CHAPTER 1. ASSESSING RISKS TO GLOBAL FINANCIAL STABILITY
- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- April 2008
What began as a fairly contained deterioration in portions of the U.S. subprime market has metastasized into severe dislocations in broader credit and funding markets that now pose risks to the macroeconomic outlook in the United States and globally. This chapter first examines the deepening of losses in the U.S. subprime mortgage market and the potential breadth of credit deterioration amid significant economic slowing along with declines in real estate prices. Estimates of potential losses and an analysis of their systemic effects are discussed next, including the potential reverberations through financial guarantors, and spill-overs to emerging market countries. The linkages through the credit channel to output growth are empirically examined and two potential downside scenarios are explored. Against the backdrop of continued weakness in global credit markets and threats to financial stability, the chapter concludes with some immediate policy measures to help foster counterparty confidence and to contain further downside risks.