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661. Credit Crunch Watch

Publication Date:
10-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
The financial stress indicator is a composite index of a number of indicators including risk spreads, mortgage spreads, equity volatility, commercial paper and commercial loans outstanding and the spread of LIBOR rates over T-bill rates (the “Ted” spread). The stress indicator fell again last week, driven by a further narrowing of corporate bond spreads and lower equity volatility. These shifts offset a rise in 30-year mortgage spreads. Stress levels are now at their lowest levels since February 2008, and while still well above their long-term average have also dropped below the levels seen in previous periods of distress such as in the early 1990s and in 2001- 2003.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States

662. Financial meltdown averted – but how deep and how widespread will the recession be?

Publication Date:
01-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
The credit crunch that began in July 2007 intensified dramatically in September 2008, with a series of bank failures prompting rescues and effective nationalisation of major financial institutions in the US, the UK and the Eurozone. Despite massive intervention, financial stress rose to new highs at the start of Q4 2008 as financial markets dried up, with treasury bond yields falling, interbank lending rates still high, emerging market spreads widening sharply and stock markets plunging further. Faced with financial sector meltdown, many governments have recapitalised banking sectors and guaranteed interbank loans and bank deposits to try to shore up confidence in the financial system. These moves have averted a meltdown, but the spotlight has moved onto the rapidly weakening real economy – both world growth and world trade are now expected to decline in 2009, making it the worst year since 1945.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States

663. Global capital flows on the rebound?

Publication Date:
10-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Global capital flows dropped steeply in the wake of the financial crisis, with an unprecedented outflow of foreign funds both from developed and emerging markets.
Topic:
Economics, Globalization, Markets, and Monetary Policy

664. Leaders and laggards, on the way down and up

Publication Date:
10-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
With the economies of most countries having passed their troughs, it is a good time to take stock of some of the main features of the crisis so far and to assess what the upturn may look like. In this article, we look back at how the different countries have fared in this crisis and how monetary and fiscal authorities have responded to the crisis. We then turn to the nascent recovery to compare and contrast the upturn across countries. Finally, we highlight some of the main legacies of this crisis. Exposure to financial services, housing booms, consumer debt and trade with the US were seen as factors that would make some countries suffer deeper downturns than others. In the event, the downturn has surprised by how quickly it has spread across countries. So the most affected countries turned out to be the most exposed to the world economy such as Germany, Italy, Japan and Eastern Europe. All major central banks have responded with aggressive cuts in interest rates and adopted wide-ranging unconventional measures. This has helped stabilise financial markets, but the goal of getting credit flowing to the non-financial economy has not yet been achieved. Governments have also responded to the crisis with large fiscal stimulus packages. These packages have helped contain the collapse in activity and contributed to some countries exiting the recession in 2009Q2. Whether these packages will be enough to get the world economy back on a sustainable growth path is still uncertain though. Beyond the short term, where fiscal stimulus and the stock cycle will boost growth, the recovery is expected to be sluggish and bumpy in most places. History suggests that recoveries from financial crises tend to be slower than others, and the repair of household and corporate balance sheets will be a drawn out process. In addition, with large amounts of spare capacity around the world, demand for investment will be weak for some time to come. Furthermore, the nascent upturn has already put pressure on oil and commodity prices. If this continues, it will hamper growth in net importer economies. These factors will combine with country-specific features that determine their potential growth. We forecast the recovery to be most drawn out in Italy, Japan and Germany as these countries are hit by weak demand for investment goods and are characterised by relatively low potential growth. One main legacy of this crisis is the likelihoo d of years of fiscal austerity, to bring public deficits back under control. Another legacy may be in changes to the regulation of financial services, although do date little progress has been made in this area. In addition, EMU has so far proved a resilient entity during the crisis, so that the euro could gain a more prominent role on the world stage, depending on how it fares in the upturn.
Topic:
Economics, Globalization, and Markets
Political Geography:
Japan, Europe, Germany, and Italy

665. Why are US home foreclosures so high?

Publication Date:
06-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
US mortgage foreclosures have risen to extraordinary heights in recent months, with the scale of the distress in the US mortgage market much greater than in the UK. Key factors behind this divergent performance include laxer underwriting standards in the US and the widespread existence of 'non-recourse' loans. The latter allow borrowers in negative equity to walk away from their mortgage debt and sap the incentive to remain current on 'underwater' loans. As a result, steep house price falls can generate a sharp rise in foreclosures even without high interest rates or unemployment. In the UK, by contrast, there are strong incentives for home owners to remain in their properties, even when in negative equity.As a result, the escalation from arrears to foreclosure in the UK is much more limited. This may head off very abrupt prices falls but could also mean a more drawn out process of adjustment in the housing market.
Topic:
Debt, Economics, Markets, and Financial Crisis
Political Geography:
United States

666. Slump in wealth to hinder global recovery prospects?

Publication Date:
05-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Since the credit crunch began in Q3 2007, there has been a dramatic slump in the prices of many financial assets. Global equity prices have dropped some 40-50% from their peaks in the major economies and by as much as 70% in some emerging markets. Many classes of other private sector securities have also seen sharp falls in value. Corporate bond spreads have exploded as defaults have soared, as have mortgage-backed securities (MBS). Currently, many classes of MBSs are trading at less than 10% of their par value, and even AAA-rated tranches are trading at as little of 25% of par.
Topic:
Economics, Markets, and Financial Crisis
Political Geography:
United States

667. How far away is a global recovery?

Publication Date:
03-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Steep drops in output have been recorded across the industrialised world and much of the emerging market world in recent months. Such has been the scale of these declines that there is now little doubt that the global economy is set for its worst year since the end of WWII, with world GDP forecast to fall almost 1½% (and more than 2% at 2000US$). Significant uncertainties nevertheless remain about the economic outlook, in particular about how deep and protracted the recession will prove to be and how rapid an eventual recovery can be expected. A key factor generating uncertainty is that the current recession has been sparked by and accompanied by a major financial crisis. Recessions of this sort are often more severe than 'standard' recessions, featuring deeper and more sustained drops in asset prices, and a weaker impact from policy interventions due to malfunctioning banking systems. Equity and house prices have continued to drop in the early part of 2009, and there looks to be a significant risk that this weakness will drag on for some time – the average duration of stock price declines in previous financial crises is more than three years and for house prices around six years. The financial sector also remains in a highly dysfunctional state. Although the credit tightening process is showing some signs of coming to an end, stress levels remain extremely elevated and risk appetite is low with banks stuck in 'balance sheet repair mode'. This process is unlikely to be complete for some time. Retrenchment has also become a priority for the corporate and household sectors. In the face of a plunge in final demand, firms have slashed investment and begun destocking. Worryingly, the destocking process could continue f or several quarters as the ratio of inventory to sales remains high. US households were net re payers of debt in the final quarter of 2008, and it seems unlikely that the appetite to take on more debt will recover quickly there or elsewhere in the face of steep increases in unemployment and large falls in household wealth. Taylor rule analysis suggests that the 'appropriate' short-term interest rate for the major economies has now turned negative, supporting the big shift to quantitative easing now under way. Eventually, this and other stimuli in the pipeline should produce a strong recovery. But the outlook for 2010 has weakened significantly in recent weeks and the risks remain skewed toward a more deflationary outcome than that envisaged by our baseline forecast.
Topic:
Economics, Markets, Foreign Direct Investment, and Financial Crisis
Political Geography:
United States

668. An Indispensable Relationship: Economic Linkages between the UK and the rest of the European Union

Publication Date:
02-2009
Content Type:
Working Paper
Institution:
Oxford Economics
Abstract:
Business for New Europe has requested Oxford Economics to undertake a study detailing the economic ties between the UK and the rest of the European Union (EU), and where possible, quantify them according to a number of parameters such as trade, labour force, tourism, FDI, portfolio investments and banking linkages. In the context of the current economic situation, there is a growing need for increased economic integration and cooperation between partner countries. Therefore, it is particularly relevant to review the importance of the economic links between the UK and the rest of the EU. These inter-relations have come to the fore since the outbreak of the financial crisis. Analysing the impact of the credit crunch on UK-EU relations is not within the scope of this report.
Topic:
Economics, International Trade and Finance, Markets, and Regional Cooperation
Political Geography:
United Kingdom and Europe

669. Global Outlook 2010: What lies ahead for the global economy

Publication Date:
11-2009
Content Type:
Working Paper
Abstract:
Leo Abruzzese, Editorial Director for North America, discusses the latest EIU forecast for the world. Forward-looking economic indicators have continued to improve in many countries in recent months, suggesting that the worst of the contraction in global GDP is over. The improvement has triggered hopes of an imminent and sustained global economic recovery. But does this signal the start of a genuine strong recovery, or is it a false dawn, to be followed by months—or even years—of anemic growth? What is the outlook for the US, Canada, and Asia, as well as the major emerging markets, over the next couple of years? And what are the downside risks to this outlook?
Topic:
Economics, International Trade and Finance, Markets, and Financial Crisis
Political Geography:
United States, Canada, Asia, and North America

670. Mortgage Loan Modifications: Program Incentives and Restructuring Design

Author:
Dan Magder
Publication Date:
11-2009
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Mortgage defaults and home foreclosures remain a growing problem that undermines the nascent US economic recovery. Delinquencies continue to skyrocket, up 300 percent since the beginning of the crisis, and the contagion has spread to prime loans where delinquencies have risen to over 11 percent of outstanding loans. The resulting foreclosures have broad consequences: Individuals lose their homes, banks take losses on the loans, neighbors suffer as area prices go down, and localities lose on property taxes. The economics of modifying loans to avoid defaults appear strong: Lenders lose an average of $145,000 during a foreclosure compared with less than $24,000 on a modified loan. Yet the track record of modification programs has been surprisingly poor. Potential lawsuits over modifying loans in securitization trusts may be a less important obstacle than many claim. More significant are misaligned incentives that put mortgage servicers in opposition to both investors and borrowers, conflicts between investors holding different tranches of mortgage-backed securities (MBS), operational impediments, and problems in loan modification design that contribute to redefaults. Policymakers should improve reporting metrics to highlight servicers' conflicts of interest, shift the emphasis of loan modifications from short-term fixes to making the new loans more sustainable, and use government resources to drive operational/capacity improvements in the industry.
Topic:
Economics, Markets, and Financial Crisis