Edited by Julio Faundez and Celine Tan
Chapter 5: Crisis and Opportunity: Emerging Economies and the Financial Stability Board
Enrique R. Carrasco* INTRODUCTION 1. The current global financial and economic crisis began in the subprime mortgage sector in the United States. Through the process of securitisation, subprime mortgage loans were pooled together, sliced into tranches and transmitted to investors in many parts of the world. When the US housing bubble burst and housing values plummeted, subprime borrowers began to default on their mortgage loans, which caused mortgage-backed securities and other related assets (collateralised debt obligations, for example) to plummet in value as well. These so-called ‘toxic assets’ led to massive losses among banks, which then led to a freeze in the credit markets. Although throughout much of 2008 the crisis was largely limited to the financial sector, by 2009 it became clear that the world was witnessing a full-blown economic crisis – the worst since the Great Depression. At the outset of the crisis, most observers believed that emerging economies would not be significantly affected by the crisis, which appeared to be concentrated in the United States and Europe. This is because most emerging economies did not hold toxic assets. Moreover, after the economic/financial crises in the 1980s and 1990s, many emerging economies engaged in significant reform of their financial sectors, including significant increases in foreign exchange reserves, which would make them less vulnerable to external shocks. Thus they would be ‘decoupled’ from developed countries’ economies and not be dependent on them for economic growth and stability (IMF, 2008a: 44; Kose and Prasad, 2008). Indeed, in the midst of the...
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