countries are allowed to borrow up to three times their quota250 over a
three-year period, although this requirement has been breached on several occasions in which the
IMF has lent at much higher multiples of quota. In response to the current financial crisis, the
IMF has activated its Emergency Financing Mechanism to speed the normal process for loans to
crisis-afflicted countries. The emergency mechanism enables rapid approval (usually within 4872 hours) of IMF lending once an agreement has been reached between the IMF and the national
government.
As of April 2009, the IMF, under its Stand-By Arrangement facility, has provided or is in the
process of providing financial support packages for Iceland ($2.1 billion), Ukraine ($16.4 billion),
Hungary ($25.1 billion), Pakistan ($7.6 billion), Belarus ($2.46 billion), Serbia ($530.3 million),
Armenia ($540 million), El Salvador ($800 million), Latvia ($2.4 billion), and Seychelles ($26.6
million). The IMF also created a Flexible Credit Line for countries with strong fundamentals,
policies, and track records of policy implementation. Once approved, these loans can be disbursed
when the need arises rather than being conditioned on compliance with policy targets as in
traditional IMF-supported programs. The IMF board has approved Mexico for $47 billion under
this facility. Poland has requested a credit line of $20.5 billion.
The IMF also may use its Exogenous Shocks Facility (ESF) to provide assistance to certain
member countries. The ESF provides policy support and financial assistance to low-income
countries facing exogenous shocks, events that are completely out of the national government’s
control. These could include commodity price changes (including oil and food), natural disasters,
249
See CRS Report RS22976, The Global Financial Crisis: The Role of the International Monetary Fund (IMF), by
Martin A. Weiss.
250
Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. A
member’s quota determines its maximum financial commitment to the IMF and its voting power. The U.S. quota of
about $58.2 billion is the largest.

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and conflicts and crises in neighboring countries that disrupt trade. The ESF was modified in
2008 to further increase the speed and flexibility of the IMF’s response. Through the ESF, a
country can immediately access up to 25% of its quota for each exogenous shock and an
additional 75% of quota in phased disbursements over one to two years.
The increasing severity of the crisis has led world leaders to conclude that the IMF needs
additional resources. At the 2009 February G-7 finance ministers summit, the government of
Japan lent the IMF $100 billion dollars.251 At the April 2009 London G-20 summit leaders of the
world’s major economies agreed to increase resources of the IMF and international development
banks by $1.1 trillion including $750 billion more for the International Monetary Fund, $250
billion to boost global trade, and $100 billion for multilateral development banks. For the
additional IMF resources, $250 billion was to be made available immediately through bilateral
arrangements between the IMF and individual countries, while an additional $250 billion would
become available as additional countries pledged their participation. The increased resources
include the $100 billion loan from Japan, and the members of the European Union had agreed to
provide an additional $100 billion. Subsequently, Canada ($10 billion), South Korea ($10 billion),
Norway ($4.5 billion), and Switzerland ($10 billion) agreed to subscribe additional funds. The
Obama Administration has asked Congress to approve a U.S. subscription of $100 billion to the
IMF’s New Arrangements to Borrow. China reportedly has said it is willing to provide $40 billion
through possible purchases of IMF bonds.252 The sources for the remaining $145.5 billion of the
planned increase in the NAB have not been announced.
The IMF reportedly is considering issuing bonds, something it has never done in its 60-year
history. 253 These would be sold to central banks and government agencies and not to the general
public. According to economist and former IMF chief economist Michael Mussa, the United
States and Europe previously blocked attempts by the IMF to issue bonds since it could
potentially make the IMF less dependent on them for financial resources and thus less willing to
take policy direction from them. 254 However, several other multilateral institutions such as the
World Bank and the regional development banks routinely issue bonds to help finance their
lending.
The IMF is not alone in making available financial assistance to crisis-afflicted countries. The
International Finance Corporation (IFC), the private-sector lending arm of the World Bank, has
announced that it will launch a $3 billion fund to capitalize small banks in poor countries that are
battered by the financial crisis. The Inter-American Development Bank (IDB) announced on
October 10, 2008 that it will offer a new $6 billion credit line to member governments as an
increase to its traditional lending activities. In addition to the IDB, the Andean Development
Corporation (CAF) announced a liquidity facility of $1.5 billion and the Latin American Fund of
Reserves (FLAR) has offered to make available $4.5 billion in contingency lines. While these
amounts may be insufficient should Brazil, Argentina, or any other large Latin American country
need a rescue package, they could be very helpful for smaller countries such as those in the
Caribbean and Central America that are heavily dependent on tourism and property investments.
251

IMF Signs $100 Billion Borrowing Agreement with Japan, IMF Survey Magazine: In the News, February 13, 2009.
“China Urges World Monetary Systems Diversification ,” Dow Jones Newswire , April 2, 2009,
http://www.djnewswires.com/eu.
253
Timothy R. Homan, “IMF Plans to Issue Bonds to Raise Funds for Lending Programs ,” Bloomberg.com, April 25,
2009.
254
Bob Davis, “IMF Considers Issuing Bonds to Raise Money,” Wall Street Journal, February 1, 2009.
252

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Changes in U.S. Regulations and Regulatory Structure
Aside from the international financial architecture, a large question for Congress may be how
U.S. regulations might be changed and how closely any changes are harmonized with
international norms and standards. Related to that is whether U.S. oversight and regulatory
agencies, government sponsored enterprises, credit rating firms, or other related institutions
should be reformed, merged, their mandates changed, or rechartered. (Many of these questions
are addressed in separate CRS reports.)255
As events have developed, policy proposals have been coming forth through the legislative
process and from the Administration, but other proposals are emerging from recommendations by
international organizations such as the IMF,256 Bank for International Settlements, 257 and
Financial Stability Forum. 258
The IMF has suggested various principles that could guide the scope and design of measures
aimed at restoring confidence in the international financial system. They include:
•

employ measures that are comprehensive, timely, clearly communicated, and
operationally transparent;

•

aim for a consistent and coherent set of policies to stabilize the global financial
system across countries in order to maximize impact while avoiding adverse
effects on other countries;

•

ensure rapid response on the basis of early detection of strains;

•

assure that emergency government interventions are temporary and taxpayer
interests are protected; and

•

pursue the medium-term objective of a more sound, competitive, and efficient
financial system. 259

255

See, for example, CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation,
by Baird Webel and Edward V. Murphy; CRS Report RL34412, Containing Financial Crisis, by Mark Jickling; CRS
Report RL33775, Alternative Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the
Subprime and Alt-A Markets, by Edward V. Murphy; CRS Report RL34657, Financial Institution Insolvency:
Federal Authority over Fannie Mae, Freddie Mac, and Depository Institutions, by David H. Carpenter and M. Maureen
Murphy; CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte; CRS Report
RS22099, Regulation of Naked Short Selling, by Mark Jickling; and CRS Report RS22932, Credit Default Swaps:
Frequently Asked Questions, by Edward V. Murphy.
256
For analysis and recommendations by the International Monetary Fund, see “Global Financial Stability Report,
Financial Stress and Deleveraging, Macro-Financial Implications and Policy,” October 2008. 246 p.
257
For information on Basel II, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable
Framework, by Walter W. Eubanks.
258
For recommendations by the Financial Stability Forum, see “Report of the Financial Stability Forum on Enhancing
Market and Institutional Resilience, Follow-up on Implementation,” October 10, 2008. 39 p.
259
International Monetary fund. “Global Financial Stability Report: Financial Stress and Deleveraging, Macrofinancial
Implications and Policy” (Summary version), October 2008. pp. ix-x.

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Appendix A. Major Recent Actions and Events of
the International Financial Crisis260
2009
October 2. American nonfarm payroll employment continued to decline in September, losing
263,000 jobs, and the unemployment rate rose from 9.4% in July to 9.7% in August, and now to
9.8% in September, the U.S. Bureau of Labor Statistics reported. The largest job losses were in
construction, manufacturing, retail trade, and government. Since the start of the recession in
December 2007, the number of unemployed persons has increased by 7.6 million to 15.1 million,
and the unemployment rate has doubled to 9.8%. Though the job market continued to worsen,
the pace of deterioration remained markedly slower than earlier in the year, when roughly
700,000 jobs a month were disappearing. U.S. Bureau of Labor Statistics, New York Times.
October 1. International Monetary Fund (IMF) releases its World Economic Outlook (WEO).
Key WEO projections include:
•

World growth. After contracting by about 1% in 2009, global activity is forecast
to expand by about 3% in 2010 (see table).

•

Advanced economies are projected to expand sluggishly through much of 2010.
Average annual growth in 2010 will be only modestly positive at about 1¼,
following a contraction of 3½% during 2009.

•

Emerging and developing economies. Real GDP growth is forecast to reach 5
percent in 2010, up from 1¾% in 2009. The rebound is driven by China, India,
and a number of other emerging Asian countries. Economies in Africa and the
Middle East are also expected to post solid growth of close to 4%, helped by
recovering commodity prices.

260

Prepared by J. Michael Donnelly, Information Research Specialist, Knowledge Services Group. Source: Various
news reports and press releases. Beginning July 1, 2009, source information will be provided.

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Visit the World Economic Outlook on the internet at
http://www.imf.org/external/pubs/ft/weo/2009/02/index.htm.
September 28. According to an IMF staff study of 15 emerging market countries with IMFsupported programs, recent IMF programs in these countries are delivering the support needed to
help these countries weather the worst of the global financial crisis, through increased resources,
supportive policies, and more focused conditionality. “What this study tells us is that, with IMF

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support, many of the severe disruptions characteristic of past crises have so far been either
avoided or sharply reduced,” IMF Managing Director Dominique Strauss-Kahn said. The study
finds that support from the IMF has enabled countries to lessen the effects of the crisis by
avoiding currency overshooting and bank runs—traits of past crises. At a time when capital flows
were severely curtailed, the IMF provided large-scale financial assistance to countries in need.
The IMF has sharply increased the resources it has available to lend, from about $250 billion to
$750 billion, following pledges made by the Group of Twenty leading emerging and advanced
economies after the London Summit in April 2008. As part of its efforts to support countries
during the global economic crisis, the IMF also conducted a major overhaul of how it lends
money by offering higher loan amounts and tailoring loan terms to countries’ circumstances. The
IMF has been instrumental in bringing down borrowing costs for emerging markets that had
spiked following the bankruptcy of Lehman Brothers.
•

IMF-supported programs during current crisis deemed more effective.

•

Upfront, large-scale financing has created room for supportive policies.

•

Signs of stabilization emerging, though challenges to secure recovery remain.

September 28. World Trade Organization, WTO, Director-General Pascal Lamy, in his
address to the WTO Public Forum, said the G20 must now “walk the talk” on Doha. He stated
that G20 leaders at their Pittsburgh Summit agreed that “their negotiators now embark on the
work programs that we have established for the next three months, and that they then assess our
collective ability to achieve our 2010 target”. World Trade Organization.
September 24-25. G20 Pittsburgh summit. The leaders of the Group of Twenty (G20) met in
Pittsburgh to “turn a page on the era of irresponsibility” by adopting reforms to “meet the needs
of the 21st century economy.” The final communiqué pledged
•
•
•

•

•
•
•

not to withdraw stimulus measures until a durable recovery is in place.
to co-ordinate their exit strategies, while also acknowledging that timing will vary from
country to country depending on the forcefulness of measures in place.
for macroeconomic policies to be harmonized to avoid imbalances—America’s
spendthrift ways and deficits; Asia’s savings glut—that made the financial crisis so much
worse. But strengthening co-operation, through the snappily named Framework for
Strong, Sustainable and Balanced Growth, will not be easy, even with International
Monetary Fund (IMF) coordination. Developing countries are publicly supportive, but
that may only be because they suspect it will be impossible to police.
The G20 will replace the narrower, Western-dominated G8 as the primary global
economic facilitator, providing China, India and Brazil a permanent seat at the table. In
return, it is hoped that they will be more flexible in other areas, such as climate change
and trade.
The G20 pledged to eliminate subsidies on fossil fuels, but only “in the medium term”;
for trade, there was only a weak commitment to get the Doha round back on track by next
year.
The governance structure of the rejuvenated IMF will also change, with “underrepresented” mostly developing countries getting at least 5% more of the voting rights by
2011. Taken together, the Fund’s overhaul and the G20’s expanded powers mark an
important shift in international macroeconomic policy.

The other big institutional change is the ascension of the Financial Stability Board (FSB), a
group of central bankers and financial regulators, which has also been broadened to include the

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big developing countries. From now on it will take a lead role in coordinating and monitoring
tougher financial regulations and serve, along with the IMF, as an early-warning system for
emerging risks. The FSB released two reports for the summit that elaborate on regulatory issues.
Tim Geithner, America’s treasury secretary, told reporters that he considered the FSB to be the
“fourth pillar” of the modern global economy, along with the IMF, the World Bank and the World
Trade Organization. The FSB will help to ensure that the rules governing big banks are
commensurate with the cost of their failure. The main tool for this will be higher capital
requirements. All agree that banks need more capital and that a greater share of it should be pure
equity, the strongest buffer against loss. The G20 communiqué also supported forcing banks to
hold especially high levels in good times so they are better prepared to ride out the bad—though
it did not endorse an American proposal for big banks to hold more than smaller ones. There will
be much wrangling over amounts and timing. The G20 has set a deadline of the end of 2012 for
new standards to be adopted, with exact figures to be decided by the end of next year. European
banks may not be able to deliver, since they entered the crisis with much feebler capital cushions
which have since been enlarged, but with hybrid instruments that do not count as pure equity.
France and Germany had pushed hard for firm numerical limits on bonuses as a proportion of
revenues or capital. The communiqué was closer to the Americans’ position to tie bankers’ pay
more closely to long-term value creation—more paid in restricted shares, with employers able to
claw back a portion if trades lead to big losses and multi-year bonus guarantees to be avoided.
Bonuses will be limited to a particular percentage of revenues only if the bank’s capital levels are
dangerously low or the payouts threaten its soundness. For economic rebalancing, the peer review
envisioned in the communiqué is a poor excuse for an effective enforcement mechanism. The
Economist.
September 25. Why did hedge funds, supposedly the bad boys of the financial world, come
through last year's crisis in relatively good shape? HedgeFund Intelligence data shows that U.S.based funds suffered an average loss of 12.7% in 2008. That's nothing like the 38.5% decline for
the Standard & Poor's 500. Losses for banks were much higher still. Some hedge funds got
pounded because they made bad bets or because investors decided to pull out their money. Nearly
500 funds disappeared last year, according to HedgeFund Intelligence, but that's out of a universe
of roughly 7,000.
•

The salvation of the hedge fund industry was that its existential crisis came 10
years earlier, with the 1998 implosion of Long-Term Capital Management. After
that fund went down, the hedge funds' lenders got nervous and tightened their
standards. As a result, in the past decade the supposedly go-go hedge funds were
actually less leveraged than many banks.

•

To see how the borrowing mania hit banking, look at confidential numbers for
big Swiss banks, once renowned for their caution. Debt ratios at the two largest
banks rose in the past dozen years from 90% to 97% -- meaning that they had 97
Swiss francs of borrowed money for every three francs of capital. In the banks'
trading accounts, the use of borrowed money was even greater. One study
calculated that by 2006, the traders at big Swiss banks were borrowing 400 times
their capital -- which was about 100 times as high as the leverage ratio of a
typical hedge fund.

In Pittsburgh, the G-20 nations are beginning the process of putting the financial house back in
order. A danger is to put too much faith in regulatory supervision -- which demonstrably didn't do
the job before the 2008 crash. The best restraint is old-fashioned market discipline, in which

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financial traders know that they, personally, will lose a ton of money if they take risky bets that
don't pan out. Making the financial industry pay for its mistakes is the idea behind the best of the
Obama administration's reform proposals: If banks issue securities backed by mortgages, say,
then require them to hold some of that paper so that they will bear some of the losses. When
banks devise compensation schemes for their top executives, urge their boards to adopt the hedge
fund practice of "claw-back" payments so that one year's big gains will be reduced by the next
year's big losses. The underlying idea is to "fight short-termism." Washington Post.
September 24. The Shared National Credit Program (SNC) 2009 Review, an annual inter-agency
report, stated that U.S. credit quality deteriorated to record levels with respect to large loans
and loan commitments. The report says that the level of losses from syndicated loans facing
banks and other financial institutions tripled to $53 billion in 2009, due to poor underwriting
standards and the continuing weakness in economic conditions. The Shared National Credit
Program was set up in 1977 to review large syndicated loans, and now reviews and classifies all
institutional loans of at least $20 million that are shared by three or more supervised institutions.
•

According to the report, criticized assets rated 'special mention', 'substandard',
'doubtful' and 'loss', touched $642 billion, representing 22.3% of the SNC
portfolio, compared with 13.4% a year ago.

•

The report also said foreign banks held about 38% of the $2.9 trillion in loans,
while hedge funds, pension funds, insurance companies and other entities held
about 21%.

•

The report also said that non-banks continued to hold a "disproportionate share"
of classified assets compared with their total share of the SNC portfolio. They
hold 47% of loans seen as 'substandard', 'doubtful' and 'loss'.

The SNC review is prepared by the Federal Reserve Board of Governors, Federal Deposit
Insurance Corp (FDIC), Office of the Comptroller of the Currency (OCC), and the Office of
Thrift Supervision (OTS). Reuters.
September 24. The U.S. National Association of Realtors reported sales of existing U.S. homes
fell a seasonally adjusted 2.7% in August following four months of increasing sales. Prospective
buyers of condos and single-family homes pulled back in the Northeast, the South, and the
Midwest, showing that a budding recovery in the housing market remained weak. Economists
said it was too soon to say whether the drop represented a hiccup in the market or a sign of deeper
problems for the housing market. Despite the monthly decline, sales in August were still 3.4%
higher than a year earlier, when the collapse of the housing market was rapidly dragging down the
economy. And they marked the second-highest sales figures of the year. “I’m not alarmed by the
softening in sales,” said Celia Chen, a housing economist at Moody’s Economy.com. “The trend
is still very strongly up.” In August, median home prices across the country fell by nearly $4,000,
to $177,700, and were down 12.5% from a year earlier. New York Times.
September 24. Former Federal Reserve chairman Paul Volcker testified before the House
Financial Services Committee that the Obama administration’s proposed overhaul of financial
rules would preserve the policy of “too big to fail” and could lead to future banking bailouts. He
endorsed a stricter separation between banks that hold deposits and investment banks. He
said the “safety net” should be limited clearly to commercial banks, while investment banks
should be excluded. He urged lawmakers to make clear that nonbank companies would not be
saved with federal money. Mr. Volcker said he did not differ with the administration on most of
its proposals and that he took “as a given” that banks would be bailed out in times of crisis. But

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he said he opposed bailouts of insurance companies like the American International Group, the
automakers’ finance arms and others. “The safety net has been extended outside the banking
system,” Mr. Volcker said. “That’s what I want to change.” New York Times.
September 24. China has been an essential player in fostering global economic recovery. As
one of the first countries to announce a massive stimulus package last November, China brought
increased stability to markets when it was needed. Today's conventional wisdom holds that in
order to ensure a stable global recovery, Chinese consumers must increase their consumption
patterns to fill the economic void left by their battered American counterparts. Can the Chinese
government succeed in boosting domestic consumption? Are there other initiatives that China can
take to put the global economy in motion? The answer to both of these questions is a tentative
'yes'.
•

In regards to stimulating domestic consumption, assertions that the Chinese aren't
spending enough may be overblown. For example, Morgan Stanley released a
report last week arguing that China's under-consumption is over-stated, and that
Chinese consumption is likely to increase.

This week, China took two steps towards assuming a greater international leadership role in
putting the global economy back on its feet.
•

First, Hu Xiaolian, deputy governor of China's central bank, proposed the
formation of a multinational sovereign wealth fund to assist developing countries
gain access to capital. In a report released in anticipation for today's G-20
summit, Xiaolian suggests:
Considerations can be (given) to setting up a 'supra-sovereign wealth investment fund' to
help channel capital inflow into developing world so that these countries can serve as new
engines in global recovery.

•

Second, in a speech to the U.N. yesterday, Chinese president Hu Jintao
announced that China will take an active role in providing assistance to the
developed economies most hit by the crisis. The English-language China Daily
reports:

China will increase support for those hit hard by the global financial crisis, earnestly implement
relevant capital increase and financing plans, intensify trade and investment cooperation and help
raise their capacity for risk-resistance and sustainable development.
Crisis Talk (World Bank).
September 24. The McKinsey Global Institute in its sixth annual survey of the world’s capital
markets says that the mature financial markets of North America, Europe and Japan may have
reached an “inflection point,” beyond which their growth will be much slower than the
breakneck expansion of the past two decades. In emerging markets, though, they still see plenty
of room to grow. “It’s going to be a very different environment,” says Charles Roxburgh, the
institute’s London-based director. “Banks will need to be riding the wave of growth in emerging
markets, and they’ll have to find new ways to profit in mature markets.”
•

The report estimates that the total value of global financial assets — including
stocks, bonds, government debt and bank deposits — fell by $16 trillion in 2008,
the largest setback since at least 1990.

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•

Financial globalization also took a big hit, as total global capital flows fell to $1.9
trillion in 2008, down 82% from 2007.

•

Among developed nations, the shrinkage of financial markets was particularly
pronounced in the U.S. The total value of U.S. financial assets declined $5.5
trillion in 2008 to $54.9 trillion, putting an end to a two-decade run during which
the value of the U.S. financial markets, expressed as a percentage of the country’s
annual economic output, grew more than twice as much as it did in the previous
80 years.

•

In Russia, the total value of financial assets stood at only 68% of gross domestic
product as of the end of 2008, compared to nearly 4 times GDP in the U.S. The
ratio of financial assets to GDP for all of Eastern Europe was 99%, for Latin
America 119%, for India 162%, and for emerging Asia 232%.

Wall Street Journal. Real Time Economics.
September 24. In preparation for the Pittsburgh G20 meeting, U.S. negotiators propose to press
Group-of-20 world leaders to raise the stakes in the Doha Development Agenda negotiations by
directing their negotiators to start identifying the “gaps” in the still incomplete modalities texts in
agriculture, nonagricultural market access and services. U.S. “sherpas” want specific language in
the end-of-summit statement that calls on trade ministers to begin a marathon exercise of
identifying the gaps—which, for the United States, means embarking on direct bilateral
negotiations. Others in Pittsburgh want to see the negotiations adhere to their original negotiating
plan—agreement first on complete modalities before embarking on give-and-take talks. A few
emerging countries led by China have consistently opposed bilateral negotiations, insisting that
the G-20 leaders follow directives contained in the G-8 meeting in Italy and the last G-20 meeting
in London, which called for quick resumption of the negotiations. The fate of the Doha
agreement would largely depend on two major players—the United States and China, commented
one envoy. He argued that if there is an agreement between the two members, others—including
India, Brazil, and South Africa—will follow.
•

Brazil is considering hosting another Group-of-20 trade ministerial summit
November 28 and 29 near Geneva for what trade diplomats describe as a crucial
final attempt to increase pressure on key members to enter into hard bargaining
on the few issues left in Doha negotiations on agriculture and market-opening for
industrial goods. The ministerial will take place just before the scheduled
biennial meeting of the World Trade Organization on November 30. Washington
Trade Daily.

September 23. Representative Barney Frank, of Massachusetts announced a plan that preserved
the core of the White House’s proposal for a new U.S. consumer financial protection agency,
while jettisoning a smaller though symbolically significant provision. The agency’s core mission
would be to protect consumers from deceptive or abusive credit cards, mortgages and other loans.
Mr. Frank also announced an ambitious schedule to complete the House’s work on the legislation
over the next two months. Recognizing that the revisions increased the odds of the bill’s passage,
the Obama administration quickly embraced the changes. Both Mr. Frank and Mr. Geithner
emphasized that the legislation would be intended to limit the “too big to fail” policy of bailing
out the nation’s largest institutions. That policy, which has provoked widespread voter anger, was
central to the bailouts of Bear Stearns and the American International Group and led to big loans
to the largest banks in the nation. “We will be putting a package of legislation together that will
substantially diminish that problem,” Mr. Frank said. “We will be providing for mechanisms for

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putting financial institutions out of their misery. There will be death panels enacted by this
Congress, but they will be for large institutions that are seen as too big to die. We are talking here
about dissolution, not resolution. We are talking about making it unpleasant for these institutions
to die.” Mr. Geithner said those institutions whose problems could shake the financial system
would face far greater regulatory scrutiny and higher capital standards. New York Times.
September 23. Switzerland and the United States have signed a treaty to increase the amount
of tax information they share to help crack down on tax evasion, Swiss officials said Wednesday.
The agreement follows a model set out by the Paris-based Organization for Economic Cooperation and Development, OECD, designed to make it harder for taxpayers to hide money in
offshore tax havens. U.S. tax authorities will be able to request information on Americans
suspected of concealing Swiss bank accounts, the Swiss Finance Ministry said. The treaty forbids
so-called 'fishing expeditions,' meaning U.S. authorities have to provide specific details on the
person they are seeking further information about and can't simply ask for wholesale lists of
Americans with Swiss accounts, the ministry said. The agreement comes into force immediately,
and will not be retroactive. Washington has been aggressively pursuing suspected tax evaders in
Switzerland, the world's biggest offshore banking center. In August, the U.S. and Switzerland
resolved a court case in which Swiss banking giant UBS AG agreed to turn over details on 4,450
accounts suspected of holding undeclared assets from American customers. The case against
UBS, as well as pressure from other OECD countries such as France, Britain and Germany,
prompted Switzerland earlier this year to agree to soften its stance on banking secrecy for
foreigners. Associated Press.
September 23. The United Steelworkers union filed a new petition asking for U.S. duties on
coated paper from both China and Indonesia. The steelworkers union is joined in its latest
trade case by paper manufacturers NewPage Corp of Miamisburg, Ohio; Appleton Coated LLC of
Kimberly, Wisconsin; and Sappi Fine Paper North America of Boston, Massachusetts, which
together employ about 6,000 union workers at paper mills in nine states. "Neither the companies
nor the union will tolerate being obliterated without asking our government to investigate and
enforce the rules of fair trade," Steelworkers President Leo Gerard said in a statement. Reuters.
September 22. The United States wants world leaders to agree this week to launch a major
rethink of the world economy in November as they try to strengthen the global economy after its
near meltdown, Reuters news service reported. Documents outlining the U.S. position ahead of
the September 24-25 Pittsburgh summit of Group of 20, G20, leaders said exporters, which
include China, Germany and Japan, should consume more, while debtors like the United States
must boost savings.
•

“The world will face anemic growth if adjustments in one part of the global
economy are not matched by offsetting adjustments in other parts of the global
economy,” said the document obtained by Reuters.

•

President Obama, cutting through the coded diplomatic courtesies, made the case
more bluntly for a change in business as usual. “We can't go back to the era
where the Chinese or Germans or other countries just are selling everything to us,
we're taking out a bunch of credit card debt or home equity loans, but we're not
selling anything to them,” he said on September 20.

•

European Central Bank President Jean-Claude Trichet said on September 21 that
persuading Europe, the United States and China to accept International Monetary
Fund advice on economic polices may be difficult. G7 sources told Reuters there

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was a renewed determination to act to stem the global imbalances because the
crisis had underlined the interconnectedness of the financial system and how
joint action could be more effective.
China has long been the target of calls from the West to get its massive population to spend more.
It may be reluctant to offer a significant change in economic policy when Chinese President Hu
Jintao meets Obama this week. Washington Trade Daily.
September 16. Reports on industrial production and consumer prices today showed the U.S.
economy is emerging from the economic slump without spurring inflation. Output at factories,
mines, and utilities climbed 0.8% last month, exceeding the median estimate of economists
surveyed by Bloomberg News, data from the Federal Reserve in Washington showed. The Fed
revised July’s increase up to 1% from the previously reported 0.5%. The back-to- back gain was
the biggest since late 2005. The Labor Department said the cost of living climbed 0.4%, and was
down 1.5% from August 2008. Another report today showed an index of homebuilder confidence
climbed in September for a third consecutive month. The National Association of Home
Builders/Wells Fargo’s measure climbed to 19, the highest level since May 2008, from 18 in
August, the Washington-based group said. A reading below 50 means most respondents view
conditions as poor. Bloomberg.com.
September 16. Japan’s parliament named Yukio Hatoyama as the country’s new Prime
Minister, a move that formalizes the first change of government by a political party with a solid
majority for over half a century. Mr. Hatoyama is president of the center-left Democratic Party of
Japan, DPJ. He told a news conference after his appointment, “History has not changed yet.
Whether history will really change will hinge on our future works.” The DPJ’s rise to power
marks the end of the Liberal Democratic Party's, LDP’s, almost unbroken rule since 1955.
Although the LDP helped to engineer Japan’s economic revival in the post-war era, the party has
not had the same success in reviving the country’s economy following the bursting of an asset
bubble in the early 1990s. The LDP also become mired in a number of financial scandals that
chipped away at voter trust. The DPJ hopes to steer the economy back to prosperity while
restoring trust in politics. Hatoyama’s coalition government, with its two junior partners the
Social Democratic Party and the People’s New Party, is expected to try to boost domestic demand
by giving money to families with children, cutting highway tolls and gasoline taxes and offering
increased aid to the unemployed. Wall Street Journal.
September 16. New York Attorney General Andrew Cuomo subpoenaed five members of Bank
of America Corp.’s board of directors amid a probe of the bank’s purchase of Merrill Lynch &
Co., said a person close to the investigation. The board members will be asked to testify under
oath, the person said. The Wall Street Journal reported on its website today the five directors are
Thomas May, chief executive officer of NStar; William Barnet III, a Spartanburg, South Carolina,
developer; retired Morehouse College President Walter Massey; Boston investment firm owner
John Collins; and retired Army General Tommy Franks. The bank will “cooperate with the
attorney general’s office as we maintain that there is no basis for charges against either the
company or individual members of the management team,” according to a statement by the
Charlotte, North Carolina-based Bank of America. The subpoenas reflect continuing pressure on
bank Chief Executive Officer Kenneth Lewis after U.S. District Judge Jed Rakoff in New York
this week refused to accept a settlement between the bank and the Securities and Exchange
Commission. The $33 million agreement would have resolved the SEC’s claim that the bank
deceived investors in November about bonuses to be paid to executives at Merrill Lynch & Co.
Bank of America bought Merrill in January. Bloomberg.com.

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September 16. Investors turned the most bearish on the U.S. dollar in 18 months as signs of a
recovery in the global economy reduced demand for the currency as a refuge, a survey of
Bloomberg users showed. The world’s main reserve currency will fall and Treasury yields will
rise over the next six months, according to 1,851 respondents in the Bloomberg Professional
Global Confidence Index. Sentiment toward the greenback fell to 30.8 in September, from 38.8 in
August, according to the survey. The reading is the lowest since it dropped to 30.3 in March 2008,
and has tumbled from a high of 68.86 a year ago. The measure is a diffusion index, meaning a
reading below 50 indicates Bloomberg users expect the dollar to weaken. Bloomberg.com.
September 16. When the U.S. Congress passed an $8,000 tax credit for first-time home buyers
last winter, it was intended as shock therapy during a crisis. Now the question is becoming
whether the housing market can function without it. As many as 40% of all home buyers this year
will qualify for the credit. It is on track to cost the government $15 billion, more than twice the
amount that was projected when Congress passed the stimulus bill in February. Some in the real
estate industry and some economists contend that all that money is well spent. They believe the
credit is encouraging a recovery in the housing market that is gathering steam. Analysts say the
credit is directly responsible for several hundred thousand home sales. Skeptics argue that most of
the money is going to people who would have bought a home anyway. And they contend that
unless it is allowed to expire on schedule in late November 2009, the tax credit is likely to
become one more expensive government program that refuses to die. The real estate industry,
including the powerful 1.1 million member National Association of Realtors, wants Congress to
extend the credit at least through next summer. The group hopes to expand the program to
$15,000 and to allow all buyers, not just those who have been out of the market for at least three
years, to qualify. The price tag on that plan: $50 billion to $100 billion. The National Association
of Realtors estimates that about 350,000 sales this year would not have happened without the tax
credit. Moody’s Economy.com used computer modeling to put the number at 400,000. The
government’s efforts to directly reward home buyers began more than a year ago with a $7,500
tax credit that had to be repaid over 15 years. Last winter, amid fears of another Great
Depression, the Senate came up with a much sweeter $15,000 package as part of the stimulus bill.
That measure was ultimately reduced to the $8,000 credit. New York Times.
September 15. The heads of the Organization for Economic Cooperation and Development,
OECD, the United Nations Conference on Trade and Development, UNCTAD, and the World
Trade Organization, WTO, have drafted a joint report to G-20 leaders meeting in Pittsburgh
later this month concerning protectionist acts by G-20 nations. The report states that G-20 and
advanced developing countries have refrained from extensive use of restrictive trade and
investment measures in recent months but have continued – “in a limited way” – to apply tariffs
and non-tariff instruments that have hindered trade flows. The report also said that trade rules and
investment agreements have prevented wide-scale protectionist policies. But tariffs, nontariff
measures, subsidies and burdensome administrative procedures regarding imports have been
applied in recent months and have acted as “sand in the gears of international trade that may
retard the global recovery,” the report said. “It is urgent that governments start planning a
coordinated exit strategy that will eliminate these elements as soon as possible,” the statement
continued. Washington Trade Daily.
September 15. One year ago, Lehman Brothers filed for bankruptcy, triggering the most acute
phase of the financial crisis. The precipitating cause of Lehman’s demise was a decision—by
Treasury Secretary Henry Paulson, Federal Chairman Ben Bernanke and New York Fed President
Timothy Geithner—to send a message. Paulson is quoted in David Wessel’s “In Fed We Trust” as
saying: “I'm being called Mr. Bailout. I can't do it again.” Geithner, for his part, was more

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circumspect, saying, “There is no political will for a federal bailout.” This made sense on the
surface. Not only is it questionable public policy to use taxpayer money to bail out private
companies, but, more important, it creates a moral hazard: the incentive for those companies to
take excessive risks with the knowledge that the government will save them should things go
wrong. The plan backfired. The chaos that ensued forced the government to step in to protect
almost every financial instrument involved in the credit markets, from money market funds to
commercial paper to asset-backed securities, and to ride to the rescue of some of America’s
largest banks. In the process, the government created moral hazard on an epic scale, transforming
a vague expectation that certain financial institutions were “too big to fail” into a virtual
government guarantee. Moral hazard had at least three aspects:
Bank employees and managers had asymmetric compensation structures. In good years, they
stood to make huge amounts of money; in bad years, even if the bank lost money, they would still
make healthy sums. This gave employees the incentive to take excessive risks because they could
shift their potential losses to shareholders.
Shareholders had the same payoff structure. Banks are highly leveraged institutions; every dollar
contributed by shareholders is magnified by 10 to 30 dollars from creditors. This meant that in
good years, shareholders benefited from profits magnified by leverage, but should things go
wrong, they could shift their potential losses to creditors. As a result, paying bank executives in
stock did not mitigate their behavior; in fact, the most senior executives at both Bear Stearns and
Lehman had and lost enormous amounts of money tied up in their companies.
Creditors had only limited incentives to watch over major banks. Ordinarily, creditors should
demand high interest rates on loans to highly leveraged institutions. However, the expectation that
large banks would not be allowed to fail made creditors more willing to lend to them. Washington
Post.
September 14. President Obama sternly admonished the financial industry and lawmakers to
accept his proposals to reshape financial regulation to protect the nation from a repeat of the
excesses that drove Lehman Brothers into bankruptcy and wreaked havoc on the global economy
last year. But with the markets slowly healing, Mr. Obama’s plan to revamp financial rules faces a
diminishing political imperative. Disenchantment by many Americans with big government,
along with growing obstacles from financial industry lobbyists pressing Congress not to do
anything drastic, have also helped to stall his proposals. Mr. Obama chastised Wall Street workers
in the audience at Federal Hall, at the foot of Wall Street. “Instead of learning the lessons of
Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” Mr.
Obama said. “They do so not just at their own peril, but at our nation’s.” Throughout history, most
major laws to change the financial system arose from the cauldron of a crisis. Senior officials
have acknowledged that as the financial system begins to mend, a kind of political inertia sets in
as lawmakers have less of an incentive to act boldly.
Big institutions and community banks have unified against a central provision of the plan to
create a new consumer finance protection agency. The new agency would regulate mortgages,
credit cards, and other forms of consumer debt. The companies, and their Republican and
Democratic allies in Congress, fear that the new agency would lead to unnecessarily burdensome
oversight. Some top regulators, including Sheila C. Bair, the head of the Federal Deposit
Insurance Corporation, FDIC, support the creation of the new agency but with less authority than
what the president is seeking.

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Lawmakers, particularly in the Senate but also in the House, have been skeptical of a second
major plank that would give the Federal Reserve more explicit authority to monitor the
markets for systemwide problems. Opponents prefer an enlarged role for a council of regulators.
The Obama plan creates such a council, but makes the Fed the first among equals and
acknowledges, as the Treasury secretary, Timothy F. Geithner, has said, that you cannot put out a
fire by committee. New York Times.
September 14. Euro zone industrial output fell in July and employment dropped again in the
second quarter, pointing to continued weakness in the economy despite signs that euro zone
recession may be ending. Industrial output in the 16 countries using the euro fell 0.3% month on
month in July for a 15.9% year-on-year fall, the European Union’s statistics office Eurostat said
on Monday. The annual numbers showed clearly the contractions in output are becoming smaller.
In June, production was 16.7% lower than a year earlier and in May it was 17.6% , better than the
21.3% in April. Eurostat also said employment in the euro zone fell 0.5% in the second quarter
against the previous three months, and was 1.8% lower than the year before.
This points to continued weakness of the labor market, as companies scale down production
capacity because of weak demand. Economists say that more people without jobs mean less
demand in the economy and therefore a slower recovery. Reuters.
September 14. U.S. President Barack Obama announced on September 11 that he will impose
duties of 35% on $1.8 billion of automobile tires from China. Then on September 14 the
President defended his decision, saying he was simply enforcing a trade agreement and not
resorting to protectionism. His decision sparked a complaint by China to the World Trade
Organization. China also said it will begin dumping and subsidy probes of chicken and auto
products from the United States. President Obama said the action wasn’t intended to be
protectionist or “provocative.” “This administration is committed to pursuing expanded trade and
new trade agreements,” the President said in New York City. “But no trading system will work if
we fail to enforce our trade agreements.” Obama’s decision on tires may encourage U.S.
producers of apparel, steel or other goods to file similar safeguard complaints against imports
from China, followed by China retaliating against U.S. companies trying to do business there,
said Robert Kapp, a Port Townsend, Washington-based business consultant specializing in China.
“There are 10 to 50 companies on the U.S. side biting their nails to the bone, hoping they are not
caught up in this,” Kapp said. Bloomberg.com, Washington Trade Daily.
September 12. Magna International of Canada, is likely to take control of the European
operations of G.M., Opel and Vauxhall. G.M. told the German government that it had decided to
sell a 55% stake in the European unit to Magna and its Russian investment partner, Sberbank.
G.M. will retain 35%, and Opel’s employees will hold the remaining 10%. Magna had gained the
support of the German government and of Opel’s unions by promising to maintain jobs in that
country. A final agreement is not expected before German’s September 27 elections. G.M.
emphasized that it still needed union agreement for the revamping of the four Opel plants in
Germany, which employ almost half of G.M.’s 55,000 workers in Europe. The IG Metall union
said that it expected negotiations to be tough. And the German government has yet to say how
much money it will commit. It had initially pledged more than $6.5 billion in loan guarantees.
Analysts questioned Magna’s plan to move beyond its base in auto parts to consolidating vehicle
production of Opel and Vauxhall, as the operation is known in Britain. They bring significant
challenges in areas like design, marketing and consumer sales. International Herald Tribune.

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September 11. U.S. poverty increased, median household income fell, and the percentage of
Americans with employer-based health coverage continued to decline in 2008, according to
Census data for 2008 issued today. The figures reflect the initial effects of the recession. Median
household income declined 3.6% in 2008 after adjusting for inflation, the largest single-year
decline on record, and reached its lowest point since 1997. The poverty rate rose to 13.2%, its
highest level since 1997. The number of people in poverty hit 39.8 million, the highest level since
1960. These data include only the early months of the recession. Poverty is expected to rise more
in 2009 but would be worse without the Recovery Act. Though the increases in poverty in 2009
are likely to be large, they would have been much greater without the economic recovery
legislation. A Center analysis issued on September 9 that examines the effects of seven Recovery
Act provisions finds those provisions will keep an estimated 6.2 million Americans—including
2.4 million children—from falling into poverty and will reduce the severity of poverty for 33
million others. Economist’s View.

September 11. The U.S. government is concerned about overall demand for U.S. Treasury
securities, not appetite from individual countries, said David Dollar, the U.S. Treasury
Department’s economic and financial emissary to China. “The interest rate on long-term treasury
bonds is at a very low level by historical standards,” Dollar said. “That says that the market has
confidence the U.S. will get the fiscal problem under control.” Chinese Premier Wen Jiabao said
in March that the Asian nation was “worried” about the safety of its investment in U.S. debt, as a
weakening dollar erodes the value of its record U.S. $2.1 trillion of foreign-exchange reserves.

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President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts
of debt sales to fund a $787 billion stimulus spending package. Treasuries of all maturities have
lost 2.8% so far this year, after returning 14% in 2008, indexes from Merrill Lynch & Co. show.
The Dollar Index, which tracks the greenback against the currencies of six major U.S. trading
partners, fell September 11 to its lowest level since September, 2008. Chinese investors have
doubled their holdings of U.S. government bonds in the past three years to $776 billion as of
June, according to Treasury data. Diversification of currency reserves by China “makes some
sense” due to their huge scale, said Dollar, who was formerly the World Bank’s country director
for China and Mongolia and was named emissary to China in June. “It is healthy to have a variety
of different reserve-type of currencies,” he said. Bloomberg.com.
September 11. General Motors is hoping to jump-start its revitalization by guaranteeing car
buyers that if they don't like their new Chevrolet, GMC, Buick or Cadillac, they have 60 days to
bring it back for a full refund. The marketing effort is called “May the Best Car Win” and aims to
win back customers leery of GM since it filed for bankruptcy protection earlier this year. The
nation’s largest automaker needs to improve sales so it can repay billions in government loans
and stay in business. The vehicles must not have more than 4,000 miles on them and the drivers
must be current on their payments. The Pontiac brand, which GM is phasing out, and leased
vehicles are not eligible. Similar programs in other countries have seen return rates of about 2%
to 3%. GM said it plans to continue its campaign through 2010. Associated Press.
September 11. The People’s Republic of China announced that it has developed its own largebody jetliner. The government-owned Commercial Aircraft Corp. of China, or Comac, unveiled a
model of the C919, whose fuel efficiency will challenge Boeing Co. and EADS Co.’s Airbus.
Analysts say it’s unlikely any of the world’s airlines—including China’s own domestic carriers—
will ever want to buy one. This project began in 2007, when the State Council, China’s Cabinet,
first outlined plans to build a 150 seat regional jet to lessen the nation’s dependence on Airbus
and Boeing. The creation of Comac was approved in February 2007, and the new firm was given
an initial investment of 19 billion yuan/U.S. $2.7 billion. Comac produced the C919, a narrowbody, single-aisle regional jet that will seat as many 200 passengers. A prototype is planned to
take off five years from now. MarketWatch.
September 10. The U.S. is starting to pare back its emergency support for banks and financial
markets, Treasury Secretary Tim Geithner declared, saying that the financial system no longer
needed extensive government props. Almost a year since the collapse of Lehman Brothers
triggered a financial panic that tipped the world into a deep recession, Secretary Geithner said it
was time to move from crisis response to recovery. Banks have repaid more than $70 billion in
emergency bail-out funds and Secretary Geithner said “we now estimate that banks will repay
another $50 billion over the next 12 to 18 months.” He also said, “we must continue reinforcing
recovery until it is self-sustaining and led by private demand.” Financial Times.
September 10. General Motors is expected to sell its Saab Co. subsidiary to Swedish sports car
maker Koenigsegg Automotive AB and Beijing Automotive Industry Holdings Co. Ltd., China’s
fastest-growing carmaker. Beijing Automotive will take a minority stake in the team bidding for
Saab and help the unprofitable GM division find opportunities to expand in China, the group said.
Chinese carmakers have been looking for investments in Europe to bolster their domestic
deliveries and technology. Geely Automobile Holdings Ltd. said Tuesday that its parent is
involved in a possible bid to buy Ford Motor Co.’s Volvo Cars division in Sweden. Beijing
Automotive, a former suitor for GM’s Opel and Vauxhall units, may share technology with Saab

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and offer some plant capacity, said Christian von Koenigsegg, the sports-car company’s founder.
Bloomberg.
September 9. China National Petroleum Corp., parent of the state-run oil and natural gas giant
PetroChina, announced that it had received a low-interest $30 billion loan to finance overseas
acquisitions—the latest sign that Beijing was deploying its vast cash reserves to ensure that its
economy had the resources it needed to keep growing. The five-year loan from the China
Development Bank, a state-run lender, serves a long-term strategy to protect growth and stability.
This year, China has spent $12 billion on overseas oil and refining assets alone. The deals include
the one that Athabasca Oil Sands announced late last month, in which PetroChina will acquire
60% in two oil sands projects in northeastern Alberta for $1.7 billion, with further plans to build a
pipeline to the coast to transport crude to China. China’s strategy has an eye on Australia.
On September 8, China Railway Materials closed deals to buy stakes in FerrAus and United
Minerals, two miners of iron ore in Australia, while China Guangdong Nuclear Power agreed to
acquire Energy Metals, a uranium explorer in the country. Half of Australia’s iron ore exports are
already exported to China’s steel mills, and more than half its wool is exported to the mainland as
well. New York Times.
September 9. China is stepping up efforts to internationalize its parochial currency, the yuan or
renminbi. That’s prompted concern about the future of the U.S. dollar, the dominant global
currency for trade and investment. But just how far can China push others to use the yuan?
One precedent for what China is doing with its currency is Japan, which also tried to broaden
international use of the yen in earlier decades as its economy took on greater global heft. Tomo
Kinoshita, an economist for Nomura, says Japan’s experience with the yen could help predict how
far China will get with the yuan, since the two economies are of similar size and share a heavy
focus on exports. Japanese companies had definite success in convincing many of their trading
partners to do business in the yen rather than the dollar – something that China is also now
starting to look at. But the use of yen in trade eventually hit an upper limit: according to
Nomura’s figures, the share of Japan’s exports that are settled in yen has been roughly stable for
the past two decades, at 35% to 40% of the total. Similarly, Japan has paid for about 20% to 25%
of its imports in yen for the last decade or so. Chinese exporters adjust their prices to match
prevailing levels in their target markets—what’s called pricing-to-market – to a similar degree as
exporters from Japan and the Czech Republic. That level is typically associated with 20% to 30%
of exports being priced in the exporter’s currency, they say, based on comparative figures from
other countries. So in the near term, an “upper bound” for the use of yuan in China’s exports is
likely to be about a third of total exports, the Hong Kong Monetary Authority paper concludes.
Wall Street Journal. Real Time Economics.
September 9. The World Bank issued its annual Doing Business report, which ranks 183
economies on the ease of doing business by comparing quantitative measures of regulations of the
life cycle of a small or medium-size enterprise. Regulations related to registering property,
employing workers, dealing with construction permits, and paying taxes are measured. Getting
electricity and worker protection were added to this year’s metrics. In 2008-2009 more
governments implemented regulatory reforms aimed at making it easier to do business than in any
year since 2004, when Doing Business started to track reforms through its indicators. Doing
Business recorded 287 such reforms in 131 economies between June 2008 and May 2009, 20%
more than in the year before. The top slots are occupied by the usual suspects: Singapore, New

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Zealand, Hong Kong, United States, United Kingdom, and Denmark are the easiest places to do
business. Each country was in the top six last year. Indonesia is the top reformer of business
regulations in the East Asia and Pacific region, but judicial reform is urgently needed to attract
new investment. Indonesia’s economy has grown at around 6% in recent years but lengthy,
uncertain legal processes and corruption within the judiciary have thwarted investment. The 2010
report said Indonesia was the region’s most improved and ranked it 122nd, up from 129th place the
previous year. Reuters/Forbes and World Bank Crisis Talk.
September 8. Gold bullion surged as high as $1,009.70 in New York, within 3% of the record of
$1,033.90 set in March 2008. Silver climbed to a 13-month high as a weaker dollar and concern
that inflation may accelerate boosted the appeal of precious metals. Gold is headed for a ninth
annual gain. Crude oil and all six industrial metals on the London Metal Exchange rallied as the
U.S. Dollar Index fell as much as 1.2% to an 11-month low. Raw materials typically rise when the
greenback falls. Equity indexes climbed from Tokyo to London and New York.
“The market thinks inflation is coming,” Leonard Kaplan, the president of Prospector Asset
Management in Evanston, Illinois, said by telephone. He has been trading gold for more than 30
years and believes gold won’t stay above $1,000 for long. “With interest rates so low, money is
chasing money and the dollar is getting murdered.” Bloomberg.
September 8. Lawyers and tax advisers from London to Hong Kong have had a surge in inquiries
from expatriate Americans worried about whether they have correctly declared offshore assets
ahead of the September 23 deadline. Concerns have been fuelled by the Swiss government’s
decision to reveal the names of 4,450 wealthy Americans who hold offshore accounts at UBS, the
country’s biggest bank. The U.S. Internal Revenue Service said that the deal underscored the U.S.
government’s determination to clamp down on tax evasion. A Senate committee has estimated
that the parking of assets offshore costs the United States $100 billion in lost taxes each year.
New IRS guidelines for individuals with untaxed offshore assets were announced on March 23.
By coming forward voluntarily, many taxpayers who are not already being investigated by the
IRS can cap their liability at six years of back taxes, interest and penalties – and avoid possible
criminal prosecution. Hong Kong and Singapore have indicated a willingness to implement
exchange of information agreements with other countries governing offshore accounts, according
to Withers. “Once these agreements enter into force it will make it far easier for other nations,
such as the U.S., to obtain information on account holders in these jurisdictions,” warned Kurt
Rademacher, a Hong Kong-based partner at Withers. Financial Times.
September 2. The U.S. Institute for Supply Management’s survey of factories and industry had
been edging higher this spring, as the blistering pace of economic declines began to level off. In
August, the group’s manufacturing index turned positive, rising to 52.9, from 48.9 in July. A
reading above 50 indicates expansion and growth; a number below 50 means economic
contraction. President Obama called the numbers “a sign that we’re on the path to economic
recovery.” Companies that make textiles, paper products, computers and electronics, appliances,
and chemicals were among 11 industry groups that said their business had grown in August. Still,
most industries were not hiring, an indication that the labor market remained weak. The
manufacturing employment index contracted again in August, although at a slower pace than in
past months. Four industry groups said their payrolls were growing while nine reported decreases.
Manufacturing jobs have been devastated by the recession, with some two million positions lost
since the downturn’s official beginning in December 2007. New York Times.

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September 2. European Union finance ministers will press for clearly defined restrictions on
bonus pay for bankers when they hold talks with their U.S. and other G20 counterparts this
month. “The bankers are partying like it’s 1999, and it’s 2009,” said Anders Borg, finance
minister of Sweden, which holds the EU’s rotating presidency. “Obviously, there’s a need for
stronger muscles and sharper teeth. It won’t be satisfactory for Europe to end up with broad
principles and guidelines.” Financial Times.
September 2. Senior International Monetary Fund and World Bank economists at a
Washington panel discussion on Tuesday said the world recovery was starting to gain
momentum, though a number of challenges remain. The IMF now expected the global economy
to expand at slightly less than 3% in 2010, said Jörg Decressin, an IMF forecaster, a upward
revision from the IMF’s July estimate of 2.5%. “The recovery is for real but it is very heavily
policy dependent,” he said at a session at the Carnegie Endowment for International Peace. At
some point, he said, private demand would have to replace the boost to the global economy from
government monetary and fiscal expansion. Hans Timmer, a World Bank forecaster, didn’t give
an estimate, but said the strength of the recovery depends “on how sustainable the rebound in
developing countries is.” He especially cited the role of China in boosting global demand. Philip
Suttle, head of global macroeconomic analyst at the Institute of International Finance, a trade
group of large global banks, said “the recovery is for real and it has a good six to nine months to
it.” The big question haunting the global economy, he said, was whether inflation would
unexpectedly climb and push the world again into recession. Another issue, he said, was whether
investors would pour money into developing countries, which are paying higher interest rates on
bonds than wealthy nations, potentially creating another asset bubble. Wall Street Journal’s Real
time Economics.
September 1. Nine of 10 U.S. cities are forced to cut spending as sales and income taxes decline
reports the National League of Cities. Future prospects look grim with property taxes expected to
drop in 2010 and 2011. To combat declining revenues, 62% of cities are delaying or canceling
infrastructure projects, the study found. That’s a 20 percentage point increase from the league’s
February status report. Some two-thirds of cities are laying off workers or instituting hiring
freezes, roughly the same figure as reported earlier this year. Cities got more bad news when a
federal report showed that metropolitan area unemployment worsened in nearly 200 places in
July. CNNMoney.com.
August 31. India’s gross domestic product accelerated to 6.1% from a year earlier in the AprilJune quarter from 5.8% in the previous quarter as government spending helped to overcome the
worst of the global downturn but drought threatens to stall the recovery. The worst effects of the
global financial crisis may have passed for Asia’s third-largest economy. India’s relatively low
dependence on exports meant that it weathered the global economic storm better than other
countries. Yet economists and policy makers now worry that the domestic economy is under
threat from weak rains, which could bring a drought, dent the recovery, and trigger food price
inflation. A drought could produce effects through the economy over the next half year, as
declining agricultural output reduces demand for transportation and storage, hits both exports and
domestic trade, and reduces incomes for hundreds of millions of Indians who rely on farming for
their livelihoods. While agriculture accounted for 16.3% of India’s GDP from April-June, some
65% of the population depend on it as their main source of income, according to Citigroup.
Monsoon rains from June 1 through August 19 are 26% below normal. Associated Press.
August 31. The Chinese government has been struggling to find enough infrastructure projects to
finance in Sub-Saharan Africa, according to the Business Day. The China-Africa Development

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Fund was founded in June 2007 after the 2006 Beijing Summit of the Forum on China-Africa Cooperation and established offices for the Southern African Development Community in
Johannesburg, South Africa in March 2009. However, the fund is finding it increasingly
challenging to fund infrastructure programs in most African states because of the “lack of
essential facilities like sound telecommunications systems.” According to a recent G20 report,
Africa’s saving grace in the aftermath of the global slowdown would be to “sustain adequate
levels of investment, especially in infrastructure.” However, “pre-existing resource constraints are
being exacerbated by a widening saving-investment gap.” Private funding, especially from
international investors, is thus of paramount importance and will require a definite commitment
from governments to promote private investment with prudent policies. Most African
governments have prioritized the diversification of their mostly resource-based economies, but
are constrained by a lack of resources, especially in shallow financial markets, experiencing a
drop-off in international funding in the global slowdown. These constraints to growth in African
economies are expected to continue for some time to come. IHS Global Insight.
August 31. Mauritius, Seychelles, Zimbabwe and Madagascar have signed an interim trade
agreement with the European Union (EU). These south-east African economies have had full
access to the European consumer market since 2008 (except for rice and sugar, with trade barriers
being gradually removed). The countries have agreed to phase out tariffs on all European
imported goods over the next 15 years. The agreement excludes trade on certain agricultural
products, such as milk, meat, vegetables, textiles, footwear and clothing. Zambia and the
Comoros have agreed to sign an interim agreement with the EU at a later date. The EU imports
mostly textiles, clothes, sugar, fish products and copper from Eastern and Southern Africa, while
European exports to the region consist mostly of mechanical and electrical machinery and
vehicles. Freer trade between south-east Africa and the EU will move the government tax
composition of these economies towards domestic corporate and individual tax sources. This
implies higher tax rates and new taxes over the longer term. IHS Global Insight.
August 31. The Croatian central budget in January–May 2009 posted a deficit of 4.553 billion
kuna/U.S. $810 million. The gap was a sharp, negative turnaround from the same period of 2008,
when the budget had been in surplus by 3.936 billion kuna/U.S. $824 million. Over the first five
months of 2009, budgetary revenues declined 8.6% year on year, undermined by a sharp decline
in economic activity, which caused tax revenues to fall 17.8% year on year. Meanwhile,
government expenditures grew at an annual rate of increase of 9.3%. Croatia remains on track to
post a deficit for the year as a whole of less than 4% of GDP, quite manageable in comparison to
other economies of the region in 2009. The Croatian government is coming under criticism for its
fiscal policy. Its 2009 budget plan was, from the outset, unrealistic, based on overly optimistic
growth expectations. This year, the government has attempted to arrest the sharp deterioration of
the fiscal balance. However, it has been loath to cut spending. Instead, taxes have been raised,
with the introduction at the beginning of August of a 4% “crisis” tax. According to KPMG
International, this makes Croatia the highest-taxed country in the world. The President protests
that any economic recovery will be undermined by the uncompetitive tax environment. An
overhaul in fiscal structure, slashing spending and allowing taxes to fall correspondingly, has
been sought for years. However, no government, regardless of which party has been in power, has
made any concerted effort to undertake this politically daunting task, even during years of
relatively robust growth, which could have provided the government cover for massive cuts to
social spending. Now, the political consequences of such an overhaul would be magnified and
thus politically impossible, even though lowering taxes would help the country’s economic
recovery. IHS Global Insight.

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August 28. The International Monetary Fund implemented a general allocation of Special
Drawing Rights, SDRs, equivalent to about U.S. $250 billion. This was the allocation initially
requested at the G-20 meeting this spring in London. It was formally approved by the IMF’s
Board of Governors on August 7, and is designed to provide more global liquidity to the world
economy by supplementing IMF members’ foreign exchange reserves. It represents a quick
multilateral response to the world financial crisis. Nearly $100 billion of this $250 billion will go
to emerging markets and developing countries, and over $18 billion to low-income countries.
This general allocation is made in proportion to members’ existing quotas and will count
immediately toward their reserves. Member nations can either hold them in their reserves or sell
all or part of their allocations to others in order to finance immediate hard currency imports. It is
also possible to buy SDRs from another member. Separately, the IMF will implement, on
September 9, a special, one-time allocation of 21.5 billion SDRs, about U.S. $33 billion. This
allocation, which is sometimes called the Fourth Amendment Allocation because it required an
amendment to the Fund’s Articles of Agreement, will mean that every member country has an
SDR allocation. IMF Press Briefing.
August 28. The IMF Executive Board completed the first review of the Latvian program. This
enabled immediate disbursement of about €195.2 million/U.S. $278.5 million, bringing the level
of total disbursements from the IMF under the stand-by arrangement to €780.7 million/U.S. $1.2
billion. IMF support for Latvia is part of a coordinated package together with the European
Union, the World Bank, Nordic countries and other program partners. The program was originally
approved in December 2008. Latvia’s economic strategy is centered around keeping the exchange
rate peg and achieving euro adoption as soon as possible. The very dramatic economic downturn
over the last few months required program revision. The most important is that the fiscal deficit
ceiling has been revised upward to up to 13% from the original target of 5%. This allows for 1%
of GDP in additional resources for social safety nets. The authorities are firmly committed to
putting the budget deficit on a rapidly declining path starting from 2010 and have outlined
measures to this effect. Corrective measures will be needed on the spending side, so there will be
some reduction in expenditures, but revenue measures will also be critical. The exact nature of
the budgetary changes will be subject to the next review mission. IMF.
August 28. Toyota will shut down the joint venture it operated with General Motors in Fremont,
California, in March 2010, eliminating 4,700 jobs. The plant, which makes Corolla compact cars
and Tacoma pickups for Toyota and, until last week, Pontiac Vibe hatchbacks for GM, was the
Japanese company’s only U.S. auto plant with a union workforce. Sagging sales and GM’s
bankruptcy are blamed. Operated as a joint venture between Toyota and the former General
Motors Corp. since 1984, the plant saw its future put in doubt last month when GM pulled out of
the arrangement as part of its bankruptcy reorganization. In addition to wiping out the jobs
directly tied to the plant, closing the facility will send ripples through suppliers that make
components for the factory and nearby stores, restaurants, and bars and could cost more than
40,000 jobs. Closing the assembly line in Fremont marks the end of large-scale auto
manufacturing in California, which over the years boasted a dozen or more plants building
vehicles ranging from Studebakers to Camaros. Toyota garnered the biggest share of the $3billion, taxpayer-funded “cash for clunkers” program. The Corolla—built in Fremont and a plant
in Canada—was the program’s top-selling model. Los Angeles Times.
August 28. The inspector general of the U.S. Securities and Exchange Commission said in a
report that the SEC has “historically been slow to act” in regulating the nation’s credit ratings
agencies before the financial crisis and recommended a broad range of improvements to the
SEC’s oversight. The report also called for further evaluation of several controversial policies,

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such as the ability of debt issuers to shop among different rating agencies for the highest possible
rating. The financial crisis raised serious questions about the rating agencies, including Moody’s,
Fitch and Standard and Poor’s, which often gave top ratings to mortgage-backed securities that
now may be worthless. The audit report found that the commission delayed adopting rules on the
rating agencies, and sometimes failed to follow the rules that existed.
August 28. Iceland decided Friday to repay Britain and the Netherlands the $5.7 billion it
borrowed to compensate savers in those countries who lost money in the collapse of an Icelandic
Internet bank last year. The Icelandic government overcame heavy opposition to the
compensation plan, securing backing from a majority of lawmakers by pledging to link the pace
of debt repayment to the rate of growth in the island nation. Iceland will begin repaying £2.3
billion (U.S. $3.8 billion) to Britain and 1.3 billion euros ($1.9 billion) to the Netherlands from
2016, with payments spread over nine years. Iceland must settle the claims arising from the
collapse of the Icesave online bank before it can draw on $4.6 billion in promised bailout funds
from the International Monetary Fund and Nordic countries. Iceland was an early victim of the
credit crunch, which sent its debt-fueled economy into a tailspin. Landsbanki collapsed in
October, as did Glitnir and Kaupthing, the country’s two other leading banks. New York Times.
August 27. U.S. Gross Domestic Product shrank at a seasonally adjusted 1% annual rate from
April through June, unrevised from an estimate on second-quarter GDP a month ago. This was far
less than the 6.4% decline experienced in the first quarter of 2009. Wall Street economists
expected the second quarter revision to be a decline of 1.5%. Corporate earnings rose by the most
in four years, the department also said. This means that the U.S. economy took a first step toward
recovering from the worst recession since the 1930s in the second quarter as companies reduced
inventories, spending started to climb and profits grew. Bloomberg, Wall Street Journal.
August 27. The Federal Deposit Insurance Corporation, FDIC, revealed that the number of U.S.
banks at risk of failing reached 416 during the second quarter. The numbers were published as
part of a broader survey on the nation’s banking system. The number of institutions on the
government’s so-called “problem bank” list surpassed 400 in the latest quarter, climbing to its
highest level in 15 years, since June 1994. The FDIC, which insures bank deposits, has been hit
by a wave of relatively large and costly failures recently, prompting concerns about the size of the
agency’s insurance fund. The FDIC reported that the fund decreased by $2.6 billion, or 20%,
during the quarter to $10.4 billion. The number of banks under scrutiny by regulators has moved
steadily higher since the recession began in late 2007. A year ago, the number of banks on the
FDIC’s watch list was 117. At the end of this year’s first quarter, the number stood at 305.
CNNMoney.com.
August 27. The U.S. banking system will lose some 1,000 institutions over the next two years,
said John Kanas, whose private equity firm bought BankUnited of Florida in May. “We’ve
already lost 81 this year,” Kanas told CNBC. “The numbers are climbing every day. Many of
these institutions nobody’s ever heard of. They're smaller companies.” Failed banks tend to be
smaller and private, which exacerbates the problem for small business borrowers, said Kanas, the
former chairman and CEO of North Fork bank. “Government money has propped up the very
large institutions as a result of the stimulus package,” he said. “There’s really very little lifeline
available for the small institutions that are suffering.” CNBC.com.
August 27. European companies are objecting against proposed reforms of the derivatives
markets, saying that new rules requiring contracts to be routed through clearing houses could
impose a huge drain on corporate cash. U.S. companies ranging from Caterpillar and Boeing to

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3M – which use derivatives contracts to hedge interest rate, currency and commodity price risks –
have been lobbying lawmakers to highlight the potential higher costs of a proposed overhaul of
rules on derivatives. Financial Times.
August 26. Toyota Motor Corp, the world’s largest automaker, said it would halt a production
line in Japan as it cuts excess capacity to return to profitability amid an industrywide sales slump.
Car plants around the world are idle or running below capacity as the industry copes with a slide
in sales that sent General Motors Co and Chrysler Group LLC into bankruptcy and has Toyota
headed for a record loss this year. Total cuts could reach 700,000 cars, or 7% of Toyota’s global
capacity. Nikkei business daily reported that Toyota planned to reduce its global capacity by 10%,
or 1 million vehicles, as early as the current financial year to March 2010. Reuters.
August 26. Eighteen of the 20 cities tracked by Standard & Poor’s Case-Shiller U.S. Home Price
Index showed improvement in June, up from eight in May, four in April and only one in March.
In a convincing sign that the worst housing slump of modern times is coming to an end, prices are
starting to rise in nearly all of the nation’s large cities. The trend, displayed in newly released data
for June, is both pronounced and wide-ranging. It is affecting the high-priced coastal cities, with a
3.8% jump for the month in San Francisco and a 2.6% rise in Boston; the industrial Midwest,
with Cleveland prices up 4.2%; and even the epicenter of the crash, the Sun Belt, with Phoenix
homes up 1.1%. These numbers are not seasonally adjusted. Said Karl E. Case, a co-developer of
the index, “It appears that the housing market is stabilizing quicker than people thought it would.”
Further confirmation that the market is recovering came in the Federal Housing Finance Agency’s
house price index, which was also released Tuesday. It rose 0.5% in June after a revised increase
of 0.6% in May. The government index is based on price information from mortgages acquired by
Fannie Mae and Freddie Mac, the government’s housing finance arms, which means it has fewer
high-priced houses than Case-Shiller. New York Times.
August 25. The White House Office of Management and Budget (OMB) now forecasts a $9
trillion U.S. federal deficit from 2010-1019. The Congressional Budget Office (CBO) in its
Budget and Economic Outlook: An Update, http://www.cbo.org/ftpdocs/105xx/doc10521/08-25BudgetUpdate.pdf, is more optimistic, projecting a 10-year budget deficit of $7.14 trillion. The
Congressional Budget Office (CBO) estimates that the federal budget deficit for 2009 will total
$1.6 trillion, which, at 11.2% of gross domestic product (GDP), will be the highest since World
War II. That deficit figure results from a combination of weak revenues and elevated spending
associated with the economic downturn and financial turmoil. The deficit has been boosted by
various federal policies implemented in response, including the stimulus legislation and aid for
the financial, housing, and automotive sectors. New American Foundation says the U.S. needs
renewed economic growth—not austerity. That is the true lesson to be drawn from new
government projections of long-term federal budget deficits. Congressional Budget Office, New
American Foundation.
August 18. Israel emerges from recession with GDP growth of 1% in Q2, after two quarters of
negative growth. Seasonally adjusted GDP rose at a 1% annual rate. The second quarter’s growth
was driven in large part by an increase in exports of goods and services which rose at a 5.8%
annual rate. Excluding diamonds and start-up companies, exports rose at an even higher rate of
7.1%. IHS Global Insight.
August 18. U.S. industrial production increased by 0.5% in July, while manufacturing output
rose by 1.0%. The industrial production report was good for the first time in almost a year and a

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half, with no hidden causes for concern. Total output of mines, utilities, and factories rose 0.5%,
and would have been much better if electric utilities did not have to dial back output because of
the milder-than-normal summer, pushing utility output down 2.4%. The motor vehicle industry
provided the biggest upward push to output, and boosted the manufacturing sector to a 1.0% gain.
The good showings were not confined to vehicles. Core manufacturing (excluding high
technology and motor vehicles) recorded an output gain of 0.1%. While that seems tepid, this was
only the second increase since March 2008; the other was a feeble bounce-back last October,
when refining and chemicals were recovering from hurricane outages. The output gains lifted
total capacity utilization to 68.5%, and the manufacturing operating rate to 65.4%. Both readings
were noticeable improvements over June, but still 11–12 percentage points below a year ago. IHS
Global Insight.
August 17. Demand for U.S. Treasuries grew in June, despite sales by China. Foreign investors
bought $90.7 billion more in long-term U.S. securities than they sold in June. In May, foreign
investors sold $19.4 billion more securities than they bought. China, the largest U.S. creditor,
reduced its June U.S. Treasury holdings by $25.1 billion or 3.1% to $776.4 billion from May’s
$801.5 billion. China Daily reported the 3.1% decrease was the largest percentage cut in nine
years. China’s June holdings were still larger than April’s $763.5 billion and $767.9 billion in
March. Japan, the second largest holder of U.S. Treasuries, increased its holdings to $711.8
billion, up $34.6 billion from May. Britain, the third largest holder, held $214 billion in June, up
$50.2 billion from May. UPI.com and Wall Street Journal’s Real Time Economics.
August 17. Economists typically say every recession is different in its own way, but recoveries
are all alike, driven by the housing sector and consumer spending. If so, this recovery may be
on very shaky ground. Consumer spending, roughly 70% of economic activity, and housing,
about 20% of GDP, have been hit with the equivalent of 100-year storms. “Is the consumer back
in the game? No, not yet,” says John J. Castellani, chief economist and president of the business
roundtable. “When we look at our members who are tied to the housing market, they are nowhere
near a recovery, while our [consumer products] companies are still moving to downscale.”
Between June 2007 and December 2008, for instance, inflation-adjusted personal wealth fell by
22.8%—the most since the Federal Reserve began collecting data almost 60 years ago. Some $6
trillion in housing wealth alone was lost in 2008. Consumer spending shrank for two consecutive
quarters for the first time in half a century. “Consumers simply have to retrench, save more, spend
less,” says David Jones of DMJ Advisors. “That in itself will give us a much slower, longer and
uneven recovery.” CNBC.com.
August 17. Japan returned to growth in the second quarter, as gross domestic product expanded
a seasonally adjusted 0.9% quarter on quarter between April and June. This follows a year of
contraction, and is its first rise since the first quarter of 2008 and the equivalent of 3.7% growth
on an annual basis. Economists warned that the recovery remained vulnerable to any faltering in
export demand or tightening of the government’s fiscal stimulus. Financial Times.
August 17. U.S. Banks and other financial institutions are lobbying against fair-value
accounting for their asset holdings. They claim many of their assets are not impaired, that they
intend to hold them to maturity anyway and that recent transaction prices reflect distressed sales
into an illiquid market, not what the assets are actually worth. Legislatures and regulators support
these arguments, preferring to conceal depressed asset prices rather than deal with the
consequences of insolvent banks. This is not the way forward. While regulators and legislators
are keen to find simple solutions to complex problems, allowing financial institutions to ignore
market transactions is a bad idea. Financial Times.

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August 17. Being in debt is about to get a lot more expensive for millions of Americans. Credit
card issuers have been rushing to raise rates in advance of August 20, when the first provisions of
the U.S. Credit Card Accountability Responsibility and Disclosure Act (CARD) will go into
effect, with other protections starting in February 2010. Starting this week, card issuers need to
give you more time to pay your bills. Also, instead of mailing bills 14 days before the due date,
issuers must send bills 21 days in advance of the payment date. That will mean fewer people will
get hit with late fees because of postal delays. Another provision effective this week requires card
issuers to give you 45 days’ notice when they plan to raise your rate, instead of the current 15-day
advance notice. That’s behind the rash of notifications sent in recent weeks, advising you that no
matter what your credit history, you'll be paying higher rates. Next year’s requirements include a
ban on marketing to students or anyone under age 21. They'll be required to have a parent or
guardian as a co-signer. Individual bankruptcies are up 36% for the first half of this year,
compared with last year. And that translates into more defaults on card balances. Bank of
America, the largest bank in the country, reported its default rate jumped to 13.8% in June from
12.5% in May. Other issuers such as JPMorgan Chase, Citigroup, Capitol One, Discover and
American Express have reported default rates around the 10% level. Chicago Sun Times.
August 17. China attracted foreign direct investment of $5.36 billion in July, a 35.7% decline
from a year earlier, according to data released Monday by the Ministry of Commerce. July’s
figures marked the tenth straight monthly decline, and far outpaced June’s one-year drop of 6.8%.
In the January-July period, foreign direct investment totaled $48.3 billion, a decrease of 20.3%
from that period a year earlier. Dow Jones Newswires.
August 16. Nearly three years into the deepest U.S. housing slump in generations, lenders are
modifying only a small number of problem mortgages, and rising foreclosures are restraining
the economy’s recovery. The Obama administration has stepped up pressure on lenders and their
mortgage servicers, who act as bill collectors on behalf of investors who own mortgage bonds.
The administration on August 4 unveiled the first of what will be monthly “name and shame”
exercises, publishing data on the loan-modification efforts of about three dozen companies. The
administration thinks that about 2.7 million U.S. homeowners are at least two months behind on
their mortgage payments, roughly equal to the population of Kansas. Yet only 9% of eligible
borrowers had been offered trial loan modifications through June. Borrowers from across the
nation say they were encouraged, directly or indirectly, by their lenders to fall behind on their
mortgage payments in order to qualify for loan modifications. The modifications never came. For
example, 47% of South Florida homeowners are behind on mortgages. The U.S. mortgage
lending industry reports in June 2009 it helped about 10% of eligible homeowners complete
“workout plans” to stay in their homes. Of 3.1 million eligible homeowners, with loans 60 days
or more past due, 310,000 completed plans. Of the 3.1 million eligible homeowners, 96,000, or
3%, received loan modifications. McClatchy Washington Bureau.
August 14. German GDP expanded 0.3% in the second quarter, the first increase since the first
quarter of 2008. This represents a clear reversal from the 3.5% contraction in the first quarter,
which was a post-reunification record low. Net exports boosted activity as imports fell more
rapidly than exports, while consumer spending and housing investment also provided positive
growth impulses. IHS Global Insight.
August 14. Hong Kong’s economy grew by 3.3% on a seasonally adjusted quarter-to-quarter
basis in the second quarter of 2009. The territory benefited from strong growth in mainland China
and better conditions in the West, the government said Friday. Higher demand for Hong Kong’s
exports, particularly from mainland China, where massive stimulus spending and relaxed

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monetary policy is driving growth, helped explain the turnaround. Exports dropped 12.4% in the
second quarter compared to the same period last year. Washington Post.
August 3. America’s manufacturing base has not entirely vanished. Americans continue to
make things. Manufacturing employment has shrunk considerably since peaking in the late 1970s,
but this has largely been a product of productivity growth. America remains the world’s largest
manufacturer, responsible for 20% of global manufacturing. China’s share is currently around
12%. This ratio has been moving steadily in favor of China, and it seems fairly clear that within a
decade China’s share will overtake America's. America, with 5% of the world’s population,
produces 20% of the world’s manufactures; China, with 20% of the world’s population produces
12% of the world manufactures. Developed nations tend to devote between 20% and 30% of
employment to industry; China as a developing nation employs 50% of workers to industry. Free
Exchange Economist.com.
July 31. China is spearheading the recovery in both the auto market and the global economy. Car
sales in China accelerated to a 48% year on year surge in June, lifting purchases above an
annualized 7.0 million units for the first time on record, and well above the 5.9 million unit peak
reached in March 2008 prior to the sharp global economic downturn. Noteworthy, our data only
include cars. If trucks and buses are included, vehicle purchases in China are on the way to
exceed 10.5 million units this year and surpass the United States as the world’s largest vehicle
market…. Auto sales in China have been increasing rapidly since 2001, and this pace is expected
to continue well into the next decade. General Motors might be well positioned to take advantage
of this growth. GM—the top-selling brand in China—padded its lead this year, with first-half
sales soaring 38% to 814,000 units—a level fast approaching the 948,000 vehicles it sold in the
United States. As recently as 2004, GM sold roughly 10 vehicles in the United States for each
model sold in China. Highlighting the importance of China in GM’s revival strategy, the company
expects to double its sales to 2 million units over the next five years, and plans to launch more
than 30 new models in the country. Other automakers, including Nissan and Honda, also continue
to expand their assembly facilities in China. Scotiabank. Global Auto Report.
July 31. French recession less severe but recovery tepid, IMF reports. The IMF projects French
real GDP to drop by 3% in 2009, followed by a gradual recovery starting in 2010. France has
been shielded from the worst effects of the crisis by its generous social safety net, which has
protected domestic demand, and the country’s limited reliance on exports, which has shielded it
from the worst effects of falling global demand. Relatively rigid labor markets and high social
protection are likely to slow the pace of recovery. Credit default swap spreads of French banks
have increased considerably, but somewhat less than for other European banks. The relative
resilience of French banks can be partly attributed to their conservative lending practices and to
the consistent supervision of all lending institutions. The authorities also undertook a number of
measures to recapitalize banks and support liquidity. This has resulted in no French bank coming
under majority state ownership. Strong automatic stabilizers and appropriate fiscal stimulus
measures have helped cushion the downturn in France. A fiscal stimulus package—worth more
than 1½ percent of GDP for 2009–10—contains measures that are mostly front loaded and
relatively well diversified, with an emphasis on temporary investment expenditures and various
tax breaks. IMF Survey Magazine, by Erik De Vrijer and Boriana Yontcheva.
July 31. U.S. real Gross Domestic Product declined 1.0% in the second quarter, much shallower
than the 6.4% decline in the first quarter. These figures are consistent with a return to modest
growth in the second half of 2009. However, revised historical data show that the recession has

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been deeper than previously thought and weak positive growth in the second half may not be
sufficient to prevent employment from continuing to fall.
Major factors for U.S. second quarter GDP growth include:
•

Business fixed investment and exports declined much less steeply than in the first quarter.

• Government spending bounced higher, probably in part due to the stimulus package, although
the biggest contributor was a sharp rise in defense spending, often volatile.
•

Inventories fell more sharply than in the first quarter, but were a smaller drag on growth.

• Foreign trade boosted growth as imports fell faster than exports. Some of the import decline
reflects the big drop in inventories.
•

Consumer spending fell 1.2%, after a small 0.6% increase in the first quarter.

•

Inflation was near zero. The GDP price index rose 0.2%.

Historical revision reveals this recession to be deeper than previously thought. The decline in real
GDP from its peak in the second quarter of 2008 stands at 3.9%, which is the most severe drop in
postwar history. Real GDP rose just 0.4% in calendar 2008, rather than rising 1.1% as previously
announced. Consumer spending declined 0.2% in calendar 2008, instead of rising 0.2% as
previously announced. The saving rate in 2008 was 2.7%, rather than 1.8%. Previous years were
also revised up. However, the saving rate for the first half of 2009 is lower than previously
reported because personal incomes decreased more than previously thought, not good for future
spending prospects. IHS Global Insight.
July 31. U.S. Treasury Secretary Timothy Geithner issued a stern warning to U.S. regulators to
end turf battles and support President Obama’s plan to overhaul financial regulation. Geithner
told Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman
Mary Schapiro, and Federal Deposit Insurance Corp. Chairman Sheila Bair to end public
criticism and stop airing concerns over their potential loss of authority. A Treasury Department
spokesman said the message to regulators was to work together to get reform done. Reuters.
July 8-10. The G8 Summit in Italy included a dialogue with five developing countries (Brazil,
China, India, Mexico, and South Africa). The summit resulted in declarations or statements
dealing with Responsible leadership for a sustainable future, Non Proliferation, Counter
Terrorism, Promoting the global agenda, Energy and Climate, G8-Africa Partnership on Water
and Sanitation, and Global Food Security. During the summit, on July 9, China pressed for new
international exchange rules. China criticized the dominant role of the U.S. dollar as a global
reserve currency and urged diversification of the reserve currency system aiming at relatively
stable exchange rates among leading currencies. Chinese state councilor Dai Bingguo’s remarks
caused concern among western leaders, some of whom fear that even discussion of long-term
currency issues could unsettle markets and undercut economic recovery. (G-8 Chair’s Summary
and Financial Times)
July 10. A new General Motors emerged from bankruptcy protection (filed for bankruptcy on
June 1) as a leaner automaker and with 60.8% government ownership. The new company will
include the Chevrolet, Cadillac, Buick, and GMC Brands, with its overseas operations. About

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4,100 of its 6,000 U.S. dealerships will remain with the new company, while other dealerships
will be shed over the next 14 months. The company will have only a fraction of the $54 billion in
unsecured debt it previously held. Other holdings, contracts and liabilities that GM needed to
divest as part of the bankruptcy process will be held by the old company, to be known as Motors
Liquidation Co. (GMGMQ). The process of disposing of those assets and liabilities could take
two to three years. These holdings include about 16 U.S. plants and facilities that employ about
20,000 workers. Some of the plants will stay open through 2012. The federal government will
initially hold 60.8% of the stock in the new company, with a union-controlled health care trust
fund owning 17.5%, the Canadian and Ontario governments owning 11.7% and bondholders of
the old GM eventually getting about 10%. (CNNMoney.com)
July 10. Treasury Secretary Timothy Geithner urged Congress to rein in the $592 trillion
derivatives market with new U.S. laws that are “difficult to evade.” The complexity of over-thecounter derivatives contracts and industry growth let corporations take on excessive risk and
caused a “very damaging wave of deleveraging” that exacerbated the global credit crisis, Geithner
said in prepared testimony at a joint hearing of the House Agriculture and Financial Services
committees. Geithner repeated the President’s call to force “standardized” contracts onto
exchanges or regulated trading platforms, and regulate all dealers. Contracts would be subject to
new disclosure rules, and “conservative” capital and margin requirements, as well as businessconduct standards, would be imposed on market participants. The market, which grew almost
seven-fold since 2000, complicated government efforts throughout the credit crisis to assess
potential losses at U.S. banks and corporations because regulators lacked adequate data to
measure their risk, Geithner said. (Bloomberg)
July 9. The U.S. House of Representatives passed 111th Congress bill H.R. 3081 that contained
H.Amdt. 311, a provision designed to overrule the President with respect to his signing statement
of June 24, 2009. That Presidential statement rejected certain congressional conditions on the
funding for the International Monetary Fund contained in 111th Congress bill H.R. 2346, The
Supplemental Appropriations Act, 2009, P.L. 111-32. (CQ Today)
July 9. A report from the McKinsey Global Institute (MGI) found that big oil investors and
Asia’s central banks and sovereign wealth funds are poised to grow twice as fast as other
institutional investors, underscoring how financial power is continuing to shift away from the
West. According to MGI, petrodollar investors—including central banks, sovereign wealth funds,
and individual magnates based mostly in the Middle East and Russia—will see the value of their
foreign assets soar to at least $9 trillion by 2013, up from an estimated $5 trillion at the end of
2008. Similarly, foreign financial assets held by Asia’s sovereign investors will collectively swell
to $7.5 trillion by 2013, up from $4.8 trillion in 2008. The projected rate of growth between 2009
and 2013 will be the slowest since 2000, but, “impressive” nonetheless.
What explains these two group’s ability to sail right through financial turmoil that wrecked some
of the West’s biggest and boldest investors? Mostly, it’s the nature of the assets they hold. As the
economy rebounds, oil prices will go up responding to growing demand for gasoline products tied
to greater economic activity. Likewise, when global trade picks up again, Asian reserves will
resume building up, reflecting those countries’ ample trade surpluses. In other words, both
petrodollar and Asian investors have a hedge over other institutional investors not so much
because of the investment decisions they’ll make but because their existing portfolios will benefit
from “structural flows that will bring money in,” as the world economy heads toward recovery.

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At least some of these structural advantages may wind down in the long run –China, for example,
is slowly steering its economy more towards satisfying domestic demand—but in the short-term,
they’ll help tick the financial power balance increasingly toward the economic power centers in
the developing world. One risk connected to continued growth in petrodollars and Asian
sovereign investment assets is that so much idle money will end up, again, feeding assets bubbles
around the world as it did in the run-up to the current recession, warns the MGI report. (Wall
Street Journal—Real Time Economics)
July 8. The International Monetary Fund (IMF) and Canada have signed an agreement to
provide the Fund with up to the equivalent of US$10 billion/about SDR 6.5 billion. The Fund can
now add these resources to those already available from borrowing agreements with Japan and
Norway to provide balance of payments assistance to its members in the current crisis. (IMF)
July 6. The world’s top wealth management firms were reported by Reuters from a survey of
14,000 private bankers and 7,000 wealthy individuals by Scorpio Partnership. Private wealth
managed by banks and investment managers around the world dropped nearly 17% to $14.5
trillion in 2008 from 2007. (CNBC.com)
Top 10 Wealth Managers
Rank Bank
Assets in Million $
1 Bank of America
1,501
2 UBS
1,393
3 Citi
1,320
4 Wells Fargo
1,000
5 Credit Suisse
612
6 JPMorgan
552
7 Morgan Stanley
522
8 HSBC
352
9 Deutsche Bank
231
10 Goldman Sachs
215
Source: Scorpio Partnership via Reuters via CNBC.com

July 6. U.S. manufacturing output from factories has contracted for four consecutive quarters
and analysts now expect manufacturing output to fall as much as 12% this year, the worst
contraction since 1946. Nearly 1.7 million manufacturing workers—or one in eight—have lost
their jobs in the last 18 months alone. (Reuters)
July 5. A bankruptcy judge said late Sunday, July 5, that General Motors Corporation (GM)
can sell the bulk of its assets to a new government-backed company, clearing the way for the
automaker to quickly emerge from bankruptcy protection. GM and the government are reportedly
preparing to complete the sale transaction within this week. Chrysler’s assets were recently sold
to a new company led by Italian automaker Fiat. If GM is able to execute its sale this week, both
automakers would have completed their trips through bankruptcy in about 40 days—an unusually
speedy process. The government and GM have argued that a quick sale was critical to preserve
the automaker’s value. (AP and Washington Post)
July 2. The American economy lost 467,000 jobs in June and the unemployment rate edged up
to 9.5% in a sobering indication that the most painful downturn since the Great Depression
continues. The number of unemployed persons, 14.7 million and the unemployment rate (9.5%)
were little changed in June. Since the start of the recession in December 2007, the number of

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unemployed persons has increased by 7.2 million, and the unemployment rate has risen by 4.6
percentage points. “The numbers are indicative of a continued, very severe recession,” said Stuart
G. Hoffman, chief economist at PNC Financial Services Group in Pittsburgh. (U.S. Bureau of
Labor Statistics and New York Times)
July 2. Eurozone unemployment rose above 15 million in May; unemployment rate at 10 year
high of 9.5%, the highest level since February 1999. The number of jobless across the Eurozone
spiked up by a further 273,000 in May. This followed increases of 398,000 in April and 423,000
in March. May witnessed the 14th successive monthly rise in unemployment. This took the
number of Eurozone jobless up to 15.0 million, the highest level since the bloc’s inception in
January 1999. It was also up by 3.95 million from the five-and-a-half-year low of 11.063 million
seen in March 2008. (IHS Global Insight)
July 2. The Federal Deposit Insurance Corporation (FDIC) plans to issue new rules that
could make it slightly easier for private equity firms to buy failed banks. Under a new directive
the agency is expected to demand that investment firms like the Carlyle Group or Kohlberg
Kravis Roberts provide support to the banks they acquire if the banks get into more trouble and
need additional capital. The new rules represent a balancing act for the F.D.I.C, which is
responsible for protecting depositors from losses. Government officials have been eager to recruit
private investors to stretch out Congressional bail-outs. Bank regulators remain concerned about
permitting comparatively high-risk investor groups take control of banks with billions of dollars
in government-guaranteed deposits. The agency has seized 45 failing banks this year, and more
than 60 since last fall. (New York Times)
July 2. China’s tax administration reports that the total value-added tax (VAT) refund for
exporting goods rose 23.4% year on year during the first five months, hitting 290 billion
yuan/U.S.$42.5 billion, as a result of progressive rebate rate increases since last year. China has
introduced seven consecutive export tax rebate hikes since the second half of last year to rein in
the freefall of the country’s exports. (IHS Global Insight)
July 1. Planned job cuts announced by U.S. employers totaled 74,393 in June, down 33% from
111,182 in May, according to a report released on Wednesday by global outplacement firm
Challenger, Gray & Christmas, Inc. June marked the fifth consecutive month of declining planned
layoffs at U.S. firms, hitting the lowest level since March 2008 and providing another hopeful
sign that the U.S. economy is attempting to end its worst recession in decades. (Reuters)
July 1. The contraction in euro zone manufacturing output moderated for the fourth
consecutive month in June, a fresh sign that the severe economic downturn in the currency block
is gradually bottoming out, final data from Markit Economics showed. However, there were
marked differences in the pace of recovery in the region’s largest economies, with Germany,
Spain, and Italy still suffering sharp downturns in manufacturing, while France and the
Netherlands moved closer to stabilization. (Wall Street Journal)
July 1. Asian economic data from Japan, China and South Korea indicate possible stabilization,
or a hesitant steps with a considerable distance to full recovery. In Japan, the Tankan survey of
big manufacturers, conducted quarterly by the Bank of Japan, bounced back from a record low it
hit in March, recording minus 48 in its June survey. Below 50 indicates economic recession,
while above 50 indicates growth. In China, an important official purchasing managers’ index,
rose for the fourth month in a row in June. And South Korea reported that exports in June were
11.3% lower than a year earlier, up from a 28.5% fall recorded in May. (New York Times)

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July 1. Home prices in 20 major U.S. metropolitan areas fell in April at a slower pace than
forecast, the S&P/Case-Shiller home- price index showed today. Today’s Case-Shiller numbers
are the latest sign that that the worst of the housing slump may be passing. Sales of existing
homes posted gains in April and May, while housing starts jumped in May from a record low.
Home prices saw a “striking improvement in the rate of decline” in April and trading in funds
launched today indicates investors believe the U.S. housing slump is nearing a bottom, said Yale
University economist Robert Shiller. “At this point, people are thinking the fall is over,” Shiller,
co-founder of the home price index that bears his name, said in a Bloomberg Radio interview
today. “The market is predicting the declines are over.” (Bloomberg)
July 1. California’s lawmakers failed to agree on a balanced budget by the start of its new fiscal
year, clearing the way to suspend payments owed to the state’s vendors and local agencies, who
instead will get “IOU” notes promising payment. The notes will mark the first time in 17 years
the most populous U.S. state’s government will have to resort to the unusual and dramatic
measure. Democrats who control the legislature could not convince Republicans late Tuesday
night to back their plans to tackle a $24.3 billion budget shortfall or a stopgap effort to ward off
the IOUs. The two sides agree on the need for spending cuts but are split over whether to raise
taxes. Democrats have pushed for new revenues while Republican lawmakers and Governor
Arnold Schwarzenegger, also a Republican, have ruled out tax increases. (CNBC)
July 1. The Turkish economy declined by 13.8% year on year in the first quarter of 2009. The
drop was the largest ever recorded for the country. This follows a 6.2% year on year fourthquarter decline, placing the Turkish economy officially in recession. This deep contraction is
among the steepest in the region, surpassed by only Estonia and Latvia. (IHS Global Insight)
July 1. Ukraine’s GDP dropped by 20.3% in the first quarter, following a decline by 7.9% in the
final quarter 2008. The first quarter’s decline was the steepest since 1994, when the economy
slumped by 22.3% for the year as a whole. The key driving force for the downturn was gross
fixed capital formation, which fell -48.7% year on year. (IHS Global Insight)
July 1. China granted a U.S. $950 million credit line to Zimbabwe. According to Agence
France-Presse, the loan will be used primarily in assisting the Zimbabwean government to rebuild
its shattered economy, which is expected to cost around US$10 billion in the near term. The
Zimbabwean prime minister also received pledges of US$500 million from Europe and the
United States. (IHS Global Insight)
June 30. The United Kingdom’s first quarter GDP contraction was deeper than previously
reported at 2.4% quarter on quarter and 4.9% year on year. These statistics represent the sharpest
decline since the second quarter of 1958 and the deepest since quarterly records began in 1948.
Consumer spending, investment, exports, and imports all fell substantially and inventories were
slashed. The revised data show that the recession began in the second quarter of 2008 rather than
the third, and has been deeper than previously thought. Problems unique to the United Kingdom
included the sharp housing-market downturn, high levels of consumer debt, and the relative
importance of the financial sector.
June 30. In the first quarter of 2009, Croatian GDP shrank by 6.7% year-on-year, its greatest
economic contraction in over 16 years. This represents its most severe economic downturn since
its post-Yugoslav violence in 1992. The Croatian economy was undermined by severe downturns
in household consumption and fixed capital formation. Exports of goods and services dropped
14.2% year on year. Imports of goods and services fell an even sharper 20.9% year on year. The

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Croatian kuna depreciated by 1.8% over this period. Lack of export orders forced manufacturers
to begin laying off thousands of workers.
June 30. The International Monetary Fund (IMF) approved an increase of 40% in financial
assistance for Belarus, bringing total support to some US$3.5 billion. The increase in financial
support of US$679 million will supply Belarus with vital liquidity relief. This increase signals the
IMF’s trust in Belarus’s ability and willingness to pursue responsible macroeconomic policy and
further structural reforms. In the longer term, challenges remain extensive and economic and
financial risks high.
June 30. Iran was reported to plan to scrap domestic gasoline subsidies for private vehicles. No
time frame for implementation was given. It was announced that the government would still
provide gasoline subsidies for fishing vessels and domestic trucks. Iranians currently purchase up
to 20 gallons per month at the subsidized price of US$0.40 per gallon, and unlimited quantities at
$1.60 per gallon. Iran’s gasoline imports of 130,000 barrels per day and profitable crude oil
exports are considered to be potential sanctions targets over Iran’s nuclear program.
June 29. Kosovo formally joined the IMF and World Bank. This gives Kosovo increased
international legitimacy, which is important since support for its 2008 unilateral declaration of
independence has been questioned by some. It is hoped that membership in the international
financial institutions will bring new investment to the country, the poorest in Europe. It suffers
widespread corruption and massive infrastructure problems. Kosovo has an unemployment rate
near 60%, and a massive trade deficit. Almost half its population lives in poverty.
June 26. United States real GDP declined a revised 5.5% in the first quarter. Profits from current
production increased US$48.1 billion, or increased 3.8% quarter on quarter. It is the first quarterly
increase since the second quarter of 2007. All profits came from the financial sector. Earnings in
other industries declined.
June 26. The French gross domestic product contracted by 1.2% quarter on quarter during the
first three months of 2009. This follows a revised contraction of 1.4% during the final quarter of
2008, and falls of 0.2% and 0.4% during the third and second quarters of last year. Investment
and exports continued to perform particularly badly during the first quarter.
June 26. New Zealand’s gross domestic product contracted 0.7% quarter-on-quarter in the three
months through March and by 2.2% for the year, marking it as the deepest recession on record. In
March growth contracted for the fifth consecutive quarter. A slump in domestic demand despite
positive net exports has driven New Zealand’s economic drop.
June 25. American International Group (AIG) announced that it has reached a deal to reduce its
debt to the Federal Reserve Bank of New York by $25 billion. AIG said that it would give the
New York Fed preferred stakes in Asian-based American International Assurance (AIA) and
American Life Insurance Company (Alico), which operates in more than 50 countries. Under the
agreement, AIG will split off AIA and Alico into separate company-owned entities called “special
purpose vehicles,” or SPVs. The New York Fed will receive preferred shares now valued at $25
billion—$16 billion in AIA and $9 billion in Alico—and in exchange will forgive an equal
amount of AIG debt. The Fed is now in the insurance business.
June 24. H.R. 2346 (P.L. 111-32) established a $1 billion program to provide $3,500 to $4,500
rebates for the purchase of new, fuel-efficient vehicles, provided the trade-in vehicles are

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scrapped (Cash for Clunkers program). On August 7, H.R. 3435 (P.L. 111-47) increased the
amount by $2 billion, tapping funds from the economic recovery act (American Recovery and
Reinvestment Act (P.L. 111-5)).
June 24. H.R. 2346 was signed to become P.L. 111-32, increasing the U.S. quota in the
International Monetary Fund by 4.5 billion SDRs ($7.69 billion), providing loans to the IMF of
up to an additional 75 billion SDRs ($116.01 billion), and authorizing the United States Executive
Director of the Fund to vote to approve the sale of up to 12,965,649 ounces of the Fund’s gold.
On June 18, Congress had cleared H.R. 2346, the $105.9 billion war supplemental spending bill,
that mainly funds military operations in Iraq and Afghanistan through September but also
included the IMF provisions. The President’s signing statement rejected certain congressional
conditions on the funding, but a provision in H.R. 3081 that passed the house on July 9, 2009,
was designed to overrule the President on this issue.
June 24. The United States and the European Union lodged a complaint in the World Trade
Organization (WTO) against China, accusing Beijing of unfairly helping their domestic steel,
aluminum, and chemical industries by limiting overseas exports of raw materials. The United
States and the EU allege that while Chinese companies get primary access low priced raw
materials from domestic producers, non-Chinese companies must buy the products in the open
market, where prices are higher due to the lack of Chinese output restricting supplies. EU Trade
Commissioner Catherine Ashton said that the Chinese restrictions on raw materials “distort
competition and increase global prices.” China responded that the curbs were put in place to
protect the environment, and retaliated with a request for the WTO to investigate U.S. restrictions
on the import of Chinese poultry products. The case represents the first trade action taken by the
United States against China, or any country, under President Barack Obama. The U.S. president is
aware that China is the largest creditor to the United States. Washington frequently complains
about China flooding the world market with cheap exports, rather than holding them back.
June 24. The International Monetary Fund (IMF) approved an increase in assistance to Armenia.
Armenia may now immediately withdraw an additional U.S. $103 million under its stand-by
program approved in March.
June 23. The Chinese Ministry of Commerce (MofCOM) reported new measures to promote
domestic consumption. The government plans to subsidize consumer durable trade-ins, reduce
electricity prices for commercial enterprises, and promote credit cards. The trade-in of home
appliances and automobiles will be emphasized.
June 23. The IMF froze Bosnia and Herzegovina’s 1.2 billion euro/U.S. $1.66 billion stand-by
arrangement when the country failed to implement agreed fiscal tightening. The IMF suspended
the loan following the Bosnian government agreement with protests by war veterans and invalids
to reverse planned cuts in benefits and pensions. The situation may be reviewed by the IMF in
September.
June 23. Airbus displayed the first A320 aircraft made outside Europe at a factory in Tianjin,
China. It was delivered to Dragon Aviation Leasing and will be used by Sichuan Airlines, a
regional Chinese airline. Airbus began assembling the A320 in Tianjin in September, shipping
components from Europe to China. The company has invested nearly U.S. $1.47 billion in the
plant, a joint venture that is 51% owned by Airbus and 49% owned by a Chinese aviation
consortium. Another 10 aircraft will be assembled this year in China, with Airbus planning to
assemble four planes per month by the end of 2011. Airbus decided to construct the China plant

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based on predictions the country will purchase up to 2,800 passenger and transport planes over
the next twenty years. Passenger travel is expected to expand five-fold during the next 20 years.
The company’s target is to gain more than 50% market share from now until 2012, a significant
increase from its 39% market share in 1995.
June 23. The World Bank approved an U.S. $8 million grant for Guinea-Bissau’s poverty
reduction and reform program. The grant will be provided under the country’s Interim Strategy
Note (ISN), for the 2009-2010 period. The grant aims to improve economic management, foster
economic growth and strengthen the delivery of basic services. It also seeks to support the
government’s reform agenda, targeting greater efficiency, transparency, and accountability in the
management of public finances. Guinea-Bissau continues to be one of the most fragile states in
sub-Saharan Africa, trapped in a cycle of political instability, weak institutional capacity and poor
economic growth since the 1998-1999 civil war. The World Bank’s grant is part of a broader
initiative to support the country’s stabilization and recovery.
June 18. Congress cleared H.R. 2346, the U.S. $105.9 billion war supplemental spending bill,
sending it to the President’s desk. House leaders advanced the measure on June 16, on a 226-202
vote. The Senate voted, 91-5, on June 18 to adopt the report, clearing the bill. The legislation
mainly funds military operations in Iraq and Afghanistan through September. It includes $5
billion in borrowing authority for the International Monetary Fund (IMF).
June 17. The U.S. Treasury released a white paper containing proposals to reorganize the
financial regulatory system. Key areas of reform include systemic risk, securitization, derivatives,
and consumer protection. Visit the full document at http://www.financialstability.gov/docs/regs/
FinalReport_web.pdf.
June 1. General Motors Corp. declares bankruptcy, filing for chapter 11. By asset value, GM was
the second largest industrial bankruptcy in history, after WorldCom in 2002. Costs to the U.S.
government to save GM Corp. and Chrysler LLC now exceed $62 billion. GM’s bankruptcy filing
declared assets of $82 billion and liabilities of $172 billion. On the same day Chrysler’s sale of
assets to Italian Fiat SpA was approved by bankruptcy court.
May 13. The U.S. Treasury in a two-page letter to Congress outlined plans to regulate the overthe-counter (OTC) derivatives market, in order to quantify and regulate risks that led to the global
financial crisis. According to Treasury Secretary Tim Geithner, the CFTC and SEC are reviewing
the participation limits in current law to recommend how the Commodity Exchange Act and the
securities laws should be amended. Treasury is coordinating with foreign governments to promote
the implementation of similar measures to ensure U.S. regulation is not undermined by weaker
standards abroad.
May 12. Standard & Poor’s (S&P) lowered Mexico’s credit rating outlook to negative from
stable. Economists are reducing forecasts for real GDP growth in 2009. The central bank now
estimates a 3.8%-4.8% annual contraction in 2009. S&P forecasts a 5.5% drop for Mexican real
GDP this year. The Mexican economy is hampered by oil and trade. Mexico has long relied on oil
revenues which are now falling. International oil prices and domestic production are down. The
Constitution keeps the oil industry a state monopoly and the financial weakness of the state oil
company, Pemex, has prevented development of deep water reserves in the Gulf of Mexico.
Mexico’s total trade, imports plus exports, equaled 62% of total Mexican GDP in 2008. Over
85% of Mexico’s total trade is with the United States. In the United States, trade accounts for less

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than 30% of GDP. In the first quarter of 2009, Mexico’s exports to the United States fell at a 26%
annual rate, less than Canada’s exports decline to the United States of 37%.
April 30. Chrysler, the third-largest U.S. vehicle manufacturer, filed for bankruptcy. The firm
announced that it would shut four of its U.S. plants, located at Sterling Heights, Michigan; St.
Louis, Missouri; Twinsburg, Ohio; and Kenosha, Wisconsin, by the end of 2010. Production at
these, and five other U.S. plants (Newark, Delaware, Conner Avenue Detroit, North St. Louis, and
its axle plant in Detroit) will be shifted to Canada and Mexico. The U.S. auto industry has been
losing jobs for years. In 2008, the industry employed 711,000 people in the United States, down
from 1.3 million in 1999. In 2008 U.S. automakers closed 230,000 jobs. Standard & Poor’s
estimates that even including component manufacturers, the U.S. auto industry accounts for just
over 1% of non-farm employment. Outside Mexico, all of Chrysler’s North American plants are
temporarily closed while Chrysler is reorganized. The new company to emerge is likely to be
20% owned by the Italian firm Fiat, with a majority stake held by the U.S. United Autoworkers
Union (UAW). Chrysler is the first bankruptcy filing by a major U.S. auto company since
Studebaker in 1933. In Mexico, Chrysler is the fourth largest vehicle maker after Volkswagen,
General Motors and Nissan. Chrysler claims that Mexican production may be unaffected. In the
first quarter of 2009, total output of 33,998 units was 51% less than the same period of 2008.
Mexico’s total automobile production fell 41% annually in the first quarter of 2009, to 291,800
units.
May 7. The government’s “stress tests” indicated that ten of the largest U.S. banks would have to
raise a combined $74.6 billion in capital to cushion themselves against economic underperformance.
May 5. The European Commission lowered its growth forecast for the European Union to -4% in
2009 and -0.1% in 2010.
May 4. The International Monetary Fund approved a 24-month $17.1 billion Stand-By
Arrangement for Romania. The total international financial support package will amount to $26.4
billion, with the European Union providing $6.6 billion, the World Bank $1.3 billion, and the
European Bank for Reconstruction and Development, the European Investment Bank, and the
International Finance Corporation a combined $1.3 billion.
April 30. Chrysler announced merger with Fiat and filed for bankruptcy. Separately, the Financial
Accounting Standards Board changed the mark-to-market accounting rule to give banks more
discretion in reporting value of assets.
April 28. Swine flu epidemic hits Mexican economy.
April 22. The International Monetary Fund projected global economic activity to contract by
1.3% in 2009 with a slow recovery (1.9% growth) in 2010. Overall, the advanced economies are
forecast to contract by 3.8% in 2009, with the U.S. economy shrinking by 2.8%.
April 21.The IMF estimated that banks and other financial institutions faced aggregate losses of
$4.05 trillion in the value of their holdings as a result of the crisis. Of that amount, $2.7 trillion is
from loans and assets originating in the United States, the fund said. That estimate is up from $2.2
trillion in the fund’s interim report in January, and $1.4 trillion last October.

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April 14. The IMF granted Poland a $20.5 billion credit line using a facility intended to backstop
countries with sound economic policies that have been caught short by the global financial crisis.
On April 1, Mexico said that it was tapping the new credit line for $47 billion.
April 2. At the G-20 London Summit, leaders of the world’s largest economies agreed to tackle
the global financial crisis with measures worth $1.1 trillion including $750 billion more for the
International Monetary Fund, $250 billion to boost global trade, and $100 billion for multilateral
development banks. They also agreed on establishing a new Financial Stability Board to work
with the IMF to ensure cooperation across borders; closer regulation of banks, hedge funds, and
credit rating agencies; and a crackdown on tax havens, but they could only agree on additional
stimulus measures through IMF and multilateral development bank lending and not through
country stimulus packages. The leaders reiterated their commitment to resist protectionism and
promote global trade and investment.
April 1. The U.S. Conference Board’s Consumer Confidence Index inched 0.7 of a point higher
in March, virtually unchanged from the 42-year low reached in February. The present situation
index has fallen from a cyclical peak of 138.3 in July 2007 to 21.5 this month. Its record low was
15.8 in December 1982, when the unemployment rate stood at a post-war high of 10.8%.
April 1. Japan’s economy shrank 3.3%, or by 12.7% in annual terms. This marked the deepest
contraction in the economy since the first quarter of 1974, when the global economy was reacting
to the oil shock, and the second-biggest decline in growth in the post-war era. Japan has
experienced a record decline in exports. Total exports fell 13.9% in quarterly comparisons and by
a stunning 45.0% in annual terms. These declines were mirrored by the Bank of Japan’s quarterly
business confidence survey, or tankan. The tankan results for the first quarter of 2009’s headline
Diffusion Index (DI) of business conditions for large manufacturing companies dropped to a
reading of -58 in the three months through March from the -24 results recorded in the December
quarter. The DI surveys respondents’ business conditions expectations over the next three to six
months. The reading for the first quarter was the worst on record.
April 1. Mexico’s President Felipe Calderón claimed yesterday that his country was willing to
take up a new credit line from the International Monetary Fund (IMF). He confirmed that
government finances were “in order”, allowing the country to boost central bank reserves via a
new IMF borrowing of some US$30–40 billion as soon as this week. The IMF has failed to attract
any borrower for a US$100-million loan offering last year. Potential borrowers may be concerned
over conditionality requirements for loans and the negative message sent out when any economy
requires IMF financing. The new Flexible Credit Line (FCL), launched recently by the IMF to
attract developing nations, offers eligible countries easy access to large loans. Countries will be
able to either immediately draw funds from the FCL, or keep it as an easily accessibly pool of
finance.
March 31. The Organization for Economic Cooperation and Development (OECD) in a new
survey reports worsening economic prospects. It is now expected that the global recession will
worsen by an average GDP contraction of 4.3% in the OECD area in 2009 before a policyinduced recovery gradually builds strength through 2010. International trade is forecast to fall
by more than 13% in 2009 and world economic activity will shrink by 2.7%. Specific forecasts
include: U.S.: -4% in 2009 and 0% in 2010; Japan: -6.6% in 2009 and -0.5% in 2010; Eurozone: 4.1% in 2009 and -0.3% in 2010. Brazil’s GDP is expected to decline by 0.3% in 2009 while
Russia’s is projected to fall 5.6%. Growth in India will ease to 4.3% in 2009 and in China to
6.3%. By the end of 2010 unemployment rates across OECD nations may reach 10.1% from

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7.5% in the first quarter of 2009. The unemployed in the 30 advanced OECD countries would
increase by about 25 million, the largest and most rapid growth in OECD unemployment in the
post-war period.
March 31. U.S. housing prices continue to fall. The Standard & Poor’s S&P/Case-Shiller 20-City
Composite Index fell 19.0% annually in January 2009, the fastest on record. High inventories and
foreclosures continued to drive down prices. All 20 cities covered in the survey showed a
decrease in prices, with 9 of the 20 areas showing rates of annual decline of over 20%.
As of January 2009, average home prices are at similar levels to what they were in the third
quarter of 2003. From their peaks in mid-2006, the 10-City Composite is down 30.2% and the 20City Composite is down 29.1%.
March 31. The World Trade Organization (WTO) predicted that the volume of global
merchandise trade would shrink by 9% this year. This will be the first fall in trade flows since
1982. Between 1990 and 2006 trade volumes grew by more than 6% a year, easily outstripping
the growth rate of world output, which was about 3%. Now the global economic machine has
gone into reverse: output is declining and trade is shrinking faster.
March 30. The central banks of China and Argentina reached an agreement for a 70 billion
yuan/U.S. $10 billion currency swap for three years, the sixth such swap China has concluded
with emerging economies including South Korea, Hong Kong, Indonesia, Belarus and Malaysia.
The move may provide capital to these emerging markets and may in the long-term promote the
Chinese yuan’s international role. For Argentina, these moves may help to offset challenges in
securing foreign exchange financing.
March 24. The Executive Board of the International Monetary Fund (IMF) approved a major
overhaul of the IMF’s lending framework, including the creation of a new Flexible Credit Line
(FCL). The changes to the IMF’s lending framework include:
modernizing IMF conditionality for all borrowers,
introducing a new Flexible Credit Line,
enhancing the flexibility of the Fund’s traditional stand-by arrangement,
doubling normal access limits for nonconcessional resources,
simplifying cost and maturity structures, and
eliminating certain seldom-used facilities.
“These reforms represent a significant change in the way the Fund can help its member
countries—which is especially needed at this time of global crisis,” said IMF Managing Director
Dominique Strauss-Kahn. “More flexibility in our lending along with streamlined conditionality
will help us respond effectively to the various needs of members. This, in turn, will help them to
weather the crisis and return to sustainable growth.”
March 23. The U.S. Treasury released the details of its Public Private Partnership Investment
Program to address the challenge of legacy toxic assets (mortgages and securities backed by
loans) being carried by the financial system. The Treasury and the Federal Deposit Insurance

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Corporation with funding from the TARP and private capital are to purchase eligible assets worth
about $500 billion with the potential to expand the program to $1 trillion.
March 20. The European Union announced additional support for the IMF’s lending capacity in
the form of a loan to the IMF totaling €75 billion, about US$100 billion.. The EU’s common
strategy is released. It focuses on regulating hedge funds, private equity, credit derivatives and
credit rating agencies, and vowed to crack down on tax havens.
March 19. The U.S. Federal Reserve announced a plan to purchase longer-term Treasury
securities. The Fed is now trying not just to influence the spread between private interest rates
and Treasuries (through its mortgage-backed securities purchases, for example), but also to pull
down the entire spectrum of interest rates by driving down the rate on benchmark Treasuries. Key
points of yesterday’s Fed announcement include:
The federal funds rate, with a current target range of 0.0%–0.25%, is likely to remain
exceptionally low for “an extended period.” Last month, the Fed said the low rate would apply
“for some time.”
The Fed will purchase:
up to an additional US$750 billion of agency mortgage-backed securities, for a total of US$1.25
trillion, and
up to an additional US$100 billion of agency debt for a total of up to US$200 billion.
It followed the central banks of the United Kingdom and Japan by announcing its intention to
purchase longer-term Treasury securities (up to US$300 billion worth) over the next six months.
It has launched its Term Asset-Backed Securities Loan Facility (TALF) program to support credit
for households and small businesses, and may expand that program to other lending.
The Fed anticipates that fiscal and monetary stimulus, plus policies aimed at stabilizing the
financial sector, will contribute to a gradual resumption of growth—although it has not said
when.
This announcement caused the 10-year Treasury yield to fall from just over 2.9% to under 2.6%.
Mortgage rates should follow Treasury yields down and spark another refinancing wave.
Economists question whether lower rates will revive home purchases as well as refinancing.
March 18. The Federal Reserve announced that it would buy approximately $1.2 trillion in
government bonds and mortgage-related securities in order to lower borrowing costs for home
mortgages and other types of loans.
March 11. Chinese total exports experienced their biggest fall on record in February declining
25.7% on the year in February, to US$64.9 billion. Imports also declined 24.1% on the year, And
China’s trade surplus shrank to a three-year low of US$4.84 billion from US$39.1 billion in
January. For the first two months of the year combined, exports fell 21.1% from the same period
of 2008. Trade contracted despite investment being supported by the recent rapid expansion of
credit and by the release of funds under the government’s four trillion yuan/US$580 billion fiscal
stimulus package.

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March 10. Finance Minister Najib Razak announced a large Malaysian fiscal stimulus package.
The 60 billion ringgit/US$16.3 billion package is the government’s second supplementary budget,
after the initial 7 billion ringgit stimulus already implemented. The package equals 9.0% of gross
domestic product (GDP).
March 10. Philippines’ exports experienced a record contraction in January as global demand
continued to decline. Official data showed that total exports fell 41% year-on-year to US$2.49
billion. In December, exports contracted by a revised 40.3% in annual terms. Shipments of
electronics, which account for more than half of total exports, almost halved, shrinking 48.4% in
annual terms to US$1.35 billion.
March 10. United Kingdom industrial production suffered the largest annual drop since
January 1981 in January. Manufacturing output plunged by 2.9% month on month and 12.8%
year on year in January 2009, according to the Office for National Statistics (ONS). This followed
a drop of 1.9% monthly in December and marked the eleventh successive monthly decline in
manufacturing output.
March 10. China’s official registered unemployment rate hit a three-year high of 4.2% in 2008.
Although during the post-Asian Financial Crisis slowdown, between 1979 and 1982,
unemployment was mostly concentrated in the state sector, this time the private sector has
experienced worse unemployment, with migrant labor being fired first, with no social programs
for relief. The number of business failures is estimated to be 7.5% of the country’s Small and
Medium sized Enterprises (SMEs), or nearly 500,000 firms.
February 24. U.S. President Barack Obama used his first address to a joint session of Congress
to outline how the economic recovery can work. He outlined the rationale behind the economic
stimulus and the financial sector rescue plans, conceding costs and risks, but warning of the
greater danger of inaction. President Obama promised to reduce the federal budget deficit by half
by the end of his first term. On the same day, U.S. Federal Reserve Chairman Ben Bernanke
testified to Congress that if the financial system is stabilized soon, the recession will end in 2009
and the economy will grow in 2010.
February 24. The Latvian government fell over fiscal adjustment measures that are required for
Latvia to comply with the IMF-led rescue program terms. This caused Standard & Poor’s (S&P)
to reduce its sovereign rating for Latvia from BBB- to BB+. S&P has thus cut the Baltic State to
junk bond status. Latvia’s ratings among various rating institutions currently vary significantly,
from BB+ to BBB+.
February 23. The Dow Jones Industrial Average lost 3.4% to close at 7113.78, its lowest level in
12 years, and just under half the high it reached 16 months ago. Banking stocks led the index
down, and losses were experienced in most sectors. The U.S. market declines have influenced
international declines as well. Japan’s Nikkei 225 ended down 1.5%, Australia’s S&P/ASX 200
was off by 0.6%, Taiwan’s Taiex lost 1.1%, and China’s Shanghai Composite fell 4.6%. Equities
are wiping huge amounts off the market value of companies and investments including pensions
worldwide.
February 23. The Chilean Finance Ministry announced that the Central Bank of Chile will
conduct U.S. dollar auctions in March 2009, to finance a US$3 billion stimulus plan announced
by President Michelle Bachelet in January. US$1 billion will be directed into fiscal spending

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transactions. These resources will be drawn from the country’s sovereign wealth fund, which
currently holds around US$20.11 billion.
February 20. Several Netherlands local and provincial councils have announced that they are
planning to launch local stimulus packages to combat the country’s economic crisis. The Dutch
government is planning to invest €94 million in the local economy and infrastructure projects,
including new street lighting and an upgrade of the sewage network. Rotterdam is planning to
launch further measures to augment the €200 million package announced in January for the
construction industry. Amsterdam plans to invest €200 million in its construction industry, while
Utrecht is still exploring options.
February 18. The German government agreed on a revised bank bailout plan. The first
version, from October 2008, cost 480 billion euro/U.S. $603.7 billion, has not delivered
appropriate results. The new text must be ratified by parliament before taking effect. To ensure
the stability of the German financial sector the new plan considers three factors. Expropriation
would be a last resort only. Acceleration of state holdings of bank shares, changes to current stock
corporation regulations are proposed. The stabilization fund for the financial markets would
increase its debt guarantee time period.
February 17. President Obama signed a US$787 billion economic stimulus bill, 111th Congress
bill H.R. 1, following House and Senate final votes on the conference report on February 13. As
passed, the stimulus package includes some US$575 billion in government spending and US$212
billion in tax cuts.
February 17. U.S. automakers General Motors Corp. and Chrysler LLC submitted recovery
plans to the U.S. government requesting U.S. $21.6 billion more in loans to enable their recovery.
February 17. Eastern Europe’s deepening recession is putting pressure on those West
European banks with local subsidiaries, Moody’s Investors Service reports. The countries with
the deepest fiscal deficits—the Baltic states, Bulgaria, Croatia, Hungary and Romania—have the
highest external vulnerability. Moody’s says Kazakhstan, Russia and Ukraine are also under
pressure despite low public external debt. The Austrian banking system is the most exposed;
banks there and in Belgium, France, Germany, Italy and Sweden account for 84% of total West
European claims. Exposure is heavily concentrated among certain banking groups: Raiffeisen,
Erste, Societe Generale, UniCredit and KBC. Modern banking has just emerged in Eastern
Europe. Eastern subsidiaries are more vulnerable in times of stress, with deteriorating asset
quality and vulnerable liquidity positions. EU member countries have failed to coordinate
national stimulus programs, and there appears to be no willingness to finance large cross-border
rescue packages.
February 16. Russian President Dmitry Medvedev replaced the governors of Pskov, Orel and
Voronezh, as well as the Nenets Autonomous Region. The terminations suggest that the Kremlin
is using the economic crisis as an excuse for getting rid of governors with whom the federal
leadership was already unhappy. As local development levels and production profiles vary
greatly, the crisis is having diverse effects on Russia’s regions. Russian economic activity as a
whole may suffer substantially in the crisis, but inequality across Russian regions may be
reduced.

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February 16. The Japanese economy contracted by 3.3% quarterly in December, the Cabinet
Office reported on preliminary figures. At an annual rate, GDP fell by 12.7%, and is now
performing at its worst since 1974.
February 16. In preparation for the London Leaders’ summit in April, world leaders are
drafting responses to the global financial crisis. The extent to which they agree on the causes of
the crisis will be critical to policies proposed. Broad consensus on key features of the financial
crisis now includes:
Maturity. It emerged from a market-led process of change that spanned around 30 years, not two
or three, and culminated in the long boom that began in the early 1990s.
Regulatory failure. For many reasons, neither regulation nor regulators policed these processes.
Opacity. A major contributory factor was the complexity and opacity of the activities and the
balance sheets of major financial institutions.
Credit boom. The boom resulted from countries’ competitive deregulation of financial markets
over some 30 years.
How these ingredients interacted to cause the crisis remains under debate. The G20 are likely to
promote global measures that address both the underlying causes and more immediate responses.
February 14. Finance ministers and central bank governors of the Group of Seven (G7)
industrialized nations met in Rome to discuss the financial crisis and economic slowdown. In
order to prevent a resurgence of protectionism, the G7 communique pledged members to do all
they could to combat recession without distorting free trade.
February 13. The U.S. federal government’s monthly budget statement reported a deficit of US
$83.8 billion in January 2009, compared with a US $17.8-billion surplus a year earlier. Both
higher outlays and falling tax receipts led to the deficit. The deficit for the first four months of the
2009 fiscal year ballooned to a record US$569 billion. The Troubled Asset Relief Program
(TARP) added about US$42 billion to the deficit in January, bringing TARP spending so far this
fiscal year to US$284 billion.
February 13. Eurozone GDP declined by 1.5% quarterly and 1.2% annually in the fourth
quarter of 2008, the sharpest contraction since the bloc came into being in January 1999.
February 12. Ukraine’s Finance Minister Viktor Pynzenuk resigned; Fitch downgraded its
long-term foreign and local currency issuer rating from “B+” to “B”; and an International
Monetary Fund (IMF) mission left Ukraine last week. The IMF, which has not concluded its US
$1.9 billion part of the Ukrainian aid package, called for immediate and serious crisis
management. The IMF mission announced last week that a successful implementation of the
financial rescue for the country is in jeopardy.
February 12. The Irish government reported a 7-billion-euro (US$9 billion) bank rescue plan
for two of the country’s largest banks, the Allied Irish Bank and the Bank of Ireland. Each bank
will receive 3.5 billion euro in recapitalization funds. The government attached conditions
including preference shares that the government will obtain, with a fixed annual dividend of 8%,
partial control over the appointment of the banks’ directors, and executive pay reductions with no
bonuses.

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February 12. China’s State Council approved a stimulus plan yesterday for the shipbuilding
industry, urging banks to expand trade finance for the export of vessels, and extending fiscal and
financial support for domestic buyers of long-range ships until 2012. The government will also
encourage industry restructuring, and force the replacement of outdated ships. The funds will
facilitate shipping research and technology. Mergers and acquisitions will be encouraged for
industry consolidation. This is the latest Chinese industry stimulus plan, following support for
textiles, automotive, steel, and machinery industries over the past few weeks.
February 12. Chinalco, the Aluminum Corporation of China, announced an investment of
US$19.5 billion in Australian mining group Rio Tinto. This investment is China’s largest-ever
overseas purchase. Chinalco will buy $7.2-billion worth of convertible bonds as well as Rio Tinto
assets worth $12.3 billion. Rio Tinto assumed substantial debt in its purchase of Canadian
aluminum maker Alcan in 2007.
February 12. The Swiss government presented a second economic stimulus plan worth 700
million Swiss francs (US$603 million). The funds are directed at infrastructure (390 million
francs), regions (100 million francs), environment and energy (80 million francs), research (50
million francs), renovation of state buildings (40 million francs), and the tourism sector (12
million francs). The first rescue package worth some 900 million francs launched in November
did not have its desired effectiveness.
February 12. Kuwait’s Sovereign Wealth Fund lost 15% in 2008. The emirate’s sovereign
wealth fund lost nine billion dinars (US$30.9 billion) in 2008 as a result of the global economic
downturn. One example of losses was the US$5-billion capital injection into Citibank and Merrill
Lynch in 2008, which fell to US$2.2 billion before returning to its current value of US$2.8
billion. These figures come days after the government unveiled a US$5.14-billion stimulus
package which will be funded by the country’s foreign-exchange reserves, as well as the Kuwait
Investment Authority.
February 12. Australian legislature rejected fiscal stimulus package as Australian
unemployment climbed to two-year high. The US$28 billion package failed over
environmentalists’ objections.
February 5. The Bank of England’s Monetary Policy Committee reduced its key interest rate
by 50 basis points from 1.50% to 1.00%. Interest rates are now at their lowest level since the
Bank of England was founded in 1694.
February 3. British Prime Minister Gordon Brown and Chinese Premier Wen Jiabao said that
coordination was necessary in order to avert the global financial crisis, at the end of Premier
Wen’s five-day tour of Europe. Prime Minister Brown said that the United Kingdom is planning
to double annual exports within the coming 18 months, from £5 billion to £10 billion. He stressed
that the United Kingdom will benefit from China’s recent stimulus packages, particularly the
aerospace, hi-tech manufacturing, education, pharmaceuticals, and low-carbon technologies
industries. China and the European Union (EU) have agreed to hold summit talks soon to
increase economic cooperation.
February 3. Chinese President Hu Jintao will travel to Mali, Senegal, Tanzania, Mauritius, and
Saudi Arabia from February 10 to February 17, 2009. Despite the global economic downturn the
Chinese government is increasing investment in Africa and the Middle East. Chinese-African

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trade has been increasing by an average of 30% per year, almost reaching US$107 billion in
2008.
February 3. China will give Senegal several cooperation projects, including a museum, a
theater, a children’s hospital, and repair of sports stadiums worth some 80 million yuan or U.S.
$11.5 million. This brings the total of pledged Chinese investments to Senegal in 2009 to
US$117.3 million, including projects for power services, transport equipment and information
technology infrastructure.
February 2. The government of Kazakhstan announced nationalization of two banks, BTA
Bank, the nation’s largest bank, and Alliance Bank, the nations third-largest bank. The
government reported it is considering a possible sale of half of its stake in BTA Bank to Russia’s
Sberbank. The Kazakh government now owns 78.1% of BTA Bank.
February 2. A survey conducted jointly by the Afghan government and the United Nations
forecast that opium production in Afghanistan will decline for the second consecutive year in
2009. The report estimates that the total area of poppy fields under cultivation declined to
378,950 acres, a 19% decline from the previous year. The survey also indicated that poppy
cultivation in the main producing regions of the south and the southwest fell for the first time in
five years. The decline was largely attributable to recent sharp falls in global prices for opiates
following saturation of the market and the negative impact of drought. Farmers had also shifted
production to staple grains after global prices surged in the first half of 2008. The survey indicates
that prices for dry opium tumbled 25% in 2008 while wheat and rice prices rose 49% and 26%
respectively. Afghanistan accounts for 90% of the world’s supply of opium with proceeds from
trafficking providing a main source of income for insurgents in the border regions with Pakistan.
February 2. Ireland average prices for housing declined by 9.1% in 2008 compared with a fall
of 7.3% in 2007. Also, Moody’s Ratings Services revised its sovereign outlook for Ireland to
negative from stable on the basis of mounting fiscal pressures, economic deterioration, and the
government’s potentially damaging exposure to the banking sector. This follows a similar
revision from Standard & Poor’s in January.
January 30. The U.S. Bureau of Economic Analysis (BEA) announced that preliminary real
gross domestic product (GDP)—the output of goods and services produced by labor and property
located in the United States – for 2008 rose 1.3%, down from 2.0% in 2007. Real GDP decreased
at an annual rate of 3.8 percent in the fourth quarter of 2008, the largest decline since the first
quarter of 1982.
January 30. South Korea reported that industrial output fell 9.6% in December. Total output
tumbled by 18.6% in annual terms compared with the 14.0% decline in November, which was the
second-largest decrease in production since the series began in 1970.
January 30. Finland reported that industrial output declined by 15.6% year-on-year in
December, after falling by a revised rate of more than 9.0% in November. Production decreased
in all main industrial sectors. Also, the Finnish government announced an increase in government
expenditure of 1.2 billion euro to support the flagging economy. Additional funds are to be
allocated to construction, renovation and transport infrastructure projects.
January 29-February 1. The World Economic Forum (WEF) met in Davos, Switzerland.
Chinese Premier Wen Jiabao and Russian Premier Vladimir Putin blamed the U.S.-led financial

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system for the global financial crisis. European Central Bank (ECB) President Jean-Claude
Trichet noted the ECB is drafting guidelines for European governments’ establishment of “bad
banks” to consolidate toxic assets.
January 29. Thailand’s parliament approved a $3.35 billion stimulus package aimed at boosting
its economy battered by months of street protests. Final approval was expected in February.
January 28. The International Monetary Fund (IMF) revised its forecast for world economic
growth down to 0.5% for 2009. This would be the lowest level of growth since World War II and
down by 1.7 percentage points since the IMF forecast in November 2008. The IMF indicated that
despite wide-ranging policy actions by governments and central banks, financial markets are still
under stress and the global economy is taking a turn for the worse. The IMF urged governments
to take decisive action to restore financial sector health (by providing liquidity and capital and
helping to dispose of problem assets) and to provide macroeconomic stimulus (both monetary and
fiscal) to support sagging demand.
January 28. Canada announced a $32 billion stimulus package that included infrastructure
spending and tax cuts.
January 28. The U.S. House of Representatives passed the American Recovery and
Reinvestment Act of 2009 (H.R. 1, Obey). The cost of the bill was estimated at $819 billion.
January 26. Australia announced a $2.6 billion stimulus package.
January 22. Malaysia announced it is preparing a second economic stimulus package to fend off
the threat of recession. Singapore unveiled a $13.7 billion stimulus package.
January 21.The Philippines announced a $633 million increase to bring its stimulus program to
$6.9 billion.
January 15. The U.S. Senate voted to release the second half of the Treasury’s Troubled Assets
Recovery Package (TARP) to stabilize the U.S. financial system, granting President-elect Barack
Obama authority to spend $350 billion to revive credit markets and help homeowners avoid
foreclosure. The Treasury Department announced it would fund a rescue of Bank of America
which guarantees $118 billion in troubled assets.
January 6. Chile announced a $4 billion stimulus package.
January 1. Belarus devalued its national currency, the Belarusian ruble, by over 20%. The
National Bank announced that it will tie its currency immediately to a basket of three
currencies—the U.S. dollar, the euro and the Russian ruble.
2008
December 31. The International Monetary Fund (IMF) gave tentative approval to Belarus for a
US$2.5 billion 15 month Stand By Arrangement. Final approval will be decided by the IMF
executive board in January.
December 30. South Korea reported that the industrial output index declined by 14.1%
annually and by 10.7% monthly. The monthly contraction was the largest in 21 years. The slump
in production is closely tied with the sharp reverse in exports, which fell by 18.3%.

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December 30. Monetary Union Pact approved by Gulf Cooperation Council (GCC)—Bahrain,
Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates. Representatives from five of the six
members of the GCC approved a draft accord for a monetary union yesterday at a summit in
Muscat. GCC finance ministers did not agree on the ultimate location of the future central bank.
The draft accord prepares for the creation of a monetary council, and the framework for a future
monetary union.
December 26. The Japanese Ministry of Economy, Trade and Industry released preliminary
figures showing that industrial production shrank at a record rate and unemployment rose. Total
industrial output contracted 8.1% from October to November 2008. This marked the largest
decline in industrial production in 55 years.
December 23. Poland’s Monetary Policy Council reduced its main policy rate by 75 basis
points. The Polish main policy rate has been reduced by 1% in two months, and now stands at
5.00%.
December 23. Japanese Cabinet approves record fiscal plan for FY2009. The ¥88.5 trillion
(US$980.6 billion) fiscal package for FY2009, which begins April 1, 2009, marks a 6.6%
increase in spending from initial targets.
December 23. After the IMF submitted a positive review of Iraq’s economic reconstruction, the
Paris Club of sovereign lenders completed the third and final step of debt forgiveness for Iraq,
reducing Iraq’s public external debt with its members by 20% or US$7.8 billion. Most of Iraq’s
remaining debt consists of official loans from Gulf Arab states and former communist countries,
which may be forgiven or discounted if Iraq’s economy continues to improve. Under former
President Saddam Hussein, Iraq’s debt totaled $125 billion.
December 23. New Zealand Real GDP declined 0.4% in quarterly seasonally adjusted terms.
This marks the third consecutive quarterly decline in Real GDP. The economy fell into its first
recession in more than a decade in the March, 2008. The rate of contraction deepened from the
first two quarters of the year during which growth shrank by 0.3% and 0.2% respectively. In
annual terms, the economy grew 1.7% in the year through September 2008.
December 23. The central People’s Bank of China lowered interest rates for the fifth time in
four months. Benchmark one-year lending and deposit rates were both lowered by 27 basis points
to 5.31% and 2.25% respectively. These rates were lowered by their biggest margin in 11 years a
month ago, lowered by 108 basis points.
December 22. U.K. Real GDP contracted by 0.6% quarterly in the third quarter of 2008. The
Office for National Statistics (ONS) revised the decline in real GDP from its previous estimate of
0.5% quarterly. This marks the first time that the British economy has contracted since the second
quarter of 1992. It had stagnated in the second quarter of 2008 and is therefore on the brink of
recession, defined as two successive quarters of contracting quarterly GDP. Prior to that, GDP
growth had moderated to 0.4% in the first quarter of 2008 from 0.6% in the fourth quarter of 2007
and 0.8% in the third quarter. Annual GDP growth fell to a 16-year low of 0.3% in the third
quarter of 2008 from 1.7% in the second quarter and a peak of 3.3% in the second quarter of
2007. Industrial production contracted by 1.4% quarterly, and 2.5% annually in the third quarter,
with manufacturing output down by 1.6% quarterly and 2.3% annually. This marks the third
successive quarterly decrease in industrial production, meaning that the sector is already in
recession.

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December 22. Russia reports that industrial output growth slowed to 0.6% annual growth in
October, then contracted by 8.7% annually in November, the worst monthly report since the
economic collapse which followed the ruble crisis of 1998. Critical to Russia’s economic
slowdown is the unwillingness of Russian banks, which are heavily exposed to foreign currency
denominated external debt, to lend.
December 21. Eurostat reports that Eurozone industrial orders fell 5.4% monthly in September
and 4.7% monthly and 15.1% annually in October.
December 21. Canada reports that its federal government and the province of Ontario will
contribute some C$4 billion (US$3.3 billion) to the short-term automotive rescue announced by
the U.S. administration. The United States will provide US$13.4 billion in emergency loans to
General Motors and Chrysler. General Motors is to receive C$3 billion of the Canadian funds,
while Chrysler is to receive C$1 billion. Ford declines injections. Limits on executive
compensation are a requirement for funds.
December 21. Zimbabwe reports its domestic debt level increased from Z$1 trillion on August 8
to Z$179.6 trillion (US$194 million at the current official inter-bank exchange rate) on September
8. This represents a monthly increase of 17,800%. Interest payments now account for roughly
90% of total debt.
December 19. President Bush announced an automotive rescue plan for General Motors Corp.
and Chrysler LLC that will make $13.4 billion in federal loans available almost immediately. The
money will come from the $700 billion fund set aside to rescue banks and investment firms in
October. The government attached several conditions to the three-year loans and set a deadline of
March 31 for the automakers to prove they can restructure enough to ensure their survival or
recall the loans. As part of the rescue, GM is required to reduce debt by two-thirds via debt-forequity swaps, pay half of the contributions to a retiree health care trust using stock, make union
workers’ wages competitive with foreign automakers and eliminate the union jobs bank, which
pays laid-off workers.
December 19. An international rescue package of 7.5 billion euro (US$10.6 billion) for Latvia
was announced. The IMF reports a 27-month stand by arrangement between Latvia and the IMF,
worth 1.7 billion euro (US$2.4 billion). The remainder of the rescue package includes 3.1 billion
euro from the European Union (EU), 1.8 billion euro from Nordic countries, 400 million euro
from the World Bank, 200 million euro from the Czech Republic, and 100 million euro each from
the European Bank of Reconstruction and Development, Estonia and Poland. Latvia nationalized
its second largest bank, Parex Bank. Latvia will implement measures to tighten fiscal policy and
stabilize its economy.
December 19. The Bank of Japan lowered the benchmark rate by 20 basis points to 0.3%. This
marks the second consecutive monthly cut.
December 18. Turkey reduces rates for the second consecutive month. The Central Bank of the
Republic of Turkey (CBRT) announced a 125-basis-point cut to their overnight borrowing rate
from 16.25% to 15.00%, and their overnight lending rate by 125 basis points, from 18.75% to
17.50%. Turkish interest rates are the highest in Europe, even after the rate cuts.
December 18. Mexican industrial output decreased an annual 2.7% in October, the sixth
consecutive monthly decline. More than 80% of Mexico’s exports go to the United States.

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December 18. Norwegian Central Bank cut its main policy interest rate by 175 basis points to
3.0%, the third decrease since October.
December 17. U.S. housing starts plummeted 18.9% in November, to a seasonally adjusted
annual rate of 625,000 units. This was a record monthly low.
December 16. The U.S. Federal Open Market Committee (FOMC) voted unanimously to lower
its target for the federal funds rate more than 75 basis points, to a range of 0.0% to 0.25%. Long
term bond yields dropped from 2.50% to 2.35%.
December 15. The Bank of Japan’s tankan survey of business confidence fell from minus 3 in
the third quarter to minus 24 points in the fourth quarter of the year. The 21 point contraction was
the steepest in the index since the oil shocks of the 1970s, and marked the lowest level in the
index since 2002.
December 12. Ecuador’s President Rafael Correa announced that Ecuador will stop honoring its
external debt; the country should expect lawsuits from bondholders in the short term. This is not
the same as declaring the entire Ecuadorean economy in default.
December 11. 27 European Union (EU) governments’ leaders approved a 200 billion euro
(US$269 billion) economic stimulus package. The cost is approximately 1.5% of the EU’s total
GDP. Member states will pay major shares; supranational EU institutions, such as the European
Investment Bank (EIB), will contribute the remaining 30 billion euro.
December 11. Taiwan’s central bank cut its leading discount rate by three quarters of a
percentage point to 2.0%, marking the biggest reduction since 1982. It was also the fifth rate cut
in two-and-a-half months.
December 11. The central Bank of Korea reduced the seven-day repurchase rate by one
percentage point to a record low of 3.00%. Interest rates have been reduced by 225 basis points in
two months, 100 basis points in October and 125 basis points in November.
December 5. November U.S. nonfarm employment loss of 533,000 jobs was the largest in 34
years, compared with the 602,000 decline in December 1974. The U.S. Bureau of Labor Statistics
also reported the unemployment rate rose from 6.5 to 6.7 percent. November’s drop in payroll
employment followed declines of 403,000 in September and 320,000 in October, as revised.
November 25. U.S. real GDP fell 0.5% in the third quarter of 2008. The announcement by the
U.S. Bureau of Economic Analysis also reported U.S. second quarter GDP increased 2.8%. BEA
attributed the third quarter decline to a contraction in consumer spending and deceleration in
exports.
November 24. The U.K. announced a fiscal stimulus package valued at £20 billion (US$30.2
billion) aimed at limiting the length and depth of the apparent U.K. recession. The package
included a temporary reduction of value-added tax from 17.5% to 15.0%.
November 24. The IMF Executive Board approved a 23-month Stand-By Arrangement for
Pakistan in the amount of $7.6 billion to support the country’s economic stabilization program.
November 24. The Central Bank of Iceland’s currency swap arrangement with Sweden,
Norway, and Denmark is extended through December 2009. On the same date, Standard & Poor’s

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Ratings Services, S&P, reduced its long-term Iceland sovereign credit rating from BBB to
BBB-, while maintaining its short-term Iceland sovereign currency rating at A-3.
November 24. The U.S. Treasury, Federal Reserve, and Federal Deposit Insurance Corp. said that
they will protect Citigroup against certain potential losses and invest an additional $20 billion
(on top of the previous $25 billion) in the company. The government is to receive $7 billion in
preferred shares in the company.
November 19. The IMF Executive Board agreed to a $2.1 billion loan for Iceland. Following the
decision of IMF’s Executive Board, Denmark, Finland, Norway, and Sweden agreed to provide
an additional $2.5 billion in loans to Iceland.
November 15. At a G-20 (including the G-8, 10 major emerging economies, Australia and the
European Union) summit in Washington, the G-20 leaders agreed to continue to take steps to
stabilize the global financial system and improve the international regulatory framework.
November 15. Japan announced that it would make $100 billion from its foreign exchange
reserves available to the IMF for loans to emerging market economies. This was in addition to $2
billion that Japan is to invest in the World Bank to help recapitalize banks in smaller, emerging
market economies. Also, the IMF and Pakistan agreed in principle on a $7.6 billion loan package
aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence.
November 14. The President’s Working Group on Financial Markets (Treasury, Securities and
Exchange Commission, Federal Reserve, and the Commodity Futures Trading Commission)
announced a series of initiatives to strengthen oversight and the infrastructure of the over-thecounter derivatives market. This included the development of credit default swap central
counterparties—clearinghouses between parties that own debt instruments and others willing to
insure against defaults.
November 13. The African Development bank conference on the financial crisis ended with a
pessimistic outlook for Sub-Saharan Africa, due to declines in foreign capital, export markets
and commodity-based exports.
November 13. Eurostat declared that Eurozone GDP declined by 0.2% in the third quarter of
2008, as well as the second quarter. Since recession is defined as two successive quarters of
contracting GDP, this means that the Eurozone is technically in recession.
November 12. United States Treasury Secretary Paulson announced a change in priorities for
the US$700 billion Troubled Asset Relief Program (TARP) approved by Congress in early
October. The first priority remains to provide direct equity infusions to the financial sector.
Roughly US$250 billion has been allocated to this sector. This scope was broadened to include
non-banks, particularly insurance companies such as AIG, which provide insurance for credit
defaults. Paulson noted that TARP would be used to purchase bank stock, not toxic assets.
Paulson’s new plan also would provide support for the asset-backed commercial paper market,
particularly securitized auto loans, credit card debt, and student loans. Between August and
November 2007 asset-backed commercial paper outstanding contracted by nearly US$400 billion.
Paulson rejected suggestions that TARP funds be made available to the U.S. auto industry.
November 12. The Central Bank of Russia raised key interest rates by 1%. Swiss Economics
Minister announced the Swiss government would inject 341 million Swiss Francs/US$286.6

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million for economic stimulus. The State Bank of Pakistan raised interest rates by 2%, to reduce
inflation. It also injected 320 billion rupees/US$4 billion into the Pakistan banking system.
November 11. IMF deferred their decision to approve US$2.1 billion loan for Iceland. This
was the third time the IMF board scheduled then failed to discuss the Iceland proposal. The
tentative Iceland package required Iceland to implement economic stabilization. That economic
stabilization was the required trigger for implementation of EU loans to Iceland from Norway,
Poland and Sweden. Iceland is reportedly involved in disputes over deposit guarantees with
British and Dutch depositors in Icelandic banks.
November 10. The United States government announced further aid to American International
Group, AIG. AIG’s September $85 billion loan was reduced to $60 billion; the government
bought $40 billion of preferred AIG shares, and $52.5 billion of AIG mortgage securities. The
U.S. support of AIG increased from September’s $85 billion to $150 billion.
November 9. G-20 meeting of finance ministers and central bank governors in Sao Paulo, Brazil,
concluded with a communiqué calling for increased role of emerging economies in reform of
Bretton Woods financial institutions, including the World Bank and the International Monetary
Fund.
November 9. China announced a 4 trillion Yuan/U.S. $587 billion domestic stimulus package.
primarily aimed at infrastructure, housing, agriculture, health care, and social welfare spending.
This program represents 16% of China’s 2007 GDP, and roughly equals total Chinese central and
local government outlays in 2006.
November 8. Latvian government took over Parex Bank, the second-largest bank in Latvia.
November 7. Iceland’s President Grimsson reportedly offered the use of the former U.S. Air
Force base at Keflavik to Russia. The United States departed Keflavik in 2006.
November 7. United States October employment report revealed a decline of 240,000 jobs in
October, and September job losses revised from 159,000 to 284,000. The U.S. unemployment rate
rose from 6.1% to 6.5%, a 14-year high.
November 7. Moody’s sovereign rating for Hungary is reduced from A2 to A3. Despite IMF
assistance, financial instability may require “severe macroeconomic and financial adjustment.”
Moody’s reduced its ratings of Latvia from A3 to A2, before the Latvian statistical office
announced Latvian GDP fell at a 4.2% annual rate in the third quarter of 2008. Moody’s also
announced an outlook reduction for Estonia and Lithuania.
November 6. IMF approved SDR 10.5 billion/U.S. $15.7 billion Stand-By Arrangement for
Hungary. U.S. $6.3 billion is to be immediately available.
November 6. International Monetary Fund announced its updated World Economic Outlook.
Main findings include that “global activity is slowing quickly”, and “prospects for global growth
have deteriorated over the past month.” The IMF now projects global GDP growth for 2009 at
2.2% , 3/4 of a percentage point lower than projections announced in October, 2008. It projects
U.S. GDP growth at 1.4% in 2008 and -0.7% in 2009.
November 6. The European Central Bank, ECB, reduced its key interest rate from 3.75% to
3.25%. In two months the ECB has reduced this rate from 4.25% to 3.25%. The Danish Central

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Bank lowered its key lending rate from 5.5% to 5%. The Czech National Bank reduced its
interest rate from 3.5% to 2.75%. In South Korea, the Bank of Korea reduced its key interest rate
from 4.25% to 4%. During October the Bank of Korea reduced its rate from 5.25% to 4.25%.
November 4. United States Institute of Supply Management’s manufacturing index fell 4.6
points in October to 38.9, after previously falling in September. The export orders component of
the manufacturing index fell 11 points in October to 41, following a drop of 5 points in
September. 41 is the lowest level in this export index in 20 years. Exports have been the
strongest sector in U.S. manufacturing during the past year.
November 4. Australia. Reserve Bank of Australia lowered its overnight cash rate by 75 basis
points to 5.25%, the lowest Australian rate since March 2005.
November 4. Indian Prime Minister Manmohan Singh established a Cabinet-level committee to
evaluate the effect of the financial crisis on India’s economy and industries. This follows the
November 2 Indian and Pakistani Central banks’ actions to boost liquidity. India cut its shortterm lending rate by 50 basis points to 7.5% and reduced its cash reserve ratio by 100 basis points
to 5.5%.
November 4. Chilean President Michelle Bachelet announced a U.S. $1.15 billion stimulus
package to boost the housing market and channel credit into small and medium businesses.
November 3. IMF announced agreement with Kyrgyzstan on arrangement under the Exogenous
Shocks Facility to provide at least U.S. $60 million. The agreement requires the approval of the
IMF Executive Board to become final.
November 3. Russian Prime Minister Vladimir Putin reported measures to support the real
economy. The measures will include temporary preferences for domestic producers for state
procurement contracts, subsidizing interest rates for loans intended to modernize production; and
tariff protection for a number of industries such as automobiles and agriculture. The new policy
aims to support exporters.
October 31. Three of the six Gulf Cooperation Council, GCC, countries, Bahrain, Kuwait and
Saudi Arabian central banks reduced interest rates to follow the actions of the U.S. Federal
Reserve and other central banks.
October 31. Kazakhstan government will make capital injections into its top four banks,
Halyk Bank, Kazkommertsbank, Alliance Bank and BTA Bank.
October 31. The U.S. Commerce Department reported that consumer spending fell 0.3% in
September after remaining flat in the previous month. On a year-to-year basis, spending was
down 0.4%, the first such drop since the recession of 1991. Consumer spending has not grown
since June.
October 30. The U.S. Bureau of Economic Analysis reported that U.S. real gross domestic
product decreased 0.3 per cent in the third quarter of 2008 after increasing 2.8 per cent in the
second quarter of 2008.
October 29. The U.S. Federal Reserve lowered its target for the federal funds rate 50 basis
points to 1 per cent. It also approved a 50 basis point decrease in the discount rate to 1.25 per
cent. The Federal Reserve also announced establishment of temporary reciprocal currency

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arrangements, or swap lines, with the Banco Central do Brasil, the Banco de Mexico, the Bank of
Korea, the Monetary Authority of Singapore, and the Reserve Bank of New Zealand. Swap lines
are designed to help improve liquidity conditions in global financial markets.
October 29. IMF approved the creation of a Short-Term Liquidity Facility, established to
support countries with strong policies which face temporary liquidity problems.
October 28. The IMF, the European Union, and the World Bank announced a joint financing
package for Hungary totaling $25.1 billion to bolster its economy. The IMF is to lend Hungary
$15.7 billion, the EU $8.1 billion, and the World Bank $1.3 billion.
October 28. The U.S. Conference Board said that its consumer confidence index has dropped to
an all-time low, from 61.4 in September to 38 in October.
October 27. Iceland’s Kaupthing Bank became the first European borrower to default on yendenominated bonds issued in Japan (samurai bonds).
October 26. The IMF announced it is set to lend Ukraine $16.5 Billion.
October 24. IMF announced an outline agreement with Iceland to lend the country $2.1 billion
to support an economic recovery program to help it restore confidence in its banking system and
stabilize its currency.
October 23. President Bush called for the G-20 leaders to meet on November 15 in Washington,
DC to deal with the global financial crisis.
October 22. Pakistan sought help from the IMF to meet balance of payments difficulties and to
avoid a possible economic meltdown amid high fuel prices, dwindling foreign investment and
soaring militant violence.
G-20. The Group of 20 Finance Ministers and Central Bank Governors from industrial and
emerging-market countries is to meet in Sao Paulo, Brazil on November 8-9, 2008, to discuss key
issues related to global economic stability.
October 20. The Netherlands agreed to inject €10 billion ($13.4 billion) into ING Groep NV, a
global banking and insurance company. The investment is to take the form of nonvoting preferred
shares with no maturity date (ING can repay the money on its own schedule and will have the
right to buy the shares back at 150% of the issue price or convert them into ordinary shares in
three years). The government is to take two seats on ING’s supervisory board; ING’s executiveboard members are to forgo 2008 bonuses; and ING said it would not pay a dividend for the rest
of 2008.
October 20. Sweden proposed a financial stability plan, which includes a 1.5 trillion Swedish
kronor ($206 billion) bank guarantee, to combat the impact of the economic crisis.
October 20. The U.N.’s International Labor Organization projects that the global financial
crisis could add at least 20 million people to the world’s unemployed, bringing the total to 210
million by the end of 2009.
October 19. South Korea announced that it would guarantee up to $100 billion in foreign debt
held by its banks and would pump $30 billion more into its banking sector.

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October 18. President Bush, President Nicolas Sarkozy of France, and the president of the
European Commission issued a joint statement saying they agreed to “reach out to other world
leaders” to propose an international summit meeting to be held soon after the U.S. presidential
election, with the possibility of more gatherings after that. The Europeans had been pressing for a
meeting of the Group of 8 industrialized nations, but President Bush went one step further, calling
for a broader global conference that would include “developed and developing nations”—among
them China and India.
October 17. The Swiss government said it would take a 9% stake ($5.36 billion) in UBS, one of
the country’s leading banks, and set up a $60 billion fund to absorb the bank’s troubled assets.
UBS had already written off $40 billion of its $80 billion in “toxic American securities.” The
Swiss central bank was to take over $31 billion of the bank’s American assets (much of it in the
form of debt linked to subprime and Alt-A mortgages, and securities linked to commercial real
estate and student loans).
October 15. The G8 leaders (Canada, France, Germany, Italy, Japan, Russia, the United Kingdom
and the United States, and the European Commission) stated that they were united in their
commitment to resolve the current crisis, strengthen financial institutions, restore confidence in
the financial system, and provide a sound economic footing for citizens and businesses. They
stated that changes to the regulatory and institutional regimes for the world’s financial sectors are
needed and that they look forward to a leaders’ meeting with key countries at an appropriate time
in the near future to adopt an agenda for reforms to meet the challenges of the 21st century.
October 14. In coordination with European monetary authorities, the U.S. Treasury, Federal
Reserve, and Federal Deposit Insurance Corporation announced a plan to invest up to $250
billion in preferred securities of nine major U.S. banks (including Citigroup, Bank of America,
Wells Fargo, Goldman Sachs and JPMorgan Chase). The FDIC also became able to
temporarily guarantee the senior debt and deposits in non-interest bearing deposit transaction
accounts (used mainly by businesses for daily operations).261
October 13. U.K. Government provided $60 billion and took a 60% stake in Royal Bank of
Scotland and 40% in Lloyds TSB and HBOS.
October 12-13. Several European countries (Germany, France, Italy, Austria, Netherlands,
Portugal, Spain, and Norway) announced rescue plans for their countries worth as much as
$2.7 trillion. The plans were largely consistent with a U.K. model that includes concerted action,
recapitalization, state ownership, government debt guarantees (the largest component of the
plans), and improved regulations.
October 8. In a coordinated effort, the U.S. Federal Reserve, the European Central Bank, the
Bank of England and the central banks of Canada and Sweden all reduced primary lending
rates by a half percentage point. Switzerland also cut its benchmark rate, while the Bank of
Japan endorsed the moves without changing its rates. The Chinese central bank also reduced its
key interest rate and lowered bank reserve requirements. The Federal Reserve’s benchmark shortterm rate stood at 1.5% and the European Central Bank’s at 3.75%.

261

U.S. Treasury. “Joint Statement by Treasury, Federal Reserve and FDIC.” Press Release HP-1206, October 14,
2008.

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October 5. The German government moved to guarantee all private savings accounts and
arranged a bailout for Hypo Real Estate, a German lender. A week earlier, Fortis, a large
banking and insurance company based in Belgium but active across much of Europe, had
received €11.2 billion ($8.2 billion) from the governments of the Netherlands, Belgium and
Luxembourg. On October 3, the Dutch government seized its Dutch operations and on October 5,
the Belgian government helped to arrange for BNP-Paribas, the French bank, to take over what
was left of the company.
October 3. U.S. House of Representatives passes 110th Congress bill H.R. 1424, Financial
Institutions Rescue bill, clearing it for Presidential signing or veto. President signs bill into law,
P.L. 110-343, the Emergency Economic Stabilization Act of 2008, sometimes referred to as the
Troubled Assets Relief Program, TARP. The new bill’s title includes its purpose:
“A bill to provide authority for the Federal Government to purchase and insure certain types of
troubled assets for the purposes of providing stability to and preventing disruption in the economy
and financial system and protecting taxpayers ... ”
October 3. Britain’s Financial Services Authority said it had raised the amount guaranteed in
savings accounts to £50,000 ($88,390) from £35,000. Greece also stated that it would guarantee
savings accounts regardless of the amount.
October 3. Wells Fargo Bank announced a takeover of Wachovia Corp, the fourth-largest U.S.
bank. (Previously, Citibank had agreed to take over Wachovia.)
October 1. U.S. Senate passed H.R. 1424, amended, Financial Institutions Rescue bill.
September/October. On September 30, Iceland’s government took a 75% share of Glitnir,
Iceland’s third-largest bank, by injecting €600 million ($850 million) into the bank. The following
week, it took control of Landsbanki and soon after placed Iceland’s largest bank, Kaupthing,
into receivership as well.
September 26. Washington Mutual became the largest thrift failure with $307 billion in assets.
JPMorgan Chase agreed to pay $1.9 billion for the banking operations but did not take
ownership of the holding company.
September 22. Ireland increased the statutory limit for the deposit guarantee scheme for banks
and building societies from €20,000 ($26,000) to €100,000 ($130,000) per depositor per
institution.
September 21. The Federal Reserve approved the transformation of Goldman Sachs and
Morgan Stanley into bank holding companies from investment banks in order to increase
oversight and allow them to access the Federal Reserve’s discount (loan) window.
September 18. Treasury Secretary Paulson announced a $700 billion economic stabilization
proposal that would allow the government to buy toxic assets from the nation’s biggest banks, a
move aimed at shoring up balance sheets and restoring confidence within the financial system. An
amended bill to accomplish this was passed by Congress on October 3.
September 16. The Federal Reserve came to the assistance of American International Group,
AIG, an insurance giant on the verge of failure because of its exposure to exotic securities known
as credit default swaps, in an $85 billion deal (later increased to $123 billion).

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September 15. Lehman Brothers bankruptcy at $639 billion is the largest in the history of the
United States.
September 14. Bank of America said it will buy Merrill Lynch for $50 billion.
September 7. U.S. Treasury announced that it was taking over Fannie Mae and Freddie Mac,
two government-sponsored enterprises that bought securitized mortgage debt.
August 12. According to Bloomberg, losses at the top 100 banks in the world from the U.S.
subprime crisis and the ensuing credit crunch exceeded $500 billion as write downs spread to
more asset types.
May 4. Finance ministers of 13 Asian nations agreed to set up a foreign exchange pool of at least
$80 billion to be used in the event of another regional financial crisis. China, Japan and South
Korea are to provide 80% of the funds with the rest coming from the 10 members of ASEAN.
March. The Federal Reserve staved off a Bear Stearns bankruptcy by assuming $30 billion in
liabilities and engineering a sale of Bear Sterns to JPMorgan Chase for a price that was less than
the worth of Bear’s Manhattan office building.
February 17. The British government decided to “temporarily” nationalize the struggling
housing lender, Northern Rock. A previous government loan of $47 billion had proven
ineffective in helping the company to recover.
January. Swiss banking giant UBS reported more than $18 billion in writedowns due to
exposure to U.S. real estate market. Bank of America acquired Countrywide Financial, the
largest mortgage lender in the United States.
2007
July/August. German banks with bad investments in U.S. real estate are caught up in the
evolving crisis, These include IKB Deutsche Industriebank, Sachsen LB (Saxony State Bank)
and BayernLB (Bavaria State Bank).
July 18. Two battered hedge funds worth an estimated $1.5 billion at the end of 2006 were
almost entirely worthless. They had been managed by Bear Stearns and were invested heavily in
subprime mortgages.
July 12. The Federal Deposit Insurance Corp. took control of the $32 billion IndyMac Bank
(Pasadena, CA) in what regulators called the second-largest bank failure in U.S. history.
March/April. New Century Financial corporation stopped making new loans as the practice of
giving high risk mortgage loans to people with bad credit histories becomes a problem. The
International Monetary Fund warned of risks to global financial markets from weakened US
home mortgage market.

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Appendix B. Stimulus Packages Announced by
Governments
Date
Announced

Country

$Billion

Status, Package Contents

17-Feb-09

United
States

787.00

4-Feb-09

Canada

32.00

Two-year program. Infrastructure, tax relief, aid for sectors in peril.
Government to run an estimated $1.1 billion budget deficit in 2008 and $52
billion deficit in 2009.

7-Jan-09

Mexico

54.00

Infrastructure, a freeze on gasoline prices, reducing electricity rates, help
for poor families to replace old appliances, construction of low-income
housing and an oil refinery, rural development, increase government
purchases from small- and medium-sized companies. Paid for by taxes, oil
revenues, and borrowing.

12-Dec-08

European
Union

39.00

Total package of $256 billion called for states to increase budgets by $217
billion and for the EU to provide $39 billion to fund cross-border projects
including clean energy and upgraded telecommunications architecture.

13-Jan-09

Germany

65.00

Infrastructure, tax cuts, child bonus, increase in some social benefits,
$3,250 incentive for trading in cars more than nine years old for a new or
slightly used car.

24-Nov-08

United
Kingdom

29.60

Proposed plan includes a 2.5% cut in the value added tax for 13 months, a
postponement of corporate tax increases, government guarantees for loans
to small and midsize businesses, spending on public works, including public
housing and energy efficiency. Plan includes an increase in income taxes on
those making more than $225,000 and increase National Insurance
contribution for all but the lowest income workers.

5-Nov-08

France

33.00

Public sector investments (road and rail construction, refurbishment and
improving ports and river infrastructure, building and renovating
universities, research centers, prisons, courts, and monuments) and loans
for carmakers. Does not include the previously planned $15 billion in
credits and tax breaks on investments by companies in 2009.

16-Nov-08

Italy

52.00

Awaiting final parliamentary approval. Three year program. Measures to
spur consumer credit, provide loans to companies, and rebuild
infrastructure. February 6, announced a $2.56 billion stimulus package that
was part of the three-year program that includes payments of up to $1,950
for trading in an old car for a new, less polluting one and 20% tax
deductions for purchases of appliances and furniture.

22-Nov-08

Netherlands

7.50

Tax deduction to companies that make large investments, funds to
companies that hire temporary workers, and creation of a program to find
jobs for the unemployed.

11-Dec-08

Belgium

2.60

Increase in unemployment benefits, lowering of the value added tax on
construction, abolishing taxes on energy, energy checks for families, faster
payments of invoices by the government, faster government investment in
railroads and buildings, and lowering of employer’s fiscal contributions.

27-Nov-08

Spain

14.30

Public works, help for automobile industry, environmental projects,
research and development, restoring residential and military housing, and
funds to support the sick.

14-Jan-09

Portugal

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2.89

Infrastructure technology, tax cuts, education, transfers to states, energy,
nutrition, health, unemployment benefits. Budget in deficit.

Funds to be provided to medium and small-sized businesses, money for
infrastructure, particularly schools, and investment in technological
improvement.

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Date
Announced

Country

20-Nov-08

Israel

5.40

Public works to include desalination plants, doubling railway routes, adding
R&D funding, increasing export credits, cutting assorted taxes, and aid
packages for employers to hire new workers.

21-Dec-08

Switzerland

0.59

Public works spending on flood defense, natural disaster and energyefficiency projects.

5-Dec-08

Sweden

2.70

Public infrastructure and investment in human capital, including job training,
vocational workshops, and workplace restructuring.; extension of social
benefits to part-time workers.

26-Jan-09

Norway

2.88

Investment in construction, infrastructure, and renovation of state-owned
buildings, tax breaks for companies.

20-Nov-08

Russia

20.00

Cut in the corporate profit tax rate, a new depreciation mechanism for
businesses, to be funded by Russia’s foreign exchange reserves and rainy
day fund.

3-Dec-08

Egypt

8.51

Infrastructure, Industrial Development Authority, Export Development
Fund, investment funds for small- and medium-sized enterprises, funds for
industrial modernization, training, technology transfer centers, export
promotion, land development

10-Nov-08

China

586.00

Low-income housing, electricity, water, rural infrastructure, projects aimed
at environmental protection and technological innovation, tax deduction
for capital spending by companies, and spending for health care and social
welfare.

13-Dec-08

Japan

250.00

Increase in government spending, funds to stabilize the financial system
(prop up troubled banks and ease a credit crunch by purchasing
commercial paper), tax cuts for homeowners and companies that build or
purchase new factories and equipment, and grants to local government.

6-Apr-09

Japan

146.00

Increasing safety net for non-regular workers, support for small businesses,
revitalizing regional economies, promoting green car purchases, promoting
solar power and nursing and medical services.

3-Nov-08

South
Korea

14.64

$11 billion for infrastructure (including roads, universities, schools, and
hospitals; funds for small- and medium-business, fishermen, and families
with low income) and tax cuts. Includes an October 2008 stimulus package
of $3.64 billion to provide support for the construction industry.

37.87

The government announced its intention to invest $37.87 billion over the
next four years in eco-friendly projects including the construction of dams;
“green” transportation networks such as low-carbon emitting railways,
bicycle roads, and other public transportation systems; and expand existing
forest areas.

$Billion

Status, Package Contents

9-Feb-09

South
Korea

16-Dec-08

Vietnam

6.00

Tax cuts, spending on infrastructure, housing, schools, and hospitals.

28-Jan-09

Indonesia

6.32

(Proposed) Tax incentives for companies and individuals, cuts in fuel and
electricity prices, spending on infrastructure.

21-Jan-09

Philippines

7.01

Stimulus package wrapped into the current budget. More spending on
infrastructure, agriculture, education, and health, cash for poor households,
and tax cuts. Partial funding by borrowing from government corporations
and from the nation’s social security system.

29-Jan-09

Thailand

3.35

Cash for low earners, tax cuts, expanded free education, subsidies for
transport and utilities.

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Date
Announced

Country

$Billion

22-Jan-09

Singapore

13.70

Personal income tax rebate; cut in maximum corporate tax rate; subsidies
for employee wages; training; cash handouts to low-income workers;
increase in public sector hiring; assuming 80% of the risk on private bank
loans; boosting aid to welfare recipients, government pensioners, and
students; invest in infrastructure.

30-Nov-08

Malaysia

1.93

High impact infrastructure projects including roads, schools, and housing.
Government budget in deficit. Expect a second, larger stimulus package in
February or March 2009.

8-Dec-08

India

4.00

Stimulus package includes $70 million to finance exports of textiles and
handicrafts; value added tax rate cut at different levels and across products.
Public works spending includes funding for various sectors, including:
housing, automobile, infrastructure, power, and medium and small
industries. In addition, import duties on naptha was revoked, export duty
on iron ore was removed, levy on exports of iron were reduced.

28-Nov-08

Taiwan

15.60

Shopping vouchers of $108 each for all citizens, construction projects to be
carried out over four years include expanding metro systems, rebuilding
bridges and classrooms, improving, railway and sewage systems, and renew
urban areas.

31-Dec-08

Sri Lanka

0.14

Cuts in prices for diesel, kerosene, and furnace oil; lifting of surcharge on
electricity, incentive for exporters not to retrench workers, lifting of tax
on rubber exports, and subsidies for tea farmers.

26-Jan-09

Australia

35.2

$7 billion stimulus package in October 2008 was cash handouts to low
income earners and pensioners. January’s $28.2 billion package includes
infrastructure, schools and housing, and cash payments to low- and middleincome earners. Budget is in deficit.

7-Jan-09

Mexico

23-Dec-08

Brazil

5.00

Program established in 2007 to continue to 2010. Tax cuts (exempt capital
goods producers from the industrial and welfare taxes, increase the value
of personal computers exempted from taxes) and rebates. Funded by
reducing the government’s budget surplus.

5-Dec-08

Argentina

3.80

Low-cost loans to farmers, automakers, or other exporters.

6-Jan-09

Chile

4.00

Infrastructure, subsidies for copper producer, lower employer
contributions for small- and medium-sized companies, and income tax
rebates. Funded from copper windfall earnings saved in sovereign wealth
funds and by issuing bonds.

54.00

Status, Package Contents

Infrastructure, a freeze on gasoline prices, reducing electricity rates, help
for poor families to replace old appliances, construction of low-income
housing and an oil refinery, rural development, increase government
purchases from small- and medium-sized companies. Paid for by taxes, oil
revenues, and borrowing.

Source: Congressional Research from various news articles and government press releases.
Notes: Currency conversions to U.S. dollars were either already done in the news articles or by CRS using
current exchange rates.

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Appendix C. Comparison of Selected Financial
Regulatory Reform Proposals262
This appendix provides a comparison, in graphic form, of selected proposals for regulatory
reform that have been put forward in the wake of the global financial crisis. Seven such proposals
are covered in the table below. They are, in chronological order:
U.S. Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure,
March 2008. (This study was completed under Secretary Henry Paulson, during the Bush
Administration.)
Counterparty Risk Management Policy Group (CRMPG), Containing Systemic Risk: The
Road to Reform, Aug. 6, 2008. (The CRMPG, a group of commercial and investment bankers,
began this study at the suggestion of the President’s Working Group on Financial Markets. Its
focus is on market participants, rather than regulators.)
Congressional Oversight Panel (COP), Special Report on Regulatory Reform: Modernizing the
American Financial Regulatory System: Recommendations for Improving Oversight, Protecting
Consumers, and Ensuring Stability, January 2009. (The COP was created by the Emergency
Economic Stabilization Act of 2008 (P.L. 110-343) to oversee the Troubled Asset Relief
Program.)
Group of Thirty, Financial Reform: A Framework for Financial Stability, January 15, 2009.
(The Group of Thirty is a private, nonprofit body composed of senior representatives of the
private and public sectors and academia, which aims to deepen understanding of international
economic and financial issues.)
Group of 20 (G-20), G-20 Working Group on Enhancing Sound Regulation and Strengthening
Transparency: Final Report (Draft), February 2009. (The G-20 is made up of the finance
ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa,
South Korea, Turkey, the U.K., and the United States, and also the European Union.)
Financial Services Authority (FSA), The Turner Review: A Regulatory Response to the Global
Banking Crisis, March 2009. (The FSA is the UK regulatory agency with jurisdiction over
banking, securities, insurance, and derivatives. Adair Turner has been FSA chairman since
September 2008.)
U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation, June 2009.
(Treasury has released draft legislative language containing many of these recommendations.)
The table below lists a number of specific recommendations contained in the above reports and
studies, and indicates by an “X” which ones contain each recommendation. The absence of an
“X” does not necessarily mean that the authors of the report oppose the recommendation—each
study has its own scope and focus. In some cases, studies identify issues as needing further study;
262

Prepared by Mark Jickling, Specialist in Financial Economics.

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in others, an issue may be identified as a problem contributing to the financial crisis without a
specific recommendation for reform being made. (In neither of these cases would an “X” appear
in the table.)

(An “X” indicates that a report includes the recommendation at the left)
Recommendation

Treasury
(2009)

FSA

G20

Group
of 30

COP

CRMPG

Treasury
(2008)

Systemic Risk
Create (or designate) a single regulator with
responsibility over all systemically-important
financial institutions, regardless of their legal
form.

X

All systemically-important financial
institutions should be subject to an
appropriate degree of regulation.

X

The systemic risk regulator should have
prompt corrective action powers with
regard to failing systemically-important firms.

X

X

X

X

Firms’ internal risk controls should be made
more robust and should take systemic risk
into account. Corporate boards should
assume more responsibility for their firms’
risk management practices.

X

X

Systemically-important banks should be
restricted in certain risky activities, such as
affiliation with non-financial firms,
proprietary trading, etc.

X

X

Financial institutions’ use of stress testing
should be more rigorous.

X

Regulation of critical payment systems
should be strengthened.

X

International monitoring for systemic risk
should be enhanced, and a more formal
mechanism should be created.

X

X

X

X

X

X

X

X

X

X

X

X
X

X

X

X

X

Capital Standards
Large complex systemically-important
financial institutions should be subject to
more stringent capital regulation than other
firms.

X

Minimum capital standards should be raised
throughout the banking system, or for all
financial institutions.

X

Capital standards should be adjusted to
avoid procyclicality, that is, firms should be
required to build up capital during good
times, and be allowed to hold less capital
during cyclical contractions.

Congressional Research Service

X

X

X

X

X

X

X

X

X

X

X

X

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Recommendation

Treasury
(2009)

FSA

G20

Group
of 30

COP

CRMPG

X

X

X

X

X

X

Regulators’ and firms’ capital decisions
should make greater provision against
liquidity risk.

Treasury
(2008)

Hedge Funds and Other Private Pools of Capital
Hedge funds should be required to register
with the Securities and Exchange
Commission (SEC) or other national
securities regulator.

X

X

X

X

X

Systemically-important hedge funds should
be subject to prudential regulation.

X

X

X

X

X

Hedge funds should provide information on
a confidential basis to regulators about their
strategies and positions.

X

X

X

X

X

Credit default swaps should be processed
through a regulated centralized counterparty
(CCP) or clearing house.

X

X

X

All standardized OTC derivatives should be
processed through a regulated CCP or
clearing house.

X

OTC derivatives dealers should be subject
to a strong regulatory regime.

X

Non-standard (or customized) OTC
derivatives should be reported to a central
trade repository or to a regulator.

X

Over-the-Counter (OTC) Derivatives
X

X

X

X

X

Resolution Authority for Non-Bank Financial Institutions
To avoid disorderly liquidations, a
government agency should have authority to
take over a failing, systemically-important
non-bank institution, and place it in
conservatorship or receivership, outside the
bankruptcy system.

X

X

X

X

Money Market Funds
SEC (or other national regulator) should
impose limits on risk-taking to make money
market funds less vulnerable to runs.
Funds that offer bank-like services should be
chartered as special purpose banks, insured,
and regulated.

X

Compensation Structures in Financial Firms
Pay practices should discourage excessive
risk-taking, via incentives for fostering longterm stability rather than maximizing annual
performance bonuses.

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X

X

X

X

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Recommendation

Treasury
(2009)

FSA

Regulators should consider compensation
structures when assessing firms’ risk
management practices.

G20

Group
of 30

COP

CRMPG

Treasury
(2008)

X

Credit Rating Agencies
Credit rating agencies (CRAs) should be
registered and regulated with the
appropriate government agency.

X

X

X

CRAs should be held more accountable for
the accuracy of their ratings, through afterthe-fact audits or independent evaluations.

X

X

The rating process for complex financial
instruments, such as structured securitized
products, should be made more transparent,
or such instruments should be subject to
additional mandatory risk disclosures.

X

CRA revenues (especially when securities
issuers pay for ratings) should be subject to
oversight, greater disclosure, or limits.

X

X

X

X

X

X

Accounting Standards
Fair value, or mark-to-market, accounting
standards should be modified to reduce
their procyclical impact.

X

X

Current rules for accounting consolidation
(specifying when assets and liabilities may be
held off the balance sheet) should be
replaced by a principles-based standard
reflecting the concepts of control and risk
exposure.

X

Other Regulatory Structure Issues
There should be a single banking regulator
for prudential supervision.
There should be a single regulator for
consumer financial products.

X
X

Financial regulators should play a greater
role in macroeconomic policy-making.

X
X

X

Government-sponsored enterprises—a
clear line should be drawn between public
and private firms.

X

X

X

X

X

Insurance companies should be chartered
and regulated at the federal level.

Minimum international standards—a
regulatory floor—should apply in all
countries, including tax havens and offshore
banking centers.

X

X

X

X

Source: Prepared by CRS.

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Appendix D. British, U.S., and European Central
Bank Operations, April to Mid-October 2008

May

Bank of England

Federal Reserve

Announced that
expanded threemonth long-term
repos would be
maintained in June and
July.

Expanded size of
Term Auction Facility
(TAF).

July

Introduced 84-day
TAF.

Announced that
expanded threemonth long-term
repos would be
maintained in
September and
October.
Announced long-term
repo operations to be
held monthly.
Extended drawndown
period for Special
Liquidity Scheme
9SLS).

Congressional Research Service

Announced that it
would conduct
operations under the
84-day TAF to
provide US dollars to
European Central
Bank counterparties.

Authorized the
auction of options for
primary dealers to
borrow Treasury
securities from the
TSLF.

Announced that
supplementary threemonth longer-term
refinancing operations
(LTROs) would be
renewed in August
and September.

Expanded collateral of
PDCF.

Announced six-month
LTROs would be
renewed in October,
and three-month
LTROs would be
renewed in November
and December.

Expanded size and
collateral of TSLF.
Announced provision
of loans to banks to
finance purchase of
high quality assetbacked commercial
paper from money
market mutual funds.

Coordinated
Central Bank
Announcements
Expansion of
agreements between
Federal Reserve and
European Central
Bank.

Extended collateral of
Term Securities
Lending Facility
(TSLF).

Primary Dealer Credit
Facility (PDCF) and
TSLF extended to
January 2009.

September

European Central
Bank

Conducted Special
Term Refinancing
Operation.

Expansion of
agreement between
Federal Reserve and
European Central
Bank.
Establishment of swap
agreements between
Federal Reserve and
the Bank of England,
subsequently
expanded.
Bank of England and
European Central
Bank, in conjunction
with the Federal
Reserve, announced
operation to lend U.S.
dollars for one week,
subsequently
extended to
scheduled weekly
operations.

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October

Bank of England

Federal Reserve

Extended collateral
for one-week U.S.
dollar repos and for
three-month longterm repos.

Announced payment
of interest on
required and excess
reserve balances.

Extended collateral of
all extended-collateral
sterling long-term
repos, U.S. dollar repo
operations, and the
SLS to include bankguaranteed debt
under the UK
Government bank
debt guarantee
scheme.

Increased size of
TAFs.
Announced creation
of the Commercial
paper Funding Facility.

European Central
Bank
Increased size of sixmonth supplementary
LTROs.
Announced a
reduction in the
spread of standing
facilities from 200
basis points to 100
basis points around
the interest rate on
the main refinancing
operation.
Introduced swap
agreements with the
Swiss National Bank.

Announced
Operations Standing
Facilities and a
Discount Window
Facility, which
together replace
existing Standing
Facilities.

Coordinated
Central Bank
Announcements
Announced schedules
for TAFs and Forward
TAFs for auctions of
U.S. dollar liquidity
during the fourth
quarter.
European Central and
Bank of England
announced tenders of
U.S. dollar funding at
7-day, 28-day, 84-day
maturities at fixed
interest rates for full
allotment. Swap
agreements increased
to accommodate
required level of
funding.

Source: Financial Stability Report, October 2008, the Bank of England. p. 18.

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Author Contact Information
Dick K. Nanto, Coordinator
Specialist in Industry and Trade
dnanto@crs.loc.gov, 7-7754

Ben Dolven
Section Research Manager
bdolven@crs.loc.gov, 7-7626

Martin A. Weiss
Specialist in International Trade and Finance
mweiss@crs.loc.gov, 7-5407

William H. Cooper
Specialist in International Trade and Finance
wcooper@crs.loc.gov, 7-7749

James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751

J. F. Hornbeck
Specialist in International Trade and Finance
jhornbeck@crs.loc.gov, 7-7782

Wayne M. Morrison
Specialist in Asian Trade and Finance
wmorrison@crs.loc.gov, 7-7767

Mark Jickling
Specialist in Financial Economics
mjickling@crs.loc.gov, 7-7784

J. Michael Donnelly
Information Research Specialist
mdonnelly@crs.loc.gov, 7-8722

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