The Global Financial Crisis: Analysis and
Policy Implications

Dick K. Nanto, Coordinator
Specialist in Industry and Trade
May 12, 2009
Congressional Research Service
7-5700
www.crs.gov
RL34742
CRS Report for Congress
P
repared for Members and Committees of Congress

The Global Financial Crisis: Analysis and Policy Implications

Summary
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. The world now appears to have entered a
global recession that is causing widespread business contraction, increases in unemployment, and
shrinking government revenues. Some of the largest and most venerable banks, investment
houses, and insurance companies have either declared bankruptcy or have had to be rescued
financially. The world is facing the worst economic conditions since the great depression. 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 (H.R. 1, P.L. 111-5). 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 for governments.
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 slowdown in economic activity 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. Some are characterizing these
meetings as Bretton Woods II. On April 2, heads of the G-20 nations met in the Leaders’ London
Summit and announced measures to bolster the international financial institutions, stabilize the
world economy, and reform and improve the financial regulatory system. The fourth phase of the
process is dealing with political, social, and security effects of the financial turmoil. Significant
foreign policy implications of the crisis are now emerging.
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, Congress plays a key role in generating policy options and informing the public. On
the regulatory side, the largest questions seem to be how U.S. regulations should be changed and,
if changed, how closely those changes are to be harmonized with international recommendations.
Other questions include: should the United States promote global regulatory standards to be
voluntarily adopted by countries or should a supranational regulatory institution be created?
Where would enforcement authority reside; at the state, national, or international level? 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
Four Phases of the Global Financial Crisis ............................................................................ 4
Contain the Contagion and Strengthen Financial Sectors ................................................. 4
Coping with Macroeconomic Effects............................................................................... 5
Regulatory and Financial Market Reform ........................................................................ 8
Dealing with Political, Social, and Security Effects ....................................................... 10
New Challenges and Policy in Managing Financial Risk ........................................................... 15
The Challenges ................................................................................................................... 15
Policy ................................................................................................................................. 19
Origins, Contagion, and Risk .................................................................................................... 23
Risk .................................................................................................................................... 27
The Downward Slide .......................................................................................................... 28
Effects on Emerging Markets .................................................................................................... 33
Latin America ..................................................................................................................... 40
Mexico ......................................................................................................................... 42
Brazil............................................................................................................................ 43
Argentina ...................................................................................................................... 44
Russia and the Financial Crisis............................................................................................ 46
Effects on Europe and The European Response ......................................................................... 47
The “European Framework for Action” ............................................................................... 51
The British Rescue Plan ...................................................................................................... 53
Collapse of Iceland’s Banking Sector .................................................................................. 55
Impact on Asia and the Asian Response..................................................................................... 56
Asian Reserves and Their Impact ........................................................................................ 59
National Responses ............................................................................................................. 60
Japan ............................................................................................................................ 60
China ............................................................................................................................ 61
South Korea .................................................................................................................. 65
Pakistan ........................................................................................................................ 66
Other Countries’ Moves ................................................................................................ 67
International Policy Issues......................................................................................................... 68
Bretton Woods II........................................................................................................... 69
G-20 Meetings .............................................................................................................. 69
The International Monetary Fund .................................................................................. 71
Changes in U.S. Regulations and Regulatory Structure.................................................. 74
Legislation ................................................................................................................................ 75

Figures
Figure 1. Quarterly (Annualized) Economic Growth Rates for Selected Countries ....................... 6
Figure 2. Origins of the Financial Crisis: The Rise and Fall of Risky Mortgage and Other
Debt....................................................................................................................................... 25
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The Global Financial Crisis: Analysis and Policy Implications

Figure 3. Selected Stock Market Indices for the United States, U.K., Japan, and Russia ............ 29
Figure 4. Exchange Rate Values for Selected Currencies Relative to the U.S. Dollar.................. 31
Figure 5. Current Account Balances (as a percentage of GDP)................................................... 35
Figure 6. Global Foreign Exchange Reserves ............................................................................ 36
Figure 7. Capital Flows to Latin America (in percent of GDP)................................................... 38
Figure 8. Capital Flows to Developing Asia (in percent of GDP) ............................................... 38
Figure 9. Capital Flows to Central and Eastern Europe (in percent of GDP)............................... 39
Figure 10. Asian Current Account Balances are Mostly Healthy ................................................ 57
Figure 11. Changes in China’s Monthly Trade Data: January 2008-February 2009..................... 63

Tables
Table 1. Problems, Targets of Policy, and Actions Taken or Possibly to Take in Response
to the Global Financial Crisis ................................................................................................. 20
Table 2. Stimulus Packages by Selected Countries..................................................................... 32

Appendixes
Appendix A. Major Recent Actions and Events of the International Financial Crisis .................. 76
Appendix B. Stimulus Packages Announced by Governments ................................................... 96
Appendix C. London Summit – Leaders’ Statement................................................................... 99
Appendix D. Comparison Selected Financial Regulatory Reform Proposals ............................ 106
Appendix E. British, U.S., and European Central Bank Operations, April to Mid-October
2008 .................................................................................................................................... 110

Contacts
Author Contact Information .................................................................................................... 112

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The Global Financial Crisis: Analysis and Policy Implications

Recent Developments and Analysis1
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 under-
performance.
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 29. The World Health Organization raised the Swine flu pandemic alert to phase 5 (human-
to-human spread of the virus into at least two countries indicating that a pandemic is imminent).
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.
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.
***********
As for the impact of a swine flu pandemic in the United States, according to Global Insight, an
economic consulting firm, in a mild epidemic of roughly 75 million infected with 100,000
fatalities the impact on U.S. economic growth would be less than -0.5% per year, but in a more
severe epidemic the consequences could be quite dire.


1 For a more complete list of major developments and actions, see Appendix A.
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The Global Financial Crisis: Analysis and Policy Implications

The Global Financial Crisis and U.S. Interests2
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 and, 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 have 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, pushing economies world wide
either into recession or into a period of slow 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) seem to able to finance their own rescue packages by borrowing domestically and in
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

2 Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division.
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The Global Financial Crisis: Analysis and Policy Implications

regulatory agencies may have to be expanded to cover a wider range of
institutions and markets.3
• 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.4
• 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
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 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 well-
being of the country while protecting taxpayer interests and facilitating business operations
without creating a moral hazard.5 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 and in recapitalizing international financial institutions, such as the International

3 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.
4 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.
5 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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Monetary Fund, and replenishing funds for poverty reduction arms of the World Bank
(International Development Association) and regional development banks. As the force of the
effects of the global financial meltdown are felt, popular and congressional concern has been
intensifying. Are the financial sector executives mainly responsible for the crisis benefitting
financially from it (in the form of large bonus payments)? Is the system too complex to be
controlled, or is it an insider’s game at the expense of Main Street? Should the U.S. domestic
economy be given first priority in spending (Buy America), and should financial institutions
receiving government funds direct their lending or repayment of debts to domestic, rather than
foreign, firms? Opposition to globalization from various quarters and rising protectionist
sentiment also may trigger new international trade disputes and work to shape the debate over
rewriting U.S. and international financial rules.
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.
Four Phases of the Global Financial Crisis
The process 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.7 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
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 may have passed, operations still are continuing, and the ultimate cost of
the actions are yet to be determined. (See Appendix E for early containment actions.)

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 See CRS Report RL34412, Containing Financial Crisis, by Mark Jickling
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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.8
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.9 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.10
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 Program11 (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, which to
date total $2.5 billion. 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.12
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
money-market assets and commercial paper, and purchases of securitized loans and lending to
businesses and consumers for purchases of asset-backed securities.13
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

8 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.
9 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.
10 Thomas F. Cooley, “Swedish Banking Lessons,” Forbes.com, January 28, 209.
11 For details, see CRS Report RL34730, Troubled Asset Relief Program: Legislation and Treasury Implementation, by
Baird Webel and Edward V. Murphy
12 U.S. Department of the Treasury, Treasury Department Releases Details on the Public Private Partnership
Investment Program
, Press Release tg-65, March 23, 2009.
13 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.
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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.
Figure 1. Quarterly (Annualized) Economic Growth Rates for Selected Countries
Percent Growth in GDP
20
Actual
Forecast
Global
15
2001
Chi na
Recession
Financial
Crisis
10
5
0
U.S.
Japan
Germ any
-5
S. Korea
M exi co
Brazi l
U.K.
-10
United States
Mexico
Germ any
United Kingdom
Russia
China
Japan
South Korea
Brazil
-15
2000 2001
2002
2003
2004 2005
2006
2007
2008 2009
2010
2011
Year (4th quarter)

Source: Congressional Research Service. Data and forecasts (March 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 ($250 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
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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.14 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.15 The
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%.16
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 billion 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. (See Appendix C for the London Summit communiqué.)
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 crisis17 (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.
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.

14 Camilla Anderson, IMF Spells Out Need for Global Fiscal Stimulus, International Monetary Fund, IMF Survey
Magazine: Interview, Washington, DC, December 28, 2008.
15 David Saha and Jakob von Weizsäcker, Estimating the size of the European stimulus packages for 2009, Brugel,
JVW/ DS, 12 December 2008.
16 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.
17 Steven Pearlstein, “Asia, Europe Find Their Supply Chains Yanked. Beware the Backlash,” The Washington Post,
February 20, 2009, pp. D1, D3.
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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
to address changes in policy, regulations, oversight, and enforcement. Some are characterizing
these meetings as Bretton Woods II.18 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, (See Appendix C)19 and the third is to be held in November 2009.
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

18 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.
19 Information on the London G-20 Summit is available at http://www.londonsummit.gov.uk/en/.
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regulatory systems to identify and take account of macroprudential (systemic) risks, but agreed to
regulate hedge funds and Credit Rating Agencies.20
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?21 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 D 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:
System 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

20: Group of Twenty Nations. “London Summit – Leaders’ Statement,” 2 April 2009 http://www.londonsummit.gov.uk/
resources/en/PDF/final-communique
21 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.
Dealing with Political, Social, and Security Effects
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.22
The political, social, and security effects of the global financial crisis can be divided roughly into
the following categories:
• effects on political leadership and regimes inside countries;
• effects on ideologies, protectionism, and state capitalism;
• effects on international leadership and attitudes toward the United States;
• effects on supranational political and economic organizations; and
• effects on poverty and flows of aid resources.
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,

22 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.
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beef, rice, coffee, and tea also carries dire consequences for exporter countries in Africa, Latin
America, and Asia.23
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
terrorist targets in Pakistan, and the country faces a budget shortfall that may curtail the ability of
the government to continue its counterterror operations.24
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 free-
market 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.

23 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.
24 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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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
Motors.
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 industry-
specific 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. Although the WTO reported in January 2009 that most WTO members had
successfully kept domestic protectionist pressures under control “with only limited evidence of
increases in trade restricting or trade distorting measures,” 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.25
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 plans to
provide subsidies to various industries (such as steel and motor vehicles) and to boost export tax
rebates. 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.

25 Bureau of National Affairs, “WTO Report Finds ‘Limited’ Impact So Far of Financial Crisis on Higher Trade
Barriers,” International Trade Reporter, 26 ITR 143, January 29, 2009. Report by the World Trade Organization
quoted in: Chris Nelson, The Nelson Report, Samuels International Associates, Inc., January 15, 2009.
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In the United States, the Buy America provision in the February 2009 stimulus package26 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” 27 and as possibly starting down a slippery slope that could lead to WTO-
inconsistent 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 have been influential in crafting international mechanisms and policies to deal
with 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 China28 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

26 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%.
27 “Europe Warns against ‘Buy American’ Clause,” Spiegel Online International, February 3, 2009, Internet edition.
28 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.29
The recession in the United States and elsewhere also may hamper efforts to reach agreement on
international issues such as climate change. In addition, U.S. trade and foreign investments are
key components of American soft power. At a time when U.S. policymakers are turning more
toward the use of soft power (or what is sometimes termed “smart power”), if the United States is
blamed for what is becoming the worst global recession in decades and U.S. companies are
perceived as reducing their overseas business activities because of the global financial crisis, the
ability of the United States to induce other countries to coalesce around U.S. goals may be
diminished.
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 risks30 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.”

29 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.
30 See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter.
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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.31
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 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
foreign policy priorities of the new Administration. 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. foreign
assistance. 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
Risk32

The Challenges
The actions of the United States and other nations in coping with the global financial crisis first
were to contain the contagion, minimize losses to society, restore confidence in financial

31 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.
32 Prepared by Dick K. Nanto, Specialist in Industry and Trade, Foreign Affairs, Defense, and Trade Division.
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institutions and instruments, and lubricate the wheels of the 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,33 although equity markets have recovered somewhat since then. There still
is considerable uncertainty, however, over whether the worst of the crisis has passed and whether
monetary and fiscal policies taken so far will be sufficient to cope with the global recession. 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. The challenges of the
third phase still remain. They arguably are to change regulatory structure and regulations and the
global financial architecture to ensure that future crises do not occur or, at least, to mitigate their
effects.
On a more philosophical plane, the fundamental assumption that markets are self-correcting and
that individuals pursuing their own financial interests like an “invisible hand” tend also to
promote the good of the global community has been questioned. Will the losses of this financial
crisis hurt investors and institutions enough that the system will become more prudent in the
future? How much further regulation and oversight is necessary to fill gaps in information and
technical expertise to compensate for faulty or incomplete methods of modeling risk and to
provide more resilience in the system to offset human error? A related question is whether there
should be a system of controls on flows of capital during a financial crisis that would be aimed at
temporarily calming markets.
At the G-20 Summit on Financial Markets and the World Economy on November 15, 2008, in
Washington, DC, the leaders of these nations concluded that major changes are needed in the
global financial system. The G-20 recommendations imply that most saw the system as functional
but major measures were needed to reduce risk, to provide oversight, and to establish an early
warning system of impending financial crises. The G-20 leaders also agreed, however, 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.” (See Appendix C
and section of this report on the G-20.)
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
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.34 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.

33 Edmund Conway, “WEF 2009: Global crisis ‘has destroyed 40pc of world wealth’,” Telegraph.co.uk, January 29,
2009, Internet edition.
34 Morgenson, Gretchen, “Behind Insurer’s Crisis, Blind Eye to a Web of Risk,” The New York Times (Internet edition),
S’/eptember 27, 2008.
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The linking of economies also transcends financial networks.35 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.
Given the international nature of financial markets, the rapid movement of capital and
information, and the secondary effects of financial problems on the services-and-production side
of the economy, there seems to be 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.36 As such, the system operates largely
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.” After such trusted AAA and AA ratings led to investments of hundreds of
billions of dollars in toxic securities, what will be necessary to restore confidence in the system?
The G-20 Summits have taken some steps toward reforming the international financial system.
The London Summit called for the regulation of hedge funds, a crack down on tax havens, and
for regulatory oversight and registration for Credit Rating Agencies. The new Financial Stability
Board is to collaborate with the IMF to provide early warning of macroeconomic and financial
risks and actions needed to address them.37 The leaders agreed that national financial supervisors
should establish Colleges of Supervisors consisting of national financial supervisory agencies that
oversee globally active financial institutions. These colleges of supervisors, are to meet together
to share information and strengthen the surveillance of cross-border firms. In banking, for
example, major global banks would meet regularly with their supervisory college for
comprehensive discussions of the firm’s activities and assessment of the risks it faces. (See
Appendix C and section of this report on the G-20.)
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

35 For an analysis of global production networks, see CRS Report R40167, Globalized Supply Chains and U.S. Policy,
by Dick K. Nanto.
36 For example, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable Framework, by
Walter W. Eubanks.
37 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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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. Some have suggested that the
U.S. Federal Reserve assume the role of a systemic regulator with a global reach that could
oversee institutions that are large or interconnected enough to pose a risk to the financial
system.38 A similar issue exists on the tangible product side of the economy. Multinational
producers of consumer and industrial goods can transfer production among supply bases all over
the world, but most manufacturing is tied to capital equipment that is fixed in place. Financial
transactions, in contrast, can nominally occur anywhere. Unless regulations and constraints apply
equally to major markets, transactions can, for example, move from New York to London, Zurich,
or elsewhere. Tighter regulations in the United States, for instance, could induce transactions to
move to London.
A related issue is the functional nature of U.S. regulation and lack of macroprudential or systemic
regulation and oversight.39 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. 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.40
Others reportedly also have mentioned the U.S. Federal Reserve as a systemic regulator.41 Other
countries have addressed their own versions of this problem. The United Kingdom, for example,
created a tripartite regulatory and oversight system consisting of the Bank of England, the 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

38 “Fed’s Rosengren: Systemic regulator needs global reach,” Reuters, May 5, 2009, Online at http://www.reuters.com.
39 See CRS Report R40417, Macroprudential Oversight: Monitoring the Financial System, by Darryl E. Getter.
40 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.
41 Kara Scannell, “Frank Backs Regulator for Systemic Risk,” The Wall Street Journal, February 4, 2009, Internet
edition.
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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.42
One early regulatory change was announced on November 14, 2008, by the President’s Working
Group on Financial Markets (Treasury, Securities and Exchange Commission, Federal Reserve,
and the Commodity Futures Trading Commission). The Working Group is undertaking a series of
initiatives to strengthen oversight and the infrastructure of the over-the-counter 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.43
For the global banking industry, the Basel II framework from the Bank for International
Settlements actually has been on the table for some time awaiting full implementation by
countries of the world. Basel II is aimed at providing a more risk-sensitive approach to financial
market supervision by better aligning capital charges with the underlying risk that banks take on.
It is to help reduce the incentive for banks to shift assets off their balance sheets, and it includes
methodologies to arrive at minimum capital requirements for credit risk, operational risk and
market risk; the supervisory review process, and market disclosure.44 On July 20, 2007, the
United States began implementing pertinent parts of Basel II.45 Some analysts assert that the
current financial crisis has already made Basel II obsolete and call for a Basel III.46 One analyst
considers the Basel capital rules to be an inappropriate basis for an international arrangement
among banking supervisors.47
Policy
As the global financial and economic crisis works its way to the regulatory phase, policy
proposals to change the regulatory and oversight structure 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 IMF,48 Bank for International
Settlements,49 and Financial Stability Board (Forum).50 Currently, it appears that the vehicle for

42 U.S. Department of the Treasury. The Department of the Treasury Blueprint for a Modernized Financial Regulatory
Structure.
March 2008. 217 p.
43 U.S. Treasury, “PWG Announces Initiatives to Strengthen OTC Derivatives Oversight and Infrastructure,” Press
Release HP-1271, November 14, 2008.
44 Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the
Comptroller of the Currency, and Office of Thrift Supervision. “Banking Agencies Reach Agreement on Basel II
Implementation.” July 20, 2007.
45 For details on U.S. implementation, see U.S. Federal Reserve, “Basel II Capital Accord, Basel I Initiatives, and Other
Basel-Related Matters.” http://www.federalreserve.gov/generalinfo/basel2/USImplementation.htm#Current.
46 See, for example, Caprio, Gerald, Jr., Ash Demirguc-Kunt, and Edward J. Kane, “The 2007 Meltdown in Structured
Securitization: Searching for Lessons Not Scapegoats,” World Bank Working Paper, September 5, 2008.
47 Tarullo, Daniel K. Banking on Basel, the Future of International Financial Regulation (Peterson Institute for
International Economics, 2008). p. 5.
48 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.
49 For information on Basel II, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable
Framework
, by Walter W. Eubanks.
50 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
(continued...)
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forming an international consensus on measures to be taken by individual countries is the G-20.
(See Appendix C.)
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.51
Table 1. Problems, Targets of Policy, and Actions Taken or Possibly to Take in
Response to the Global Financial Crisis

Actions Taken or Possibly To
Problem
Targets of Policy
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
—Al ow to go bankrupt
Excess toxic debt
Capital base of debt holding
—Write-off of debt by holding
institution
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
Board)
—Restructure mortgages
—Nationalize debt holding

(...continued)
10, 2008. 39 p.
51 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.
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Actions Taken or Possibly To
Problem
Targets of Policy
Take
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
Banks
—Guarantee bank deposits
and money market funds
Brokerage houses
—Guarantee money market
accounts
—Buy underlying money market
securities to cover redemptions
Declining stock markets
Investors
—Temporary ban on short sales of
Short sellers
stock
—Government purchases of stock?
Global recession, rising
National governments
—Stimulative monetary and fiscal
unemployment, decreasing tax
policies
revenues, declining exports
—Increased lending by International
Financial Institutions
—Trade policy?
—Support for unemployed
Coping with Long-Term, Systemic Problems
Poor underwriting standards
Credit rating agencies
—More transparency in factors
Overly high ratings of collateralized
Bundlers of collateralized debt
behind credit ratings and better
debt obligations by rating companies obligations
models to assess risk?
Lack of transparency in ratings
Corporate leveraged lenders
—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 require-
ments to make information more
easily accessible and usable?
Incentive distortions for originators
Mortgage originators
—Require loan originators and
of mortgages (no penalty for
Fannie Mae/Freddie Mac
bundlers to provide initial and
mortgage defaults due to faulty
All participants in the originate-to-
ongoing information on the quality
lending practices)
distribute chain
and performance of securitized
assets?
—Strengthened oversight of
mortgage originators?
—Penalties for malfeasance by
originators?
Shortcomings in risk management
Investors
—More prudent oversight of capital,
practices
Banks, securities companies
liquidity, and risk management?
Severe underestimation of
—Raise capital requirements for
risks in the tails of default
Regulatory agencies
complex structured credit products
distributions and insufficient regard

and to account for liquidity risk?
for systemic risk
—Strengthen authorities’
Risk models that encourage pro-
responsiveness to risk?
cyclical risk taking
—Set stricter capital and liquidity
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Actions Taken or Possibly To
Problem
Targets of Policy
Take
buffers for financial institutions?
Banks had weak controls over off-
Bank structured investment vehicles
—Strengthen accounting and
balance sheet risks
Bank sponsored conduits
regulatory practices?
—Raise capital requirements for off-
Regulatory agencies
balance sheet investment vehicles?

Regulators are “stove piped.” Do not Financial intermediaries engaged in a
—create an independent agency to
deal adequately with large complex
combination of banking, securities,
monitor systemic risk (March 20,
financial institutions
futures, or insurance
2009 Treasury Announcement)
—increase coordination and


cooperation among regulatory


agencies
Hedge funds and private equity are
Regulatory agencies
—extend regulation and oversight to
largely unregulated
hedge funds and private equity (April
Information on Credit Default Swaps
2, 2009, London Summit)
not public
—create clearing counterparty for
credit default swaps (March 26, 2009
Treasury Announcement)
Problems for International Policy
Lack of consistency in regulations
National regulatory and oversight
—Implement G-20 Action Plan
among nations and need for new
authorities
(November 15, 2008 G-20 Summit)
regulations to cope with new risks
Bank for International Settlements
—Implement Basel II (Bank for
and exposures
International Monetary Fund
International Settlements’ capital and
other requirements for banks) (in
Financial Stability Board (Financial
process by countries)
Stability Forum)
—Bretton Woods II agreement?

—Greater role for the Financial
Stability Board/Forum and
International Monetary Fund (April 2,
2009 London Summit)
—Establish col eges of national
supervisors to oversee financial
sectors across boundaries
(November 15, 2008 G-20 Summit)
Countries unable to cope with
IMF, Development Banks
—Increased resources for the IMF
financial crisis
National monetary authorities and
and World Bank (April 2, 2009
governments
London Summit)
—Loans and swaps by capital surplus
countries
—Creation of long-term
international liquidity pools to
purchase assets?
Countries slow to recognize
National monetary and banking
—Increased IMF and Financial
emerging problems in financial
authorities
Stability Board/Forum
systems
Governments
macroprudential/systemic oversight,
IMF
surveillance and consultations (April
Regional organizations
2, 2009 London Summit)
—Build more resilience into the
system?
—Increase reporting requirements?
—Establish col eges of national
supervisors to oversee financial
sectors across national borders
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Actions Taken or Possibly To
Problem
Targets of Policy
Take
(Nov. 15, 2008, G-20 Summit)
Lack of political support to
National political leaders
—G-20 international summit
implement changes in policy
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 Risk52
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.53 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.54
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
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.55 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.56
The accumulation of hard currency assets was so great in some countries that they diverted some

52 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.
53 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.
54 Gelpern, Anna. “Emergency Rules,” The Record (Bergen-Hackensack, NJ), September 26, 2008.
55 From 2005-2007, the U.S. current account deficit (balance of trade, services, and unilateral transfers) was a total of
$2.2 trillion.
56 Reuters. Factbox—Global foreign exchange reserves. October 12, 2008.
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of their reserves into sovereign wealth funds that were to invest in higher yielding assets than
U.S. Treasury and other government securities.57
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.


57 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

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.58 This housing boom
coincided with greater popularity of the securitization of assets, particularly mortgage debt
(including subprime mortgages), into collateralized debt obligations (CDOs).59 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.60
In order to cover the risk of defaults on mortgages, particularly subprime mortgages, the holders
of CDOs purchased credit default swaps61 (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
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.

58 See U.S. Joint Economic Committee, “Chinese FX Interventions Caused international Imbalances, Contributed to
U.S. Housing Bubble,” by Robert O’Quinn. March 2008.
59 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.
60 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 mortgage-
backed 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.
61 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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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),62
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.63 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
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.64 It was this requirement to post collateral that pushed some companies

62 Notional value is the face value of bonds and loans on which participants have written protection. World GDP is
from World Bank. Development Indicators.
63 International Swaps and Derivatives Association, ISDA Applauds $25 Trn Reductions in CDS Notionals, Industry
Efforts to Improve CDS Operations. News Release, October 27, 2008.
64 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
(continued...)
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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.

(...continued)
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
Stock Market Indices (1 Oct 2007 = 100)
140
Russian RTS
120
UK FTSE 100
100
Severe
Global
Contagion
80
Dow Jones Industrials
60
Japan’s Nikkei 225
40
Mild Global Contagion
20
ct-07ov-07ec-07
ar-08 pr-08ay-08
ug-08ep-08 ct-08ov-08 ec-08
ar-09
31-O 30-N 31-D 31-Jan-08
29-Feb-08
31-M 30-A 30-M 30-Jun-08
31-Jul-08
29-A 30-S 31-O28-N 31-D 30-Jan-09
27-Feb-09
31-M
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),65 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

65 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.66
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.

66 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
Currency Exchange Rates in Dollars (Oct 1, 2007 = 100)
140
Severe
Hungarian Forint
Global
Contagion
120
Euro
100
80
Icelandic Krona
60
Pakistani Rupees
South Korean Won
40
Mild Global Contagion
20
10/31/2007
11/30/2007
12/31/2007
1/31/2008
2/29/2008
3/31/2008
4/30/2008
5/30/2008
6/30/2008
7/31/2008
8/29/2008
9/30/2008
10/31/2008
11/28/2008
12/31/2008
1/30/2009
2/27/2009
3/31/2009
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 $250 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 787.00 Infrastructure technology, tax cuts, education, transfers to states, energy,
States
nutrition, health, unemployment benefits. Budget in deficit.
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 39.00 Total package of $256 billion called for states to increase budgets by $217
Union
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
29.60 Proposed plan includes a 2.5% cut in the value added tax for 13 months, a
Kingdom
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.
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 Increase in government spending, funds to stabilize the financial system
(prop up troubled banks and ease a credit crunch by purchasing commercial
6-Apr-09
Japan
100.00 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, revitalizing regional economies, promoting
solar power and nursing and medical services.
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Date
Announced Country $Billion
Status, Package Contents
3-Nov-08
South
14.64 $11 billion for infrastructure (including roads, universities, schools, and
Korea
hospitals; funds for small- and medium-business, fishermen, and families with
9-Feb-09
37.87 low income) and tax cuts. Includes an October 2008 stimulus package of
South
$3.64 billion to provide support for the construction industry.
Korea
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 al 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 middle-
income 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. dol ars were either already done in the news articles or by CRS using
current exchange rates.
Effects on Emerging Markets67
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.

67 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.” Original y 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%.68 The average
deficit for the region was greater than 6% in 2008 (Figure 5).

68 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,69 and on November 24,
the IMF approved a $7.6 billion stand-by arrangement for Pakistan to support the country’s
economic stabilization.70
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.71 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

69 Information on ongoing IMF negotiations is available at http://www.imf.org.
70 International Monetary Fund, “IMF Executive Board Approves Stand-by Arrangement for Pakistan.” Press Release
No. 08/303, November 24, 2008.
71 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.
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trade surpluses.72 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.73
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

72 “New paradigm changes currency rules,” Oxford Analytica, January 17, 2008.
73 See CRS Report RL34336, Sovereign Wealth Funds: Background and Policy Issues for Congress, by Martin A.
Weiss.
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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.74
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.75
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-the-
board deleveraging and flight to safety, rolling over is far from easy, and uncertainty about
rolling over aggravates the loss in confidence.76

74 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.
75 Joanna Slater and Jon Hilsenrath, “Currency-Price Swings Disrupt Global Markets ,” Wall Street Journal, October
25, 2008.
76 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-1077 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%.78 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.79

77 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).
78 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.
79 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.80
Latin America81
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.82 Repercussions from the
global financial crisis have varied by country based in part on policy differences, but also
exposure to two major risks, the degree of reliance on the U.S. economy, and/or dependence on
commodity exports. Nonetheless, investors have been especially hard on the region as a whole,
perhaps leery of its capacity to weather short-term financial contagion let alone a protracted
global recession.
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.83
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 recent 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
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.84
Latin America is experiencing two levels of economic problems related to the crisis. First order
effects from financial contagion are evident in the high volatility of financial market indicators.
All major indicators fell sharply in the second half of 2008, as capital sought safe haven in less
risky assets, many of them, ironically, dollar denominated. Regional stock indexes have fallen at

80 David Roodman, “History Says Financial Crisis Will Suppress Aid,” Center for Global Development, October 13,
2008.
81 Prepared by J. F. Hornbeck, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
82 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.
83 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.
84 Ocampo, Jose Antonio. The Latin American Boom is Over. REG Monitor. November 2, 2008.
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one point by half since October 2008, but recovered slightly in many cases. 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 at least two countries, Mexico and Brazil, large speculative derivative positions in the
currency markets exacerbated the depreciations, compounding losses.85
Debt markets followed in kind, as credit tightened and international lending contracted, even for
short-term needs such as inventory and trade finance. Borrowing has become more expensive, as
seen in widening bond spreads. Over the past year, bond spreads in the Emerging Market Bond
Index (EMBI) and corporate bond index for Latin America increased by over 600 basis points,
half occurring in the fall of 2008. 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 the region. The full extent of the problem will become clearer
in 2009 as the more highly leveraged Latin American countries seek to roll over their public debt.
Still, compared to earlier financial crises, when bond spreads on average rose by over 1,000 basis
points, Latin America’s stronger economic fundamentals and regulatory regimes helped cushion
many countries from a more severe reaction in 2008. Many Latin American banks are well
capitalized, have sound balance sheets, and continue to lend. 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 have risen by well over
1,500 basis points, reflecting a lack of confidence in their financial future.86
Second order effects all point to a deterioration of broader economic fundamentals. GDP growth
for the region is expected to be a negative 1%-2% in 2009. The fall in global demand, particularly
for Latin America’s commodity exports, will be a big factor, as already seen in contracting export
revenue. Tightening credit markets and the sharp rise in the cost of capital for Latin America is
dampening investment. Consumption, trade surpluses, and remittances are also declining, which
along with deteriorating public sector budgets, points to the region-wide economic slowdown.87
Public sector borrowing is expected to rise and budget constraints may threaten spending on
social programs, with a predictably disproportional effect on the poor.
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.

85 Latin American Newsletters. Latin American Economy and Business. London: October 2008. pp. 1-3 and Fidler,
Stephen. Going South. Financial Times. January 9, 2009. p. 7.
86 International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the Global
Financial Crisis
. Washington, D.C. October 2008. pp. 7-10.
87 A summary of these trends is presented in: United Nations. Economic Commission on Latin America and the
Caribbean. Preliminary Overview of the Economies of Latin America and the Caribbean 2008. Santiago, 2008.
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The United States has taken steps to provide dollar liquidity 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 has access to a $30 billion
currency swap reserve with the U.S. Federal Reserve System through April 30, 2009. The swap
arrangement is intended to ensure dollar availability in support of the large trade and investment
transactions conducted between the United States and these two countries.88
National governments are also using 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.
Among the few countries adopting a fiscal stimulus, preliminary estimates of their size suggest
they are small, ranging from 1.0% of GDP in Mexico, Brazil, and Argentina, up to 2.5% of GDP
in Peru. 89 Many countries may also be limited in using monetary policy responses to expand
liquidity. In particular, reducing interest rates is difficult for those experiencing significant
currency depreciations, which increase inflationary pressures. There is also a growing concern
that countries may eventually resort to nationalistic policies that will reduce the flows of goods,
services, and capital. Capital controls, increased tariffs, and regulations that hinder trade and
capital flows can have debilitating effects on recovery strategies in the long run. The magnitude
of the global economic downturn and adequacy of policy responses vary by country as three
examples discussed below illustrate.
Mexico
The Mexican economy contracted sharply in the fourth quarter of 2008 and a survey of estimates
forecasts that economic growth may fall by 2%-3% in 2009.90 Declines are seen in both industry
and services sectors. In January 2009, automobile production alone fell by 50% and car exports
declined by 57% from the year earlier. Mexico faces two problems: one short term, the other
long-term, but both tied to its dependence on the U.S. economy. The United States accounts for
half of Mexico’s imports, 80% of its exports, and most of its foreign investment remittances
income. Therefore, Mexico, despite its relatively strong fiscal position and solid macroeconomic
fundamentals, has begun to suffer first from direct links to the U.S. financial fallout, and second,
from its vulnerability to a protracted U.S. recession.
On the financial side, Mexico experienced a run on the peso in which its value fell at one point by
40% from its August 2008 high (currently down by 37% compared to 17% for the regional
currency index). The decline was not related to investments in U.S. mortgage-backed securities,
but rather the re-balancing of investor portfolios away from emerging markets, the dramatic fall
in commodity prices, and decline in U.S. demand for Mexican exports. The Central Bank of
Mexico has responded by purchasing pesos, but currency intervention has only slowed the
depreciation trend and there is growing debate over the feasibility of continuing this policy given
limited foreign exchange reserves.91

88 Board of Governors of the Federal Reserve System. Federal Reserve Press Release. October 29, 2008.
89 Loser, Claudio. Stimulus Packages: How Much Can the Region Afford? Latin American Advisor. Inter-American
Dialogue. January 29, 2009.
90 Global Outlook. Mexico. March 17, 2009.
91 International Monetary Fund. Global Markets Monitor. March 16, 2009.
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The peso also suffered because Mexican firms had apparently taken to heart the notion of
“decoupling,” believing that the peso’s strength would not be seriously challenged by the U.S.
financial crisis. Many firms had gone beyond hedging in the currency market to bet heavily on
the future strength of the peso by taking large derivative positions in the currency. As the peso
began to depreciate, companies had to unwind these large speculative (and 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 accepting a temporary currency swap arrangement with
the U.S. Federal Reserve to assure liquidity in the currency market.92
Mexico’s long-term economic prospects hinge on U.S. aggregate demand. Because Mexico has a
poorly diversified trade regime, the effects of the U.S. downturn are already noticeable, with
Mexican exports to the United States on a monthly basis falling 37% from October 2008 to
January 2009, reaching the lowest level since January 2005. The trade effect has been
compounded by the fall in remittances from Mexican workers living in the United States, which
in 2007 amounted to $26 billion, equal to 3% of Mexico’s GDP. Employment figures for the
formal economy are beginning to register large job losses, but data are sketchy. In the short-term,
it will be important to evaluate Mexico’s ability to counter the peso’s decline and maintain
liquidity to support both domestic financing and its trade with the United States. In the medium
term, the depth of Mexico’s economic slowdown in response to the U.S. recession will be the
most telling benchmark of its vulnerability to the global crisis.93
To date, the Mexican government has adopted a $4.4 stimulus package heavily weighted towards
reducing energy costs to consumers. The price of cooking gas has been reduced by 10% and
petroleum prices in the domestic market have been frozen. The Mexican government estimates
that consumers will benefit by some $45 billion. On the fiscal side, the Mexican Government has
announced a small $10.8 billion dollar package (1.1% of GDP), which has yet to begin.94
Brazil
Brazil entered the financial crisis from a position of relative macroeconomic and fiscal strength,
but nonetheless is not immune to the global contraction. Although the economy grew by 5.1% in
2008, it decelerated 3.5% in the fourth quarter relative to the third. Some GDP growth estimates
for 2009 call for Brazil to enter a recession, a marked revision downward from 4% growth
forecast in late 2008. Investment in both public and private projects appears to be on hold and at
the close of 2008, industrial output fell by over 20% in the last two months of 2008, led by a
nearly 60% decline in automobile production compared to output a year earlier.95
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 stocks and the Brazilian
currency (the real). The Brazilian government sold billions of dollars to fight a rapidly

92 The Wall Street Journal. Mexico and Brazil Step In to Fight Currency Declines, October 24, 2008 and Latin America
Monitor: Mexico
. December 2008.
93 Latin American Newsletters. Latin American Mexico and NAFTA Report, March 2009, p. 10 and Latin America
Monitor: Mexico
, March 2009, p. 3.
94 Latin American Newsletters. Latin American Economy & Business, February 2009, pp. 4-6 and Loser, Claudio.
Stimulus Packages: How Much Can the Region Afford?, January 29, 2009.
95 Business Monitor International. Latin American Monitor: Brazil. March 2009.
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depreciating currency, which fell at one point by over 35% from its August 2008 high. Both
indexes have recovered slightly, but remain down by 25%-30% with volatility expected to
continue. Brazil also has a large currency derivative 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 $188 billion
in international reserves (down from a peak of $206 billion in September 2008), a sound and
well-regulated banking system, and an experienced central bank staff that has so far helped
maintain confidence in the financial system.96
The real economy faces longer-term challenges. The fall in production has led to Brazil shedding
654,000 jobs in December 2008, another critical indicator of the sudden, sharp slowdown in the
economy. In addition to the fall in domestic demand, Brazil’s exports have suffered in part
because over half are commodities, which experienced dramatic price declines in late 2008.
Capital inflows, which were strong in 2008, are also expected to slow, 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 has a
large internal market and is well-positioned on macroeconomic and fiscal fronts, which may
soften effects of the global financial crisis, depending, as with other countries, on the severity of
the recession.97
From the policy perspective, Brazil has emphasized enhancing financial sector liquidity through
monetary policy over adopting a large fiscal stimulus. The Central Bank has injected billions of
dollars into the banking system, lowered reserve requirements, and reduced the key short-term
interest rate twice in 2009, from 13.75% to 11.25%. 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, exempted foreign investment firms from the financial transaction tax, and entered
into a new $30 billion currency swap arrangement with the U.S. Federal Reserve.98 Unibanco of
Brazil has also procured a $60 million credit extension from the World Bank’s International
Finance Corporation to support trade financing. On the fiscal side, the government has frozen
spending of approximately 6% of the federal budget, preferring to reinforce a policy of fiscal
balance, but has also announced a small $16 billion stimulus package (1% of GDP).99
Argentina
Argentina, because of its shaky economic and financial position at the outset of the crisis, is
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. The collapse of commodity
prices in late 2008 has diminished export 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. Particularly hard hit has been motor

96 Ibid., and Canuto, Otaviano. Emerging Markets and the Systemic Sudden Stop. RGE Monitor. November 12, 2008.
97 Latin American Brazil & Southern Cone Report, January 2009, p. 12.
98 Brazil-U.S. Business Council. Brazil Bulletin. October 27, 2008 and December 8, 2008.
99 Soliani, Andre and Iuri Dantas. Brazil Freezes 37.2 Billion Reais of 2009 Budget. Bloomberg Press. January 27,
2009 and Loser, Claudio. Stimulus Packages: How Much Can the Region Afford?, January 29, 2009.
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vehicles, metallurgy, and textiles. Economists forecast the economy will grow by less than 1% in
2009, with the possibility of a recession by 2010.100
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,
has further diminished confidence in its financial system. Although the banks remain liquid and
solvent, the stock market is down 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 most recently, nationalization of private pension funds to bolster public
finances.101 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.
After ten months of steady growth, Argentina’s exports declined by 6% in November and an
additional 24% in December 2008, which includes key agricultural and energy products.102 In
response to falling demand for Argentine exports and the government’s questionable financial
policies and position, Argentina’s currency has begun to depreciate slowly, but not in line with its
neighbors’ currencies because of heavy exchange rate intervention. In selling dollars to protect
the peso’s value, however, Argentina has so far used up over 15% of its one-time $54 billion in
foreign reserves, forced interest rates skyward, and made exports less competitive. In recognition
that industrial production and exports are falling rapidly, Argentina has also adopted
administrative trade restrictions to limit imports. These affect Brazilian goods in particular,
including textiles and various machinery exports, raising tensions between the two major trade
partners of the regional customs union, Mercosur.103
Risk assessment has been swift and punishing. Bond ratings have fallen, yields on short-term
public debt exceed 30%, and the interest rate spread on Argentina’s bonds has risen to over 1,700
basis points. The interest rate spread on credit default swaps peaked at 4,500 basis points in
December 2008 before falling to the current level of 3,500 basis points, 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.104

100 Latin American Newsletters. Latin American Economy & Business, January 2009, pp. 10-11 and Republica
Argentina. Ministerio de Economia y Finanzas Publicas. Instituto Nacional de Estadistica y Censos (INDEC).
Utilizacion de la Capacidid Instalada en la Industria. Buenos Aires. January 2009.
101 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.
102 Republica Argentina. Ministerio de Economia y Finanzas Publicas. Instituto Nacional de Estadistica y Censos.
Intercambio Comercial Argentino. Buenos Aires, January 28, 2009.
103 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.
104 International Monetary Fund. Regional Economic Outlook. Western Hemisphere: Grappling with the Global
Financial Crisis
. Washington, DC. October 2008. p. 8ff.
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Argentina has adopted a number of policies to address the domestic effects of the global
economic crisis. The first initiative is a massive $32 billion public works program, which will
raise expenditures by 2 percentage points of GDP. It is complemented by a $3.8 billion (1.2% of
GDP) fiscal stimulus package comprising reduced interest rate loans for the purchase of durable
goods, a 5 percentage point reduction in export taxes on wheat and corn, and subsidized credit
extension to industrial sectors, including small- and medium-sized firms.105
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 2011.106 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.
Russia and the Financial Crisis107
Russia tends to be in a category by itself. Although by some measures, it is an emerging market, it
also is highly industrialized. Until recently, Russia had been experiencing impressive economic
success, an average of 7% annual growth in real gross domestic product (GDP). In 2008,
however, Russia 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 with Georgia over the
break-away areas of South Ossetia and Abkhazia. These events have exposed three fundamental
weaknesses in the Russian economy: substantial dependence on oil and gas sales for export
revenues and government revenues; a rise in foreign and domestic investor concerns; and a weak
banking system. The economic downturn is showing up in Russia’s performance indicators. In
January 2009, Russia’s industrial production declined 20% from the previous month, the largest
drop in at least seven years and indicates a likely drop in overall Russian GDP.108 The government
predicted that Russian GDP will contract 2.2% in 2009, which would be the first annual
contraction since 1998.109
The decline in world oil prices has hit Russia hard. Oil, natural gas, and other fuels account for
about 65% of Russia’s export revenues (2007).110 In addition, the Russian government is
dependent on taxes on oil and gas sales for more than half of its revenues. An average price of oil
below $60/barrel could put the government budget into deficit.111 An average price in the $30-

105 Latin American Brazil & Southern Cone Report, February 2009, p. 3.
106 Ibid., Latin American Brazil & Southern Cone Report, January 2009, p. 10, and IMF. Global Markets Monitor.
March 2, 2009.
107 Prepared by William H. Cooper, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
108 Financial Times. February 16, 2009.
109 Financial Times. February 18, 2009.
110 Economist Intelligence Unit.
111 Open Source Center. Government Bails Out Oil Companies Suffering From World Financial Crisis. October 30,
2008.
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$35/barrel range could cause the Russian economy to stop growing, according to one estimate.112
As of February 9, 2009, the price of Urals-32 was $42.80, a 69.0% drop from its July 4, 2008
peak of $137.61.113
Another sign of financial trouble for Russia has been the rapid decline in stock prices on Russian
stock exchanges. At the close of business on February 13, 2009, the RTS index had lost 75.0% of
its value from its peak reached on May 19, 2008.114 (The decline was the largest since Russia
experienced a financial crisis in August 1998.) On September 16, 2008, alone, the RTS index lost
11.5% of its value leading the government to close stock markets for two days. The overall drop
in equity prices has been blamed on the loss of investor confidence in the wake of the August
2008 conflict between Russia and Georgia but also because of the decline in oil prices and as a
result of the credit crisis that has affected markets throughout the world. In addition, 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. The ruble had
declined 34.8% in terms of the dollar from July 29, 2008, to February 17, 2009.115 Russian
official reserves have declined substantially in part because of Russian Central Bank intervention
to defend the ruble although the government has allowed some gradual depreciation. Between
July 31 and January 23, 2009, the reserves declined from $596.6 billion to $386.5 billion, or
35.2%.116
Russia’s banking system remains immature, and high interest rates prevail. Russian companies,
therefore, have relied on foreign bank loans for financing rather than equity-based financing or
domestic bank loans. However, these foreign loans were secured with company stocks as
collateral. Because of the drop in stock values and because of the overall tightening of credit
availability, foreign banks have declined to rollover loans. The Russian government, led by
President Medvedev and Prime Minister Putin, has implemented several packages of measures
valued at over $200 billion since September 2008 to prop up the stock market and the banks. The
economic crisis is also forcing Russian leaders to confront restructuring of government budget
priorities as Russia is expected to face its first budget deficit since 2000.117
Effects on Europe and The European Response118
Some European countries119 initially viewed the financial crisis as a purely American
phenomenon. That view has changed as economic activity Europe has declined at a fast pace over
a short period of time. Making matters worse, global trade has 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

112 Economist Intelligence Unit. Monthly Report—Russia. October 2008. p. 7.
113 U.S. Department of Energy. Energy Information Administration.
114 RTS.
115 http://www.quote.ru.
116 Central Bank of Russia.
117 Financial Times.
118 Prepared by James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade
Division.
119 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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financial and economic turmoil, are increasing 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 could present 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
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.
European countries are also concerned over the impact the financial crisis and the economic
recession are having on the economies of East Europe and prospects for political instability120 as
well as future prospects for market reforms. Worsening economic conditions in East European
countries could compound 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.
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 has proposed a plan to
rescue distressed banks by acquiring preferred stock temporarily. Iceland, on the other hand, has
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 raises 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.121 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

120 Pan, Phillip P., Economic Crisis Fuels Unrest in E. Europe, The Washington Post, January 26, 2009, p, A1.
121 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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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
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.122
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 sharp drop in the prices of oil and other commodities in the later
part of 2008 may have helped improve the rate of economic growth, but the length and depth of
the economic downturn likely will mean that the IMF projections will prove to be too optimistic
when the final data for 2009 are known. Indeed, 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%.123
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.124 The actions, however,

122 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.
123 Flash Estimates for the Fourth Quarter of 2008, Eurostat news release, STAT/09/19, February 13, 2009.
124 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.
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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,125 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,126 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
common set of principles to address the financial crisis.127 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.128 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.”129 This approach likely will be tested as a
result of failed talks with the credit derivatives industry in Europe. In early January 2009, an EU-
sponsored 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

125 Castle, Stephen, British Leader Wants Overhaul of Financial System, The New York Times, October 16, 2008.
126 The G-7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.
127 Summit of the Euro Area Countries: Declaration on a Concerted European Action Plan of the Euro Area Countries,
European union, October 12, 2008.
128 EU Sets up Crisis Unit to Boost Financial Oversight, Thompson Financial News, October 16, 2008.
129 Ibid.
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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.130
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.131 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.132 The
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 flexicurity133 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)

130 Bradbury, Adam, EU Eyes Next Step on Clearing, The Wall Street Journal Europe, January 7, 2009. p. 21.
131 Communication From the Commission, From Financial Crisis to Recovery: A European Framework for Action,
European Commission, October 29, 2008.
132 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.
133 The combination of labor market flexibility and security for workers.
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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.134
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
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 Euros135 (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.136 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.137
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

134 Hall, Ben, George Parker, and Nikki Tait, European Leaders Decide on Deadline for Reform Blueprint, Financial
Times
, November 8, 2008, p. 7.
135 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.
136 Benoit, Bernard, German Stimulus Offers Job Promise, Financial Times, December 16, 2008. p. 1.
137 Walker, Marcus, Germany Mulls $135 Billion in Rescue Loans, The Wall Street Journal Europe, January 8, 2009.
p. 1.
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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.” 138
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
such clients as exporters. France reportedly was preparing to inject more money into the banking
system.139
On December 4, 2008, President Sarkozy announced a $33 billion (26 billion euros) package of
stimulus measures to accelerate planned public investments.140 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.141 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.142 The auto industry and its suppliers reportedly employ about
10% of France’s labor force.
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.

138 Steinbruck, Peer, Germany’s Way Out of the Crisis, The Wall Street Journal, December 22, 2008.
139 Parussini, Gabrielle, France to Give Banks Capital, With More Strings Attached, The Wall Street Journal Europe,
January 16, 2009, p. A17.
140 Gauthier-Villars, David, Leading News: France Sets Stimulus Plan, The Wall Street Journal Europe, December 5,
2008, p. 3.
141 Hall, Ben, France Gives Renault and Peugeot E.U.R 779m, Financial Times, December 16, 2008, p. 4.
142 Abboud, Leila, France Considers New Measures to Aid Auto Companies, The Wall Street Journal Europe, January
15, 2009, p. 4.
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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
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 mortgage-
backed and other securities for UK Treasury bills.143
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).144 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.145
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

143 The Bank of England, Financial Stability Report, April 2008, p. 10.
144 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.
145 Falloon, Matt, and Mike Peacock, UK Government to Borrow Record Sums to Revive Economy, The Washington
Post
, November 24, 2008.
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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.146
Collapse of Iceland’s Banking Sector
The failure of Iceland’s banks raises questions of bank supervision and crisis management for
governments in Europe and the United States. As Icelandic banks began to 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.147 This incident raises questions about how national governments should
address the issue of supervising foreign financial firms 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.148 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.149 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.150 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

146 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.
147 Benoit, Bertrand, Tom Braithwaaite, Jimmy Burns, Jean Eaglesham, et. al., Iceland and UK clash on Crisis,
Financial Times, October 10, 2008, p. 1.
148 Anderson, Camilla, Iceland Gets Help to Recover From Historic Crisis, IMF Survey Magazine, November 19, 2008.
149 Iceland Raises Key Rate by 6 Percentage Points, The New York Times, October 29, 2008.
150 Jolly, David, Nordic Countries Add $2.5 Billion to Iceland’s Bailout, The New York Times, November 20, 2008.
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for two days.151 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,152 but this
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.153 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 anti-
terrorism laws to freeze British assets of Landsbanki until the situation is resolved.
Impact on Asia and the Asian Response154
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 provides 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 (and, so far, cannot
fully insulate) Asian economies from global contagion.
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
crisis of the late 1990s. These surpluses have been one reason for the buildup of enormous
government reserves in the region, including China’s $1.9 trillion and Japan’s $996 billion—the
two largest reserve stockpiles in the world. Such reserves give Asian governments resources to

151 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.
152 Portes, Richard, The Shocking Errors Behind Iceland’s Meltdown, Financial Times, October 13, 2008, p. 15.
153 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.
154 Prepared by Ben Dolven, Asia Section Research Manager, Foreign Affairs, Defense, and Trade Division.
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provide fiscal stimulus, inject capital into their financial systems, and provide backstop
guarantees for private financial transactions where needed. So overall, Asian economies are much
healthier 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

Source: Merrill Lynch
Still, Asia has not been insulated. The initial stage of the crisis, which centered around losses
directly from subprime assets in the United States, has given 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 appear 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, Asian economies
appear extremely vulnerable—and that threatens deeper damage to Asian financial systems and
then, in turn, to markets for U.S. exports and investments.
The signs of distress in Asia are legion. Japan’s government officially forecasts zero growth for
2009. The Nikkei-225 Index has lost half its value over the course of 2008, exacerbated by a
surge by the yen to its highest level against the dollar since 1982. The yen’s strength makes
Japanese exports more expensive and adds to the damage that slowing economies around the
world are already expected to inflict on Japan’s export-led economy. Japan entered a recession in
the July-September 2008 quarter, contracting for the second straight quarter. And in November,
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Japanese exports fell by 26.7%, the largest year-on-year decline on record, leaving Japan with a
trade deficit for the second straight month—the first time that has happened since 1980.155
Meanwhile, South Korea’s stock market and currency have plunged precipitously, as South
Korean companies have hoarded dollars because of substantial dollar debts. Chinese GDP
growth, while still strong, slowed from 10.4% in the April-June quarter to 9.0% in the July-
September period. Further slowing in China seems inevitable. In November, Chinese exports
dropped 2.2%, the first monthly decline in seven years, while imports plunged by 18% in the
month, reflecting a substantial decline in domestic Chinese demand. This has raised concerns that
further slowing could lead to unemployment and social unrest, key concerns of the Chinese
government. Such concerns prompted the government to announce a $586 billion stimulus
package in early November 2008, although the measures included many policies that had
previously been announced. Smaller economies dependent on the financial and trading sectors,
such as Hong Kong and Singapore, have been hammered—Singapore is already in a recession,
and Hong Kong’s government has announced it will guarantee all the $773 billion in Hong Kong
bank deposits through 2010.
One of the most worrying developments in Asia 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.156 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.157 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.158
Since the outset of the crisis, governments in Japan, South Korea, Hong Kong, Singapore,
Malaysia, Australia, New Zealand, Indonesia and elsewhere have been forced into a range of
moves to support domestic financial systems, pumping money into financial markets, issuing
guarantees for bank deposits, and providing fiscal stimulus to shore up economic growth and
slow declines in local stock markets. In several instances, including in Japan and South Korea,
initial interventions failed to staunch financial market declines, leading authorities to broaden
their support moves as the crisis deepened.
So 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. Declines in Asian stock markets are similar in scale to, or larger than, those in
the U.S. and Europe, despite the lack of bankruptcies and failed institutions in Asia. Throughout
the crisis thus far, Asian economies have experienced a so-called “flight to quality,” in which
lenders and investors have sought safe investments and moved out of those perceived as risky.
This has so far included the majority of Asia’s emerging economies. Some economists, however,

155 Japan Logs Trade Deficit on Slumping World Demand, Reuters, November 22, 2008.
156 Despite Ambivalence, Pakistan May Wrap Deal by Next Week, The Wall Street Journal, October 28, 2008.
157 IMF ‘Has Six Days to Save Pakistan,’ Financial Times, October 28, 2008.
158 Pakistan Says it will Need Financing Beyond IMF Deal, The Wall Street Journal, November 17, 2008.
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believe that Asia’s reserves and current account surpluses may recover more strongly than other
emerging markets once the crisis stabilizes.159
Asian Reserves and Their Impact
Some analysts argue that substantial Asian reserves could be one source of relief for the global
economy.160 Japan has contributed funding for the IMF support package of Iceland, and on
November 14, 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 2009.161 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 has
approached China and several Gulf states for such support.
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.162 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.”163 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 Nations164, 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

159 See, for instance, Morgan Stanley report, “EM Currencies, No Differentiation in the Sell-Off,” October 23, 2008.
160 See, for instance, Jeffrey Sachs, The Best Recipe for Avoiding a Global Recession, Financial Times, October 27,
2008.
161 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.
162 Leaders of Europe and Asia Call for Joint Economic Action, New York Times, October 25, 2008.
163 Chinese Premier Blames Recession on U.S. Actions, Wall Street Journal, January 29, 2009.
164 ASEAN’s members are Indonesia, Singapore, Malaysia, Thailand, the Philippines, Brunei, Vietnam, Cambodia,
Laos and Burma (Myanmar).
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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.165
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.166 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
$28 billion and an expansion of an existing yen-won swap line to the equivalent of $20 billion.167
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

165 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.
166 Japan, China, S. Korea Eye Financial Stability Forum, Reuters, October 20, 2008.
167 Asian Leaders See Growth Driver, The Wall Street Journal, December 15, 2008.
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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%.168
There have been signs of stress in the Japanese financial system in the weeks following the
Nomura and Mitsubishi UFG purchases. In October, Yamato Insurance, a mid-sized insurance
company, filed for bankruptcy, with $2.7 billion in liabilities. Then, in late October, with share
prices tumbling, the much larger Mitsubishi UFG Group—which just two weeks earlier was
sufficiently capitalized that it had bought the Morgan Stanley stake—said it would raise as much
as $10.7 billion to improve its capital base. Many analysts say smaller banks may need direct help
from the government. Japan’s two largest political parties, the ruling Liberal Democratic Party
and the main opposition Democratic Party of Japan, have agreed on the need to re-authorize
expired legislation that would allow the government to purchase equity to support private banks,
and Japanese media reports say this is expected to be passed in December. This move would
restart a program first authorized in 2002 as part of the bank recapitalization process.
China169
The extent of China’s exposure to the current global financial crisis, in particular from the fallout
of the U.S. sub-prime mortgage problem, is mixed but is believed to be 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. Thus, the exposure of Chinese private
sector firms and individual investors to sub-prime U.S. mortgages is likely to be rather small. On
the other hand, the exposure of Chinese government entities, such as the State Administration of
Foreign Exchange, the China Investment Corporation (a $200 billion sovereign wealth fund
created in 2007),170 state banks, and state owned enterprises), may be more exposed and may
have suffered losses from troubled U.S. mortgage securities. 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.171

168 Japan Passes Contentious Stimulus Budget, Associated Press, January 27, 2009.
169 The section on China was prepared by Wayne M. Morrison, Specialist in Asian Trade and Finance, Foreign Affairs,
Defense, and Trade Division.
170 For an overview of the China Investment Corporation, see CRS Report RL34337, China’s Sovereign Wealth Fund,
by Michael F. Martin.
171 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.
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However, China’s economy has not been immune to 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.172 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.
• The value of China’s main stock market index, the Shanghai Stock Exchange
Composite Index, dropped by 36% from June 2, 2008, to March 18, 2009.173
• China’s trade has plummeted recent months (see Figure 11). For example,
exports and imports in February 2009 were down 25.7% and 24.1%, respectively
on a year-on-year basis. The decline in exports was the biggest monthly decline
every recorded.
• The level of FDI flows to China has fallen four months in a row (November
2008-February 2009). Monthly FDI flows to China dropped by 15.8% in
February 2009 and by 32.6% in January (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.
Global Insight, an international forecasting firm, estimates that China’s real GDP
growth would slow to 5.7% in 2009.174 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.175

172 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 anti-
inflation policies and instead has sought to stimulate the economy.
173 However, the Shanghai Index is one of the few global indexes to experience positive growth in 2009; from January
5, 2009, to March 18, 2009, it was up 18%.
174 Global Insight, China, March 18, 2009.
175 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.
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Figure 11. Changes in China’s Monthly Trade Data: January 2008-February 2009
year-on-year basis
% Change
60
40
20
0
-20
-40
-60
Feb
Apr
Jun
Aug
Oct
Dec
Feb
Jan-08
Mar
May
Jul
Sep
Nov
Jan-09
Exports
Imports

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.” 176 On
October 8, 2008, China’s central bank announced plans to cut interest rates and the reserve-
requirement 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
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.177 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).178 On November 14, 2008, China reportedly provided $500
million in aid to Pakistan. On November 15, 2008, Chinese President Hu Jintao attended the G-20
summit, calling for reform of the global financial system and stating that growing China’s
economy was the most important step the government could take to respond to the global
financial crisis.

176 Chinaview, September 27, 2008.
177 Global Insight, Country Intelligence Analysis, China, October 20, 2008.
178 China Xinhua News Agency, November 12, 2008.
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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.179
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 $740 billion as of January 2009.180
On September 21, 2008, the White House indicated that President Bush had called President Hu
to discuss the global financial crisis and steps the United States planned to take to address the
crisis. An unnamed Chinese trade official reportedly stated that “the purpose of that call was to
ask for China’s help to deal with this financial crisis by urging China to hold even more U.S.
Treasury bonds and U.S. assets.” The official was further quoted as saying that China recognized
that it “has a stake” in the health of the U.S. economy, both as a major market for Chinese exports
and in terms of preserving the value of U.S.-based assets held by China.” and that a stabilized
U.S. economy was in China’s own interest.181 At a press conference during her visit to China on
February 21, 2009, Secretary of State Hillary Rodham Clinton brought up this issue, stating 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. 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.

179 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.
180 See CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M.
Morrison and Marc Labonte.
181 Inside U.S. Trade, China Trade Extra, September 24, 2008.
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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.182 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.183 However, the government has also stated that it intends
to assist Chinese export industries as well.
South Korea
South Korea, Asia’s fourth largest economy, has been deeply affected by the crisis, with both the
South Korean stock market and the won tumbling throughout recent 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.184
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.185
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.

182 For additional information, see CRS Report RS22984, China and the Global Financial Crisis: Implications for the
United States
, by Wayne M. Morrison.
183 People’s Daily Online, February 19, 2009.
184 SOUTH KOREA: Seoul Faces Growth and Liquidity Tests, Oxford Analytica, October 8, 2008.
185 Lee Warns Against Dollar Hoarding, Korea Times, October 8, 2008.
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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
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%.186
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 2008.187
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.”188
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.189
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.190 The first

186 See Merrill Lynch, “Asia: Risks Rising”, October 3, 2008.
187 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.
188 “Pakistan’s Zardari to Give Up Powers,” AFP, September 20, 2008.
189 Simon Cameron-Moore, “Pakistan Needs $10-15 Bln Fast, Says PM’s Adviser,” Reuters, October 21, 2008.
190 “IMF Okays $7.6 Bln Package for Pakistan: Tareen,” Associated Press of Pakistan, November 15, 2008.
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installment of the loan—up to $4 billion—was expected by the end of November; Pakistan is to
repay the loan by 2016.191
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.192 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.193 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.
Other Countries’ Moves
Governments around the region have been affected by the crisis, and have issued a range of
rescue measures to keep financial markets functioning and shore up economic growth. Other
moves include:
Australia, which had seen one of the largest jumps in housing prices in the world in recent years,
has seen property prices tumble, leading to a spike in bad loans among Australian banks.
Australia’s commodities-dependent economy has also been hurt by declining commodities prices,
and the Australian dollar has declined substantially in recent weeks. In response, the government
issued a full guarantee on all bank deposits in early October, and added a $7 billion fiscal
stimulus plan on October 14.
On October 14, The Hong Kong Monetary Authority said it would provide government backing
for all of the $773 billion in Hong Kong bank deposits through 2010 as government assistance for
banks in Europe and the United States put pressure on Asian regulators to follow suit even though
Asian banks tended to be better capitalized. The authority also said that it was prepared to provide

191 Jamie Anderson, “Pakistan Turns to IMF for Financial Aid,” Money Times, November 16, 2008.
192 “Pakistan Unveils Package for Economic Stability,” Reuters, September 19, 2008.
193 Farhan Bokhari, “Pakistan Vows to Target Rich Tax Evaders as IMF Concludes Talks on Vital Loan,” Financial
Times
, November 3, 2008.
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capital to the 23 locally incorporated banks if they needed it, following the examples of the
United States and Britain.
Many countries have seen trade volumes fall—both because of slowing global demand but also
because domestic banks have been wary of issuing trade finance. India’s central bank, the
Reserve Bank of India, announced emergency measures on November 15 to support Indian banks
who issue letters of credit for Indian exporters. The central bank more than doubled the level of
funds it makes available for banks to refinance export credits at favorable rates.194 The
availability of trade finance has become a regional problem that further threatens export-led Asian
economies, as evidenced by a call from the Asian Development Bank on November 16 for Asian
banks to unfreeze credit to borrowers seeking to continue doing business.195
International Policy Issues
In making policy changes, Congress faces several fundamental issues. First is whether any long-
term 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. 196 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.197 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.198 Could this crisis mark the beginning of the end of “free market capitalism?” On the
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.199
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

194 India Acts to Avert Liquidity Crunch, Financial Times, November 16, 2008
195 Ibid.
196 For an analysis of bubbles, see CRS Report RL33666, Asset Bubbles: Economic Effects and Policy Options for the
Federal Reserve
, by Marc Labonte.
197 Lanman, Scott and Steve Matthews. “Greenspan Concedes to ‘Flaw’ in His Market Ideology,” Bloomberg News
Service
, October 23, 2008.
198 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.
199 International Monetary Fund. “The Recent Financial Turmoil—Initial Assessment, Policy Lessons, and Implications
for Fund Surveillance,” April 9, 2008.
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Trade Organization, or should the IMF or other international institution be ceded oversight and
regulatory authority by national governments?
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.200 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. (See Appendix C.)
G-20 Meetings
On November 15, 2008, the G-20 Summit on Financial Markets and the World Economy 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 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 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.
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

200 Gerstenzang, James. “Bush will Meet with G-20 After Election,” Los Angeles Times, October 23, 2008.
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leaders reiterated their commitment to resist protectionism and promote global trade and
investment.201
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 risk-
taking.
• 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.
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

201 G-20, Meeting of Finance Ministers and Central Bank Governors, United Kingdom, 14 March 2009, Communiqué,
March 14, 2009.
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• 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
• 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 Fund202
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

202 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.
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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.203 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.
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 wel 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 long-
term systemic reform of the international financial system.204 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.

203 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.
204 See CRS Report RS22976, The Global Financial Crisis: The Role of the International Monetary Fund (IMF), by
Martin A. Weiss.
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IMF rules stipulate that countries are allowed to borrow up to three times their quota205 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 48-
72 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,
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.206 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.207 The sources for the remaining $145.5 billion of the
planned increase in the NAB have not been announced.

205 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.
206 IMF Signs $100 Billion Borrowing Agreement with Japan, IMF Survey Magazine: In the News, February 13, 2009.
207 “China Urges World Monetary Systems Diversification ,” Dow Jones Newswire , April 2, 2009,
(continued...)
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The IMF reportedly is considering issuing bonds, something it has never done in its 60-year
history.208 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.209 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.
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.)210
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,211 Bank for International Settlements,212 and
Financial Stability Forum.213

(...continued)
http://www.djnewswires.com/eu.
208 Timothy R. Homan, “IMF Plans to Issue Bonds to Raise Funds for Lending Programs ,” Bloomberg.com, April 25,
2009.
209 Bob Davis, “IMF Considers Issuing Bonds to Raise Money,” Wall Street Journal, February 1, 2009.
210 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.
211 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.
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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.214
Legislation
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 a discussion of housing legislation, see CRS Report RL34623, Housing and Economic
Recovery Act of 2008
, coordinated by N. Eric Weiss andCRS Report RL33879, Housing Issues in
the 110th Congress
, coordinated by Libby Perl.
For policy related to the financial sector, see CRS Report R40224, Troubled Asset Relief Program
and Foreclosures
, by N. Eric Weiss et al., and CRS Report RL34730, Troubled Asset Relief
Program: Legislation and Treasury Implementation
, by Baird Webel and Edward V. Murphy.
For policy related to government sponsored enterprises, see CRS Report RS21663, Government-
Sponsored 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.

(...continued)
212 For information on Basel II, see CRS Report RL34485, Basel II in the United States: Progress Toward a Workable
Framework
, by Walter W. Eubanks.
213 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.
214 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 Crisis215

2009
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 under-
performance.
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.
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

215 Prepared by J. Michael Donnelly, Information Research Specialist, Knowledge Services Group. Source: Various
news reports and press releases.
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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 policy-
induced 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
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%.
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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 20-
City 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
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
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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.
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.
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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
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.
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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 bank
s 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.
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.
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• 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.
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
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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
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
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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
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
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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%.
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
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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.
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.
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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-for-
equity 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.
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.
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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
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
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(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-the-
counter 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
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
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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 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 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 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. 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
Ban
k lowered its key lending rate from 5.5% to 5%. The Czech National Bank reduced its
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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 short-
term 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. 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
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.
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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 yen-
denominated 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 executive-
board 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.
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
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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).216
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 short-
term rate stood at 1.5% and the European Central Bank’s at 3.75%.
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

216 U.S. Treasury. “Joint Statement by Treasury, Federal Reserve and FDIC.” Press Release HP-1206, October 14,
2008.
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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).
September 15. Lehman Brothers bankruptcy at $639 billion is the largest in the history of the
United States.
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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
787.00 Infrastructure technology, tax cuts, education, transfers to states, energy,
States
nutrition, health, unemployment benefits. Budget in deficit.
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
39.00 Total package of $256 billion called for states to increase budgets by $217
Union
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
29.60 Proposed plan includes a 2.5% cut in the value added tax for 13 months, a
Kingdom
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
2.89 Funds to be provided to medium and smal -sized businesses, money for
infrastructure, particularly schools, and investment in technological
improvement.
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Date
Announced
Country
$Billion Status, Package Contents
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 energy-
efficiency 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
100.00 Increasing safety net for non-regular workers, support for smal businesses,
revitalizing regional economies, promoting solar power and nursing and
medical services.
3-Nov-08
South
14.64 $11 billion for infrastructure (including roads, universities, schools, and
Korea
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.
South
9-Feb-09
The government announced its intention to invest $37.87 billion over the
Korea
37.87 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.
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 Status, Package Contents
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 al 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 middle-
income earners. Budget is in deficit.
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.
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.
Source: Congressional Research from various news articles and government press releases.
Notes: Currency conversions to U.S. dol ars were either already done in the news articles or by CRS using
current exchange rates.
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Appendix C. London Summit – Leaders’ Statement
2 April 2009
1. We, the Leaders of the Group of Twenty, met in London on 2 April 2009.
2. We face the greatest challenge to the world economy in modern times; a crisis which has
deepened since we last met, which affects the lives of women, men, and children in every
country, and which all countries must join together to resolve. A global crisis requires a global
solution.
3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be
shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-
working families, not just in developed countries but in emerging markets and the poorest
countries of the world too; and must reflect the interests, not just of today’s population, but of
future generations too. We believe that the only sure foundation for sustainable globalisation and
rising prosperity for all is an open world economy based on market principles, effective
regulation, and strong global institutions.
4. We have today therefore pledged to do whatever is necessary to:
• restore confidence, growth, and jobs;
• repair the financial system to restore lending;
• strengthen financial regulation to rebuild trust; fund and reform our international
financial institutions to overcome this crisis and prevent future ones;
• promote global trade and investment and reject protectionism, to underpin
prosperity; and
• build an inclusive, green, and sustainable recovery.
By acting together to fulfil these pledges we will bring the world economy out of recession and
prevent a crisis like this from recurring in the future.
5. The agreements we have reached today, to treble resources available to the IMF to $750 billion,
to support a new SDR allocation of $250 billion, to support at least $100 billion of additional
lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the
additional resources from agreed IMF gold sales for concessional finance for the poorest
countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and
jobs in the world economy. Together with the measures we have each taken nationally, this
constitutes a global plan for recovery on an unprecedented scale.
Restoring growth and jobs
6. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create
millions of jobs which would otherwise have been destroyed, and that will, by the end of next
year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green
economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore
growth.
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7. Our central banks have also taken exceptional action. Interest rates have been cut aggressively
in most countries, and our central banks have pledged to maintain expansionary policies for as
long as needed and to use the full range of monetary policy instruments, including
unconventional instruments, consistent with price stability.
8. Our actions to restore growth cannot be effective until we restore domestic lending and
international capital flows. We have provided significant and comprehensive support to our
banking systems to provide liquidity, recapitalise financial institutions, and address decisively the
problem of impaired assets. We are committed to take all necessary actions to restore the normal
flow of credit through the financial system and ensure the soundness of systemically important
institutions, implementing our policies in line with the agreed G20 framework for restoring
lending and repairing the financial sector.
9. Taken together, these actions will constitute the largest fiscal and monetary stimulus and the
most comprehensive support programme for the financial sector in modern times. Acting together
strengthens the impact and the exceptional policy actions announced so far must be implemented
without delay. Today, we have further agreed over $1 trillion of additional resources for the world
economy through our international financial institutions and trade finance.
10. Last month the IMF estimated that world growth in real terms would resume and rise to over
2 percent by the end of 2010. We are confident that the actions we have agreed today, and our
unshakeable commitment to work together to restore growth and jobs, while preserving long-term
fiscal sustainability, will accelerate the return to trend growth. We commit today to taking
whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly
the actions taken and the global actions required.
11. We are resolved to ensure long-term fiscal sustainability and price stability and will put in
place credible exit strategies from the measures that need to be taken now to support the financial
sector and restore global demand. We are convinced that by implementing our agreed policies we
will limit the longer-term costs to our economies, thereby reducing the scale of the fiscal
consolidation necessary over the longer term.
12. We will conduct all our economic policies cooperatively and responsibly with regard to the
impact on other countries and will refrain from competitive devaluation of our currencies and
promote a stable and well-functioning international monetary system. We will support, now and
in the future, to candid, even-handed, and independent IMF surveillance of our economies and
financial sectors, of the impact of our policies on others, and of risks facing the global economy.
Strengthening financial supervision and regulation
13. Major failures in the financial sector and in financial regulation and supervision were
fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our
financial system. We will take action to build a stronger, more globally consistent, supervisory
and regulatory framework for the future financial sector, which will support sustainable global
growth and serve the needs of business and citizens.
14. We each agree to ensure our domestic regulatory systems are strong. But we also agree to
establish the much greater consistency and systematic cooperation between countries, and the
framework of internationally agreed high standards, that a global financial system requires.
Strengthened regulation and supervision must promote propriety, integrity and transparency;
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guard against risk across the financial system; dampen rather than amplify the financial and
economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage
excessive risk-taking. Regulators and supervisors must protect consumers and investors, support
market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory
arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.
15. To this end we are implementing the Action Plan agreed at our last meeting, as set out in the
attached progress report. We have today also issued a Declaration, Strengthening the Financial
System
. In particular we agree:
• to establish a new Financial Stability Board (FSB) with a strengthened mandate,
as a successor to the Financial Stability Forum (FSF), including all G20
countries, FSF members, Spain, and the European Commission;
• that the FSB should collaborate with the IMF to provide early warning of
macroeconomic and financial risks and the actions needed to address them;
• to reshape our regulatory systems so that our authorities are able to identify and
take account of macro-prudential risks;
• to extend regulation and oversight to all systemically important financial
institutions, instruments and markets. This will include, for the first time,
systemically important hedge funds;
• to endorse and implement the FSF’s tough new principles on pay and
compensation and to support sustainable compensation schemes and the
corporate social responsibility of all firms;
• to take action, once recovery is assured, to improve the quality, quantity, and
international consistency of capital in the banking system. In future, regulation
must prevent excessive leverage and require buffers of resources to be built up in
good times;
• to take action against non-cooperative jurisdictions, including tax havens. We
stand ready to deploy sanctions to protect our public finances and financial
systems. The era of banking secrecy is over. We note that the OECD has today
published a list of countries assessed by the Global Forum against the
international standard for exchange of tax information;
• to call on the accounting standard setters to work urgently with supervisors and
regulators to improve standards on valuation and provisioning and achieve a
single set of high-quality global accounting standards; and
• to extend regulatory oversight and registration to Credit Rating Agencies to
ensure they meet the international code of good practice, particularly to prevent
unacceptable conflicts of interest.
16. We instruct our Finance Ministers to complete the implementation of these decisions in line
with the timetable set out in the Action Plan. We have asked the FSB and the IMF to monitor
progress, working with the Financial Action Taskforce and other relevant bodies, and to provide a
report to the next meeting of our Finance Ministers in Scotland in November.
Strengthening our global financial institutions
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17. Emerging markets and developing countries, which have been the engine of recent world
growth, are also now facing challenges which are adding to the current downturn in the global
economy. It is imperative for global confidence and economic recovery that capital continues to
flow to them. This will require a substantial strengthening of the international financial
institutions, particularly the IMF. We have therefore agreed today to make available an additional
$850 billion of resources through the global financial institutions to support growth in emerging
market and developing countries by helping to finance counter-cyclical spending, bank
recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and
social support. To this end:
• we have agreed to increase the resources available to the IMF through immediate
financing from members of $250 billion, subsequently incorporated into an
expanded and more flexible New Arrangements to Borrow, increased by up to
$500 billion, and to consider market borrowing if necessary; and
• we support a substantial increase in lending of at least $100 billion by the
Multilateral Development Banks (MDBs), including to low income countries,
and ensure that all MDBs, including have the appropriate capital.
18. It is essential that these resources can be used effectively and flexibly to support growth. We
welcome in this respect the progress made by the IMF with its new Flexible Credit Line (FCL)
and its reformed lending and conditionality framework which will enable the IMF to ensure that
its facilities address effectively the underlying causes of countries’ balance of payments financing
needs, particularly the withdrawal of external capital flows to the banking and corporate sectors.
We support Mexico’s decision to seek an FCL arrangement.
19. We have agreed to support a general SDR allocation which will inject $250 billion into the
world economy and increase global liquidity, and urgent ratification of the Fourth Amendment.
20. In order for our financial institutions to help manage the crisis and prevent future crises we
must strengthen their longer term relevance, effectiveness and legitimacy. So alongside the
significant increase in resources agreed today we are determined to reform and modernise the
international financial institutions to ensure they can assist members and shareholders effectively
in the new challenges they face. We will reform their mandates, scope and governance to reflect
changes in the world economy and the new challenges of globalisation, and that emerging and
developing economies, including the poorest, must have greater voice and representation. This
must be accompanied by action to increase the credibility and accountability of the institutions
through better strategic oversight and decision making. To this end:
• we commit to implementing the package of IMF quota and voice reforms agreed
in April 2008 and call on the IMF to complete the next review of quotas by
January 2011;
• we agree that, alongside this, consideration should be given to greater
involvement of the Fund’s Governors in providing strategic direction to the IMF
and increasing its accountability;
• we commit to implementing the World Bank reforms agreed in October 2008. We
look forward to further recommendations, at the next meetings, on voice and
representation reforms on an accelerated timescale, to be agreed by the 2010
Spring Meetings;
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• we agree that the heads and senior leadership of the international financial
institutions should be appointed through an open, transparent, and merit-based
selection process; and
• building on the current reviews of the IMF and World Bank we asked the
Chairman, working with the G20 Finance Ministers, to consult widely in an
inclusive process and report back to the next meeting with proposals for further
reforms to improve the responsiveness and adaptability of the IFIs.
21. In addition to reforming our international financial institutions for the new challenges of
globalisation we agreed on the desirability of a new global consensus on the key values and
principles that will promote sustainable economic activity. We support discussion on such a
charter for sustainable economic activity with a view to further discussion at our next meeting.
We take note of the work started in other fora in this regard and look forward to further discussion
of this charter for sustainable economic activity.
Resisting protectionism and promoting global trade and investment
22. World trade growth has underpinned rising prosperity for half a century. But it is now falling
for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures
and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for
restoring global growth. We will not repeat the historic mistakes of protectionism of previous
eras. To this end:
• we reaffirm the commitment made in Washington: to refrain from raising new
barriers to investment or to trade in goods and services, imposing new export
restrictions, or implementing World Trade Organisation (WTO) inconsistent
measures to stimulate exports. In addition we will rectify promptly any such
measures. We extend this pledge to the end of 2010;
• we will minimise any negative impact on trade and investment of our domestic
policy actions including fiscal policy and action in support of the financial sector.
We will not retreat into financial protectionism, particularly measures that
constrain worldwide capital flows, especially to developing countries;
• we will notify promptly the WTO of any such measures and we call on the WTO,
together with other international bodies, within their respective mandates, to
monitor and report publicly on our adherence to these undertakings on a quarterly
basis;
• we will take, at the same time, whatever steps we can to promote and facilitate
trade and investment; and
• we will ensure availability of at least $250 billion over the next two years to
support trade finance through our export credit and investment agencies and
through the MDBs. We also ask our regulators to make use of available flexibility
in capital requirements for trade finance.
23. We remain committed to reaching an ambitious and balanced conclusion to the Doha
Development Round, which is urgently needed. This could boost the global economy by at least
$150 billion per annum. To achieve this we are committed to building on the progress already
made, including with regard to modalities.
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24. We will give renewed focus and political attention to this critical issue in the coming period
and will use our continuing work and all international meetings that are relevant to drive progress.
Ensuring a fair and sustainable recovery for all
25. We are determined not only to restore growth but to lay the foundation for a fair and
sustainable world economy. We recognise that the current crisis has a disproportionate impact on
the vulnerable in the poorest countries and recognise our collective responsibility to mitigate the
social impact of the crisis to minimise long-lasting damage to global potential. To this end:
• we reaffirm our historic commitment to meeting the Millennium Development
Goals and to achieving our respective ODA pledges, including commitments on
Aid for Trade, debt relief, and the Gleneagles commitments, especially to sub-
Saharan Africa;
• the actions and decisions we have taken today will provide $50 billion to support
social protection, boost trade and safeguard development in low income
countries, as part of the significant increase in crisis support for these and other
developing countries and emerging markets;
• we are making available resources for social protection for the poorest countries,
including through investing in long-term food security and through voluntary
bilateral contributions to the World Bank’s Vulnerability Framework, including
the Infrastructure Crisis Facility, and the Rapid Social Response Fund;
• we have committed, consistent with the new income model, that additional
resources from agreed sales of IMF gold will be used, together with surplus
income, to provide $6 billion additional concessional and flexible finance for the
poorest countries over the next two to three years. We call on the IMF to come
forward with concrete proposals at the Spring Meetings;
• we have agreed to review the flexibility of the Debt Sustainability Framework
and call on the IMF and World Bank to report to the IMFC and Development
Committee at the Annual Meetings; and
• we call on the UN, working with other global institutions, to establish an
effective mechanism to monitor the impact of the crisis on the poorest and most
vulnerable.
26. We recognise the human dimension to the crisis. We commit to support those affected by the
crisis by creating employment opportunities and through income support measures. We will build
a fair and family-friendly labour market for both women and men. We therefore welcome the
reports of the London Jobs Conference and the Rome Social Summit and the key principles they
proposed. We will support employment by stimulating growth, investing in education and
training, and through active labour market policies, focusing on the most vulnerable. We call
upon the ILO, working with other relevant organisations, to assess the actions taken and those
required for the future.
27. We agreed to make the best possible use of investment funded by fiscal stimulus programmes
towards the goal of building a resilient, sustainable, and green recovery. We will make the
transition towards clean, innovative, resource efficient, low carbon technologies and
infrastructure. We encourage the MDBs to contribute fully to the achievement of this objective.
We will identify and work together on further measures to build sustainable economies.
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28. We reaffirm our commitment to address the threat of irreversible climate change, based on the
principle of common but differentiated responsibilities, and to reach agreement at the UN Climate
Change conference in Copenhagen in December 2009.
Delivering our commitments
29. We have committed ourselves to work together with urgency and determination to translate
these words into action. We agreed to meet again before the end of this year to review progress on
our commitments.
Source: http://www.londonsummit.gov.uk/resources/en/PDF/final-communique.
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Appendix D. Comparison Selected Financial
Regulatory Reform Proposals217

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, Framework for Regulatory Reform: New Rules of the Road,
March 26, 2009. (Only a four-page summary of these proposals is available.)
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;

217 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)
Treasury
G-
Group
Treasury
Recommendation
(2009)
FSA 20
of 30
COP CRMPG (2008)
Systemic Risk
Create (or designate) a single regulator with
X



X

X
responsibility over all systemically-important
financial institutions, regardless of their legal
form.
All systemically-important financial
X
X
X
X
X

X
institutions should be subject to an
appropriate degree of regulation.
The systemic risk regulator should have
X



X

X
prompt corrective action powers with
regard to failing systemically-important firms.
Firms’ internal risk controls should be made

X

X

X

more robust and should take systemic risk
into account. Corporate boards should
assume more responsibility for their firms’
risk management practices.
Systemically-important banks should be

X

X
X


restricted in certain risky activities, such as
affiliation with non-financial firms,
proprietary trading, etc.
Financial institutions’ use of stress testing
X

X
X

X

should be more rigorous.
Regulation of critical payment systems
X





X
should be strengthened.
International monitoring for systemic risk

X
X
X
X


should be enhanced, and a more formal
mechanism should be created.
Capital Standards
Large complex systemically-important
X

X

X

X
financial institutions should be subject to
more stringent capital regulation than other
firms.
Minimum capital standards should be raised

X
X
X
X


throughout the banking system, or for al
financial institutions.
Capital standards should be adjusted to

X
X
X
X
X

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.
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Treasury
G-
Group
Treasury
Recommendation
(2009)
FSA 20
of 30
COP CRMPG (2008)
Regulators’ and firms’ capital decisions
X
X
X
X
X
X

should make greater provision against
liquidity risk.
Hedge Funds and Other Private Pools of Capital
Hedge funds should be required to register
X

X
X
X

X
with the Securities and Exchange
Commission (SEC) or other national
securities regulator.
Systemically-important hedge funds should
X

X
X
X

X
be subject to prudential regulation.
Hedge funds should provide information on
X
X
X

X

X
a confidential basis to regulators about their
strategies and positions.
Over-the-Counter (OTC) Derivatives
Credit default swaps should be processed
X
X
X
X
X
X

through a regulated centralized counterparty
(CCP) or clearing house.
All standardized OTC derivatives should be
X



X


processed through a regulated CCP or
clearing house.
OTC derivatives dealers should be subject
X






to a strong regulatory regime.
Non-standard (or customized) OTC
X



X


derivatives should be reported to a central
trade repository or to a regulator.
Resolution Authority for Non-Bank Financial Institutions
To avoid disorderly liquidations, a
X


X



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.
Money Market Funds
SEC (or other national regulator) should
X


X



impose limits on risk-taking to make money
market funds less vulnerable to runs.
Funds that offer bank-like services should be



X



chartered as special purpose banks, insured,
and regulated.
Compensation Structures in Financial Firms
Pay practices should discourage excessive

X
X

X
X

risk-taking, via incentives for fostering long-
term stability rather than maximizing annual
performance bonuses.
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Treasury
G-
Group
Treasury
Recommendation
(2009)
FSA 20
of 30
COP CRMPG (2008)
Regulators should consider compensation


X




structures when assessing firms’ risk
management practices.

Credit Rating Agencies
Credit rating agencies (CRAs) should be

X
X

X


registered and regulated with the
appropriate government agency.
CRAs should be held more accountable for



X
X


the accuracy of their ratings, through after-
the-fact audits or independent evaluations.
The rating process for complex financial

X



X

instruments, such as structured securitized
products, should be made more transparent,
or such instruments should be subject to
additional mandatory risk disclosures.
CRA revenues (especially when securities



X
X


issuers pay for ratings) should be subject to
oversight or limits.
Accounting Standards
Fair value, or mark-to-market, accounting


X
X



standards should be modified to reduce
their procyclical impact.
Current rules for accounting consolidation





X

(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.
Other Regulatory Structure Issues
There should be a single banking regulator



X


X
for prudential supervision.
There should be a single regulator for




X

X
consumer financial products.
Financial regulators should play a greater

X
X




role in macroeconomic policy-making.
Insurance companies should be chartered



X


X
and regulated at the federal level.
Government-sponsored enterprises—a



X



clear line should be drawn between public
and private firms.
Minimum international standards—a
X
X

X
X


regulatory floor—should apply in all
countries, including tax havens and offshore
banking centers.
Source: Prepared by CRS.
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Appendix E. British, U.S., and European Central
Bank Operations, April to Mid-October 2008

Coordinated

European Central
Central Bank
Bank of England
Federal Reserve
Bank
Announcements
May
Announced that
Expanded size of
Expansion
of
expanded three-
Term Auction Facility
agreements between
month long-term
(TAF).
Federal Reserve and
repos would be
European Central
maintained in June and Extended collateral of
Bank.
July.
Term Securities
Lending Facility
(TSLF).
July
Introduced
84-day
Announced that it

TAF.
would conduct
operations under the
Primary Dealer Credit 84-day TAF to
Facility (PDCF) and
provide US dollars to
TSLF extended to
European Central
January 2009.
Bank counterparties.
Authorized the
Announced that
auction of options for
supplementary three-
primary dealers to
month longer-term
borrow Treasury
refinancing operations
securities from the
(LTROs) would be
TSLF.
renewed in August
and September.
September
Announced that
Expanded col ateral of Announced six-month Expansion of
expanded three-
PDCF.
LTROs would be
agreement between
month long-term
renewed in October,
Federal Reserve and
repos would be
Expanded size and
and three-month
European Central
maintained in
collateral of TSLF.
LTROs would be
Bank.
September and
Announced provision
renewed in November
October.
Establishment of swap
of loans to banks to
and December.
agreements between
Announced long-term
finance purchase of
Conducted Special
Federal Reserve and
repo operations to be
high quality asset-
Term Refinancing
the Bank of England,
held monthly.
backed commercial
Operation.
subsequently
paper from money
expanded.
Extended drawndown
market mutual funds.
period for Special
Bank of England and
Liquidity Scheme
European Central
9SLS).
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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Coordinated

European Central
Central Bank
Bank of England
Federal Reserve
Bank
Announcements
October
Extended collateral
Announced payment
Increased size of six-
Announced schedules
for one-week U.S.
of interest on
month supplementary
for TAFs and Forward
dol ar repos and for
required and excess
LTROs.
TAFs for auctions of
three-month long-
reserve balances.
U.S. dollar liquidity
term repos.
Announced a
during the fourth
Increased size of
reduction in the
quarter.
Extended collateral of
TAFs.
spread of standing
all extended-collateral
facilities from 200
European Central and
sterling long-term
Announced creation
basis points to 100
Bank of England
repos, U.S. dol ar repo of the Commercial
basis points around
announced tenders of
operations, and the
paper Funding Facility. the interest rate on
U.S. dollar funding at
SLS to include bank-
the main refinancing
7-day, 28-day, 84-day
guaranteed debt
operation.
maturities at fixed
under the UK
interest rates for full
Government bank
Introduced swap
al otment. Swap
debt guarantee
agreements with the
agreements increased
scheme.
Swiss National Bank.
to accommodate
required level of
Announced
funding.
Operations Standing
Facilities and a
Discount Window
Facility, which
together replace
existing Standing
Facilities.
Source: Financial Stability Report, October 2008, the Bank of England. p. 18.



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Author Contact Information

Dick K. Nanto, Coordinator
Ben Dolven
Specialist in Industry and Trade
Section Research Manager
dnanto@crs.loc.gov, 7-7754
bdolven@crs.loc.gov, 7-7626
Martin A. Weiss
William H. Cooper
Specialist in International Trade and Finance
Specialist in International Trade and Finance
mweiss@crs.loc.gov, 7-5407
wcooper@crs.loc.gov, 7-7749
James K. Jackson
J. F. Hornbeck
Specialist in International Trade and Finance
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
jhornbeck@crs.loc.gov, 7-7782
Wayne M. Morrison
Mark Jickling
Specialist in Asian Trade and Finance
Specialist in Financial Economics
wmorrison@crs.loc.gov, 7-7767
mjickling@crs.loc.gov, 7-7784
J. Michael Donnelly

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




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