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O Contexto Global e O Brasil
30 setembro 2010
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Outline
• Antecedents– Real Estate Boom
– Financial Sector Expansion
• The Great Recession Begins and Spreads– The United States
– European Union
– The Developing World
• Recovery Starts in 2009 and Continues On• Brazil
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A Global Real Estate Boom Appears
• Residential Construction Becomes a Growing Percentage of Real Investment Responding to Low Interest Rates– But Prices Rise Rapidly Too: In the Early 21st Century Values Rise from
$40 Trillion to More Than $70 Trillion• The Biggest Bubble in History: The US, Spain, Britain, Ireland
• There Is a Wealth Effect Encouraging Consumption– Additionally, People Can Borrow More Against Their Increased Capital
• Values Peak at End of 2005 in US, Later Elsewhere• Then There is Substantial Debt, But No Matching Assets
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The Bubble: Going Up
Q 1 2005 Q 1 2004 1997-2005
Spain 15.5% 17.2% 145%
France 15.0 14.7 87
Germany - 1.3 - 0.8 - 0.2
Ireland 6.5 13.2 192
UK 5.5 16.9 154
Australia 0.4 17.9 114
US 12.6 8.4 73
Japan - 5.4 - 6.4 - 28
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The Financial Sector Expands
• Financial Intermediation Rises– New financial instruments created
• Collateralized Debt Obligations• Credit Default Swaps
– Much kept off the balance sheets• Structured Investment Vehicles
– Rise of hedge funds
• Occurs Internationally• Even US Nasdaq decline is temporary• Leverage Goes Up
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The “New Economy” Begins To Fray
• A Jobless Recovery After 2001 With No Wage Growth– Income Distribution Worsens Perceptibly
• Stock Options For the Rich
• Consumption Drives the Economy: Despite Initial Stock Market Decline
• A Sense of Economic Irrationality Prevails:– Capital Inflows Replace Domestic Savings
• Federal Reserve Only Raises Interest Rates in June 2004– Continues Upward Until June 2006: 5 ½%
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But Global Collapse Is Around the Corner…
• The Process First Begins to Unravel in the US in 2007– Credit Crisis Occurs Briefly at End of August
• Central Banks Begin to Collaborate
– Growth Begins to Show Effects of Housing Contraction
• Recession Seems Imminent– Federal Reserve Begins Reducing Interest Rate in September and
Again in December
• But Few Predict Magnitude of the Shock
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US Financial System Under Increasing Strain
• Federal Reserve Lowers Interest Rate in January 2008 By 125 Points to 3%
• Then Comes A Record Tax Rebate of $167 Billion in February– Doubts –Later Shown To Be Correct- About Positive Effects
• A Dramatic Decision in March : Bear, Stearns Is Acquired By JP Morgan– The Federal Reserve Has to Guarantee Asset Value First
• Right Afterwards, Fed Rate Falls to 2.25%– And Quickly Goes to 2% in April As Fed Seeks to Provide Unlimited
Resources In Uncertain Market
• Freddie Mac and Fannie Mae Are Nationalized In August• Is This Intervention Enough?
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September Is the Cruelest Month
• A Weekend FBNY Conference: Who Wants Lehman Brothers?– No One
• Then the Lights Begin To Go Out– AIG Has to Be Publicly Acquired Soon After
– Merrill, Lynch Acquired by Bank of America
– JP Morgan Chase Buys Washington Mutual
– Wells Fargo Later Takes Over Wachovia
• Congress Considers A Major Financial Assistance Package, TARP– It Doesn’t Pass Right Away: The Stock Market Declines by 22%
– Then It Does: $700 Billion to Save The Banks
• Thereafter, the Fed Increases the Money Supply Without Limit
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The Rest of the Developed World Is in Trouble, Too
• Unlike the Past, This Time Europe and Japan Follow the US– It Began With the UK and Black Rock in September 2007
• No Surprise: Residential Housing Is A Major Cause in Many Countries
– But It is Also Purchase by EU Banks of US Mortgage Securities
• Policy Coordination Still Weak– ECB Raises Interest Rate by .25% in July 2008
• Reason Is Fear of Inflation: Rising Food and Fuel Prices
– But Rates Already Higher Than US and Japan
– Large Lending to Commercial Banks Occurs
• Japan Declines As Exports Begin to Weaken– High Fiscal Deficits and Low Interest Rates Do Not Help Much
• A Carry Trade Develops, and Extends to Emerging Countries
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Some 4th Quarter 2008 Results
Country Negative Fourth Quarter Growth
South Korea 20.8
Brazil 13.4
Japan 12.7
Mexico 10
US 6.2
EU 5.8
India 4.7
Canada 3.4
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Fiscal deficits rise within developed countries
• Fiscal deficits increase – Compensatory finance automatically adjusts
– Additional governmental outlays and tax cuts occur
• But not enough to avoid sharply rising unemployment– Construction is labor intensive activity
• Increased indebtedness occurs as a consequence– For the US, much of the increase is external
• Almost 40% of public debt, half in Japan and China
• Short-term adjustment can translate into longer-term problem– Will foreign debt holders accept current low interest rates
– Will fiscal accounts improve in time to avoid a mounting disequilibrium
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Financial sector takes priority
• Magnitude of bad loans is impressive– IMF calculates as $2.8 trillion problem
• Concentrated in US and EU
• Decision to treat immediately and not delay as in Japan• Central question emerges
– Bankruptcy or bail-out?• Some favor buy-out
– Main street against wall street
• Bail-out selected on the whole– “Too big to fail”
• Changes in financial regulation legislation and Basel rules come a year later
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Recovery begins to take shape: the US
• Obama’s policies for recovery– Monetary expansion by Fed continues into 2010 and beyond
• Credit availability grows slowly– Housing market difficult to fix as mortgage defaults rise
– Aggressive fiscal help• $787 billion stimulus plan approved early on
– Would it be enough?
• Internal deficit grows to almost double digits • Politics increasingly divides rather than unites• Unemployment lags, and goes higher than predicted
– Household wealth reduced by more than $10 trillion in 2008• Most due to stock market fall
• Increasingly, corporate earnings recover and stock market goes up• Growth projections are first raised, but then lowered
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Macroeconomic indicators: US
2006 2007 2008 2009 2010 2015
Growth rate 2.7 2.1 0.4 -3.2 3.1 2.4
Inflation 3.3 2.9 2.1 1.2 0.7 1.9
Fiscal deficit 2.0 2.7 6.6 12.5 11.0 6.5
Structural balance -2.5 -2.9 -5.4 - 7.9 - 9.2 -6.6
Current account deficit 6.0 5.2 4.9 2.9 3.3 3.5
Net debt 41.9 42.3 47.2 58.3 66.2 85.5
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Recovery begins to take shape: Japan
• Japan had grown from 2002-2007, recuperating its position among the OECD countries– In fact, the longest post-war continuous positive period
– Export growth was the secret, increasingly to China and rest of Asia
– With spreading recession in 2008, decline occurs with recuperation only in 2009 and continuing in 2010
– Internal deficit grows some more• It adds to very large debt, viable because of low interest rate and internal
savings
– External surplus threatened by appreciating currency
• Domestic investment lags as does recovery
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Macroeconomic indicators: Japan
2006 2007 2008 2009 2010 2015
Growth rate 2.0 2.4 -1.2 -5.2 1.9 1.7
Inflation -0.9 -0.7 -0.8 -1.0 -1.7 0.6
Fiscal deficit 4.0 2.4 4.2 10.3 9.8 7.3
Structural balance -3.9 -2.5 -3.5 -7.4 -7.5 -7.5
Current account deficit -3.9 -4.8 -3.2 -2.8
-2.8 -1.8
Net debt 83.8 81.5 96.9 111.6 121.7 154.0
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Europe, another crisis in the making?
• The EU does not go on unaffected– Housing boom in Britain, Ireland, Spain comes to a halt
• Financial sector is hit as a consequence, and elsewhere as well– Deleveraging is necessary and public sector is available to help
– Internal deficits rise, and Maastricht targets disappear
– Growth is negative and some countries pay a heavy price• IMF is involved in Baltic countries, Iceland, Hungary• Russia hurt by fall in petroleum prices, but has ample reserves
– A fundamental disequilibrium within the euro area• Germany sells and the rest buy too much
– No easy way to rebalance with fixed exchange rate
– The Greek problem threatens and now Ireland: IMF help needed
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Macroeconomic indicators: Euro area
2006 2007 2008 2009 2010 2015
Growth rate 3.0 2.8 0.6 -4.1 1.0 1.7
Inflation 2.0 2.4 2.3 1.1 0.6 1.8
Fiscal deficit 1.3 0.6 2.0 6.3 6.8 4.2
Structural balance -2.0 -1.7 -2.6 -4.3 -4.7 -4.1
Current account deficit -0.4 -0.4 0.8 0.4 0 -0.1
Net debt 59.6 57.0 59.5 68.3 73.9 84.2
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Developing Economies Lead Recovery
• After the downturn in 2008, China and India lead the world economy forward– Delinking didn’t occur: globalization is real
– But financial systems are less integrated
• Recovery in the developing economies is rapid– Involves lesser fiscal deficits
– For most, involves lesser consumption
• Responsible for a majority of world growth 2010-2015
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Developing Countries: Rate of Growth
2007 2008 2009 2010 2015
Asian NICs 5.8 1.8 -0.9 5.2 4.3
Asia 10.6 7.9 6.6 8.7 8.5
China 13.0 9.6 8.7 10.0 9.5
India 9.4 7.3 5.7 8.8 8.1
Sub SaharanAfrica
6.9 5.5 2.1 4.7 5.4
Western Hemisphere
5.8 4.3 -1.8 4.0 4.0
Brazil 6.1 5.1 -0.2 5.5 4.1
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Developing Countries: Real Export Growth
2007 2008 2009 2010 2012-15
Asian NICs 9.6 3.8 -5.5 7.3 7.3
Asia 13.2 6.0 -9.0 11.0 13.2
Sub SaharanAfrica
7.2 0.8 -7.2 7.4 5.5
Western Hemisphere
3.3 0.1 -9.0 9.6 5.9
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Developing Countries: Current Account Balances
2007 2008 2009 2010 2015
Asian NICs 6.1 4.9 8.9 6.6 6.0
Asia 7.0 5.7 4.1 4.1 5.0
China 11.0 9.4 5.8 6.2 8.0
India -1.0 -2.2 -2.1 -2.2
-2.0
Sub-SaharanAfrica
1.2 0.9 -2.1 -1.7 -1.4
Western Hemisphere
0.4 -0.6 -0.5 -1.0 -1.6
Brazil 0.1 -1.7 -1.5 -2.9 -3.2
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Developing Countries: Domestic Savings
2007 2008 2009 2010 2012-15
Asian NICs 32.4 32.8 32.4 31.8 31.7
Asia 45.0 43.9 41.6 45.4 46.0
Sub-SaharanAfrica
22.8 23.3 20.3 21.6 21.6
Western Hemisphere
22.5 22.8 19.2 19.9 21.2
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Developing Countries: Central Gov’t Net Lending
2007 2008 2009 2010 2011
Asian NICs 4.4 1.5 -0.7 -0.2 0.2
Asia 2.5 1.8 1.3 1.2 1.5
China 6.3 6.2 6.1 5.4 5.2
India -2.8 -5.2 -6.7 -5.7 -4.7
Sub-Saharan Africa
0.6 -2.1 -4.6 -4.2 -3.6
Western Hemisphere
-1.1 -0.5 -3.1 -2.1 -2.4
Brazil -2.2 -0.4 -3.4 -1.2` -2.0
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If Delinking Didn’t Succeed the First Time, Try, Try Again
• Many Are Still Searching For An Exclusive South-South Tie– Has Long-standing Origins
• UNCTAD• OPEC
– Regional Trade Agreements In Latin America and Africa
– Unifying Feature Is Some Element of Discrimination
• Now Intercontinental– IBSA
• Dates Back to 2003
– BRICs• Second meeting, 2010 •
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South-South Unity: Myth or Reality?
• South-South Trade: Complementary or Competitive or Not Very Important– IBSA
• High Growth, But Without Great Significance– China
• Now a Leading Global Trader– Asia, North America, Latin America– Absorbs Raw Materials, Exports Manufactures
» Benefits From Foreign Investment and Technology Transfer
• Exchange Rate Policy Under Attack– Regional Trade Pacts
• New Strategies– Payments in Domestic Currencies– South Investment in the South
»
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Brazil: Next Year
• Slower Real Growth– After more than 7% in 2010 hardly surprising
• Estimates 4.5 to 5%
– But need for adjustment• Inflation may remain a problem: higher than Central Bank target
– More rapid World recovery may strengthen increase
– Unemployment already down
– Capacity utilization running at high level
– Selic rate projected to rise• 150 basis points to 12.25%
– Exchange rate around 1.75 Reais per dollar
• Will Such short-term measures be enough?•
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Brazil: The Medium Term I
• Domestic investment is too low: 19% GDP– China and India show rates more than twice as great
• And there are many future needs– Petroleum pre-sal investments substantial– Infrastructure: Housing, Ports, Roads, Railways– World Cup, Olympics– Education
• To grow at 5% a year, I has to be close to 25% because of capital intensity of investments
• To keep foreign inflows at a level of 3%, domestic savings has to increase from 16% to 22%
• Where will it come from?– One place: Public pension deficit >3%GDP
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Brazil: The Medium Term II
• Other reforms are needed as well– Fiscal
• Magnitude and efficiency• State value added taxes
– Labor• Ease in absorption
– International trade• Brazilian tariffs, unlike Chinese and Indian, have not come down
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Productivity Change Is Basis of Advance
• Secrets of Rapid and Continuous Growth– Productivity Advance
• High Levels of Investment (And Domestic Savings)• Improvement in Quality of the Labor Force• Changing Technology
– Trade and Foreign Investment As Positive Elements• Globalization
– As a Strategy Rather Than Passive Response
– Institutional Change• Participation• Continuity of Rules• A Sense of Fairness
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