Tuesday, March 10, 2009

Financial assets around the world may have lost “well over $50 trillion” of value last year, a collapse of wealth equivalent to a year’s worth of world economic output, the Asian Development Bank reported Monday.

This “astounding” decline reflects stock market losses, write-downs on bonds and currencies losing ground against the dollar as investors engaged in a “surprising run” toward the greenback in search of a safe-haven currency, the ADB report said.

The report attributed the “genesis” of the global financial crisis to growing imbalances among the main economies of the world. It blamed the United States for embarking on “a consumption binge and a growing fiscal deficit” without the internal savings to finance these explosions in demand. As a result, the U.S. trade deficit soared.

U.S. trade deficits were financed by oil-exporting countries, China, Japan and, to a lesser extent, European and Latin American countries.

“These imbalances grew rapidly, but markets did not respond significantly before 2007,” the report said.

When markets finally did respond, they did so with a vengeance that left nobody unscathed.

Asian and Latin American economies have been hammered by the fallout from the financial crisis, even though investors there purchased few of the securitized subprime mortgages whose collapse precipitated the crisis in the summer of 2007.

Financial assets in Latin America suffered more than $2 trillion in losses last year, including $1.3 trillion in stock market losses. Developing countries in Asia and the newly industrialized economies of Hong Kong, Taiwan, South Korea and Singapore cumulatively suffered financial losses of nearly $10 trillion in 2008, including more than $7 trillion in stock market losses.

The perception that developing countries in Asia and Latin America had “broken the links with the larger economies has been painfully refuted by the hard facts of the last 18 months,” the report declared. The economies of Eastern Europe and Russia are faring even worse. The so-called “decoupling” theory has been delivered a fatal blow.

The world’s financial markets have experienced “the most violent shock” since the Great Depression, the report said, and the global economy has rapidly decelerated in the aftermath. The United States, Europe and Japan are already mired in deep recessions, and growth in most emerging economies slowed sharply last year. Economists expect this year will be considerably worse.

Indeed, a new World Bank analysis concludes that the volume of world trade in 2009 will fall for the first time since 1982 and will suffer its largest decline in 80 years.

“Global GDP will decline this year for the first time since World War II, with growth at least 5 percentage points below potential,” the World Bank report said Sunday.

China, the largest exporter among emerging economies, “has seen 20 million jobs disappear,” said Virendra Singh, a global economist for Moody’s Economy.com. “India reports 3 million jobs were lost due to shrinking exports.”

The Institute of International Finance recently revealed that net private capital flows to emerging markets declined 50 percent last year to less than $500 billion. Those capital flows will plunge to $165 billion this year, the Washington think tank estimates. The World Bank expects 98 developing countries will face a cumulative financing gap between $270 billion and $700 billion this year.

Both the Asian Development Bank and the World Bank expect remittances sent home by immigrants working in wealthy countries will decline sharply this year, worsening the slowdown in developing countries.

“This global crisis needs a global solution, and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said World Bank President Robert B. Zoellick. “We need investments in safety nets, infrastructure and small and medium-size companies to create jobs and to avoid social and political unrest.”

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