Professional Documents
Culture Documents
Figure 1
Property Prices
Figure 2
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Source: D. Papadimitrius et. al. Strategic Analysis, Jan. 2006. Levy Economics, Institute of Bard College
Figure 3
CDO Market
Collateralized Debt Obligations - higher level of complication and leverage. CDO consists of package of ABS (asset backed securities) arranged in different tranches with different credit ratings, returns, and payment priority. Investors choose which tranche to invest according to risk appetite. Often funding mismatch; cross-selling CDOs CDO of CDS; CDO squared; CDO cube.
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Typical CDO
SUBPRIME MORTGAGES
80%
AAA Tranche
15% 5%
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Figure 5
300 $ BILLIONS
200
100
0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Source: Presentation on Subprime to ADB by Credit Mortgage Group of TCW Inc., Sept. 2007 13
Crisis Spreads to CDO, SIV, LBOs, Monolines, Credit Cards, Auto loans etc.
When lower tranche gets hit, holders of upper tranches panic and head for exit, causing prices to fall. Investors no longer want to fund CDOs. SIVs (structured investment vehicles). SPVs to short fund high yielding assets like CDOs, MBS. Investors panic, no longer want to fund CDOs, SIVs. Led to freeze in commercial paper market. Credit default swaps market ($60 trillion). 7 top monolines guarantee $4 trillion CDS. Monolines downgraded. Fannie Mae and Ginnie Mae - guarantee $5 trillion of mortgages - also downgraded.
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Inflation
Geo-political instability in Middle East adds to concerns over supply of commodities particularly of oil. Oil price doubled in less than 12 months, rose 5x from 2003. Prices of agricultural commodities also shot up as demand for bio-fuel competes for use of agricultural products. Rice prices tripled btw Jan and May 2008. Role of financial speculation in commodities also contributory factor
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Stagflation
Policymakers caught between rock and hard place - struggling to raise interest rates and to tighten credit to control inflation. Same measures suppress investment and consumption contributing to slow growth GDP growth in Asia (ex Japan) projected to be about 5% in 2008.
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Financial Markets
Reasons : withdrawal of foreign equity funds from Asia to cover losses in U.S. China and India markets over-heated Bond markets - emerging market bond yield risen. Banking system still relatively strong and stable. Except for some Japanese and Chinese banks, few banks exposed to subprime assets. Corporate leverage ratio improved dramatically since 1997 crisis. Average debt:equity <50%.
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Conclusions
Financial crisis far from over. Will spill over into real economy; U.S. economy going into stagflation; Asian economy slowdown but still positive growth. Bigger threat is inflation; Financial markets highly volatile and has dropped more drastically in Asia; Macro economic fundamentals in Asia relatively strong and robust;
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Conclusions
Trade will be affected - especially in E&E industry in Malaysia with impact on employment; Outflow of portfolio investments 2008 likely; Less impact seen on capital flows. In fact, Malaysia has net capital outflows; Malaysian banking system - loans too reliant on household consumption; not enough for businesses. Consumption bubble.
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Thank You!
By Dr Michael Lim Mah Hui
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