admin Feb 24, 2010 No Comments
Global Institute Forecasts New Ball Game for Global Capital Markets
After establishing the frame of reference as 1980 through 2007, the consulting firm’s February 8 appraisal, “Global Capital Markets: Entering a New Era,” reports world financial assets–equities, private and public debt, and bank deposits—multiplied by four times the rate of world GDP growth. This led to overheating and the meltdown down of 2008.
Concurrently with the expansion of financial assets, capital flows between nations surged, facilitated by the rapid development of communications and information technologies, and funded by an outpouring of financial products and services. From 1990 to 2008, McKinsey estimates cross-border capital inflows increased at a 15 percent compound annual growth rate (CAGR), escalating from $1 trillion to $10.5 trillion.
Unfortunately, many of the securities exchanged were subprime mortgage IOU’s, watered down by loose fiscal standards and risky credits. The Champagne bubble of super growth popped in 2008, punctured by the spike of a metastasizing loss of confidence in the morass of those sub-prime mortgages.
Such debts often bore adjustable rates of interest, always problematic for marginal borrowers. They were securitized in voluminous packages and marketed to international investors. Too often, there was a complete disregard for the high credit risks buried in the toxic debts, as they came to be called.
When the laxity of the times morphed into the present worldwide recession, commencing December 2008, the party was over. The $178 trillion of world financial assets lost $16 trillion, biggest crash on record.
Although the report questions whether the emphasis on globalization of financial assets and markets will continue, in view of its role in the economic trauma caused by the 2008 crisis, it evinces a strong belief in the recovery of capital flows into the emerging markets of developing countries; however, questioning what forms that investment will take.
Whether banks will resume lending at their pace before the crisis remains unclear. Their balance sheets are in a shambles. Indeed, global capital inflows of all kinds dropped by $600 billion in 2008. Non-bank lending by governmental agencies, hedge funds, investment banks and finance companies will likely have to carry the burden of expansion by the emerging countries.
Although in the beginning, analysts at McKinsey Global Institute regarded favorably the long-term growth in financial assets that outpaced the growth in world GDP, they are having second thoughts. They point out that the phenomenal jump in securitized assets like the toxic mortgages, buried in global portfolios, led to a burgeoning of funded bubbles rather than productive economic growth.
Nevertheless, they suggest that global policy makers struggling to retool a broken financial system carefully consider the useful aspects of financial deepening (increasing financial assets rapidly to stimulate GDP), before purging international finance of financial asset securitization or non-bank financing products.
This suggests they believe the real remedy for rebuilding the international financial system is to improve the transparency of financial instruments, in order to improve their quality, rather than risk quashing growth prospects for the emerging countries by restraining debt summarily.
In effect, they are reprising an old bromide: Don’t throw out the baby with the bath water.
Compiled by: www.ivyproschool.com