State of Us Economy

Just as generals are often accused of fighting the last

war, the seeds of modern economic crises are sown by

well-intentioned efforts to prevent a repeat of past ones.

However, while the global �credit crunch’ may have its

origins in the relaxation of monetary policy following the

bursting of the dot com bubble and efforts to avert a US

recession post-9/11, its impact on the global economy

will be felt via the same transmission mechanisms that

have led to past contagion.

But, while a certain amount of scepticism is warranted

against those stating that �it’s different this time’, the

global economy’s evolution over the past decade – notably

the rise of China and India and the political and

economic maturation of many emerging markets – mean

that the identity of those most vulnerable, and the ways

in which they are exposed, has changed. This report,

which draws on BMI’s proprietary Sovereign, Country

Risk and Industry Ratings systems explains which states

and industries are most vulnerable, providing a vital

guide to corporate strategists, analysts and financiers

seeking to manage their vulnerabilities.

The Origins Of The Problem:

The Sub-Prime Crisis

Following several decades of research and multilateral

efforts to ensure good governance within emerging

markets (EM) to reduce economic volatility, it is no

small irony that the credit crisis originated in the US,

the heart of the global economy. Abundant liquidity

and a shareholder imperative on financial institutions

to boost returns at a time of low interest rates, triggered

a rise in mortgage lending to those with poor credit

histories (sub-prime).

The relaxation of lending criteria led to a rapid rise in

borrowing which was in turn facilitated by innovation

within the investment banking industry. Instead of

holding the debt to maturity, mortgage lenders sold it

on to other financial institutions, which mixed together

sub-prime and less risky debt in new products and resold

them – after receiving investment grade status from the

Credit Ratings agencies – to other institutions.

This securitisation of sub-prime debt was initially

viewed positively, as it spread the risk globally. However,

three core problems arose. First, the products were

often difficult to understand, leaving many who had

purchased investment grade debt unwittingly exposed

to a risky asset class. Second, as much of the debt was

held off balance sheets by banks, the level of exposure

of institutions was virtually impossible to calculate.

Third, the bursting of the US housing market bubble

left assumptions regarding default rates on sub-prime

loans looking overly-optimistic.

These