July 25, 2007
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MS. STANKOVA: Good morning. My name is Olga Stankova, and I am with Media Relations at the IMF. Welcome to this press briefing on the updates to the April 2007 World Economic Outlook and the Global Financial Stability Report.
Today marks the first time we are releasing a WEO update. We now plan to do it on a regular basis-twice a year-between the publications of our Spring and Fall WEO reports. These releases will provide an update to our overall view on the global economic outlook on the basis of recent developments and provide greater continuity and transparency to our assessment of global conditions.
We are also taking this opportunity to present a Financial Market Update. You may be aware that we have been putting this document on our web site for several years already, and it was a way for us to provide an update on financial stability risks in-between the publications of the Global Financial Stability Report, which also comes out twice a year.
Let me introduce today's speakers. To my left is Mr. Jaime Caruana, Counsellor and Director of the Monetary and Capital Market Department, which prepares the Global Financial Stability Report. To his left is Mr. Charles Collyns, Deputy Director of the Research Department, which prepares the World Economic Outlook.
Mr. Collyns will make brief introductory remarks on the update to the World Economic Outlook, and then Mr. Caruana will review the Financial Market Update, and then we will take your questions. I would like also to welcome journalists viewing the briefing over the Media Briefing Center. We have more than 40 media online, and we have already received a number of questions on country-specific matters.
I would like to say that we are prepared today to discuss global financial issues and the World Economic Outlook update and those countries that are listed in the table attached to the World Economic Outlook update. Not all country-specific questions we can take today, they will be prepared for our upcoming publication of the World Economic Outlook in the Fall. Now let me turn the table over to Mr. Collyns.
MR. COLLYNS: Thank you very much, Olga, and good morning. The global economy has continued to expand at a brisk pace since the release of our April 2007 World Economic Outlook. Emerging market countries have led the way, with China growing by a very impressive 11½ percent in the first half of 2007, and India and Russia also growing very strongly.
Although growth in the United States slowed in the first quarter, recent indicators suggest that the U.S. economy gained strength in the second quarter. We'll know more this Friday. In the Euro area and in Japan, growth has remained above trend, with some welcome signs of domestic demand taking a more central role in the expansions. Inflation remains generally well-contained despite strong global growth, although some emerging market and developing countries have faced rising price pressures, especially from energy and food prices.
Oil prices have risen back towards record highs against the backdrop of limited spare production capacity, while food prices have been boosted by supply shortages and increased use of bio-fuels.
Against this background, we have raised our forecast for global growth in both 2007 and 2008. Global growth is now projected at 5.2 percent in both years compared to 4.9 percent growth projected at the time of the April 2007 world economic outlook. That's an increase of 0.3 percentage points.
The details for the major countries and regions are provided in Table 1 of our press release. Most of the large revisions have been in emerging market and developing countries, with growth projections for China, India, and Russia each marked up substantially.
In fact, for the first time, we expect China to be the largest contributor to global GDP growth, measured at market exchange rates, as well as in purchasing power parity terms. Among the advanced economies, growth projections for the Euro area, particularly for Germany, and for Japan, have been raised. Growth in the United States is now expected at 2 percent this year, 0.2 percentage points lower than projected in April, although activity should regain momentum through the year and next.
The overall balance of risks to the global growth outlook remains tilted modestly to the downside, as it was at the time of the April 2007 World Economic Outlook. Nevertheless, there have been some changes in our assessment of individual risk factors.
A number of risks look more balanced. In particular, while the correction of the U.S. housing sector is likely to continue for some time, overall downside risks for the U.S. economy have diminished somewhat, as the inventory cycle has turned and business investment looks to be picking up.
Upside risks to growth in the Euro area and emerging market countries flagged in our April 2007 report, have partially materialized and have now been built into the baseline projections. Further, some progress has been made toward reducing risks of a disorderly unwinding of global imbalances, although protectionist pressures are a continuing concern.
In other respects, some downside concerns have been accentuated. With even stronger growth, supply constraints are tightening and inflation risks have edged up since the April report, increasing the likelihood that central banks will need to tighten monetary policy further. The risk of an oil price spike also remains a concern. And as Mr. Caruana will now discuss, financial market risks have risen as credit qualities deteriorated in some sectors and market volatility increased. Thank you.
MR. CARUANA: Thank you. Good morning. Financial stability risks have evolved largely as foreseen in our April Global Financial Stability Report. The set of charts comprising this financial market update highlight the rise in some of these risks, credit risks and market risks. Whereas continued strong global economic performance, as Charles has explained, continue to underpin overall financial stability.
Furthermore, during this period of global growth, systemically important financial institutions have been able to improve their capital base. Again, the clearest idea for which risks have risen is credit risks, where the weakening of credit discipline that we identified in our last global financial stability report has resulted in rising difficulties in the U.S. subprime market and leverage loan market.
Delinquencies, defaults, and foreclosures have continued rising, especially in the 2006 vintages of the subprime lending. The materialization of these risks are set to continue as rising mortgage rates will translate into higher rates on adjustable rate mortgages, many of which will reset this year and next year. Also, evidence of the effects of this weakening of credit discipline is also visible in the leverage loan market associated with LBO [leveraged buyout] activity. While the degree of leverage has continued to rise, we also see that investors are becoming more cautious, more reticent to accept the so called covenant lite loans, where credit or protections have been loosened.
The second point we would like to make is that credit risks have begun to translate into higher market risk, notably on products based on U.S. subprime mortgages and leverage loans. Though, it is also true that we are seeing some effects in other markets where the underlying credit-worthiness of securities is being now scrutinized by markets.
Spreads on indexes representing the risky segment of these products have widened considerably and have caused distress for some investors. We have some cases of hedge funds with exposure to these securities. And there is now a significant pipeline of financing for LBO transactions, in part because of what I mentioned, some investors are expressing some reservations about the terms of these deeds, and this could pose some challenges for the banks that are involved in underwriting and syndication, since they hold their associated leverage loans while investors are found.
Turning to our third point, emerging markets, we continue to see improved fundamentals in emerging market countries and positive developments in the local capital markets. But we also see that financial vulnerabilities have continued to exist in some of them. Banks in some emerging market countries have kept foreign capital markets, leading to overly rapid credit growth, which is further complicated by their foreign currency exposure. Emerging market corporations, some of which have relatively low credit ratings, have also tapped foreign capital markets, borrowing in foreign currency.
In some, risk have increasing, and credit markets could remain volatile in the period ahead, with further reprising of some credit products. However, so far our assessment is that these risks are likely to remain contained, although further adjustments, and again, further volatility could be expected. It is important that markets are discriminating on the up-strength or the fundamentals-in underlying fundamentals, and recent corrections have been mostly concentrated in the subprime related kind of securities.
We expect that the ongoing adjustment in the structure and leverage finance markets will help bolster credit discipline. And again, the capacity of market participants to discriminate according to fundamentals is an important element of why we view financial stability as contained. So it would be very important that market participants continue to pay attention to the underlying fundamentals going forward. Thank you very much.
MS. STANKOVA: Thank you. Now we will open the floor for questions. The first question, please.
QUESTIONER: My question is for Mr. Collyns. Sorry, I was slightly late. But I got that you said that China was, for the first time, the first country contributing to global growth; can you elaborate a bit? Is it the first time you realized it or is it the first time it happened and how does it play out?
MR. COLLYNS: For some time China has been the largest contributor to global growth, measured in terms of purchasing power parity. On purchasing power parity terms, China represents 15 percent of the global economy. So with China growing over 10 percent for the last few years, it has provided the largest chunk of the increase in global GDP growth for some time.
However, evaluated at market exchange rates, China is only 5 percent of the global economy, and therefore, its contribution to global growth measured in using market exchange rates is substantially less. This year for the very first time, with the very strong growth expected, and with the growth slowing down in the United States, China will be contributing the largest part to the increase in global growth measured at market exchange rates, as well as in purchasing power parity terms.
QUESTIONER: Could you just expand on that? Does that mean that of the increase in growth that you've marked up, that's where you mean China has contributed? It's not how much of total global growth is accounted for by China, the total aggregate increase expected for 2007?
MR. COLLYNS: Well, talking in purchasing power parity terms, China is 15 percent of the global economy. It's growing at 11 percent this year. So China, by itself, is contributing, you can do the math, it's like 1.7 percentage points to global growth out of a total of 5.2, so it's around a third. If you add together Russia and India, as well, you get over half of global growth coming from these emerging market countries. And this really underlines the increasing importance of the dynamic emerging market countries to the performance of the global economy.
So we're paying increasing attention in our world economic outlook assessments to the performance of these countries, as well as continuing to pay, of course, attention to the industrial countries, but an increasing importance for these emerging market countries is an important lesson.
QUESTIONER: I have a couple of questions. The first that you were talking about inflation risks still being pretty high and maybe the necessity the central bank will act on it; if you could elaborate on this first, thanks.
MR. COLLYNS: Yes; we see a number of sources of global inflation risk, which have accentuated. First, the stronger the global economy grows, the more we expect to face supply constraints. In our last report in April, we showed a chart showing how output gaps are being reduced around the world as a result of the strong global growth in 2006. With this increase in our forecast for growth in 2007, that means that that reduction in gaps is even stronger than we had previously anticipated.
And you see the impact of that. If you look, for example, at import prices of non-fuel commodities into the advanced economies, five or six years ago those prices were declining, they were a dis-inflationary force. But over the past couple of years, those prices have been increasing, as there is less spare capacity, less competition for these goods. So this is now a source of upward pressure on inflation.
The second source of upward pressure on inflation has been commodities markets. We're all quite accustomed to upward pressure coming from energy prices, and that upward pressure has continued in recent months with oil prices going back up to record highs. We're also seeing upward pressure now from food prices, which has been particularly important for any emerging market in developing countries, where food prices constitute a much larger portion, around 35-40 percent, of consumption bundles in some countries. And the combination of rising global demand for food with some bad weather has contributed to this increase in food prices. And there's also some spill-over from the energy market, as increasing demand for bio-fuels has affected not just the prices of grains, but also of dairy products and other products.
So we're seeing this upward pressure very generally on commodity prices, which is particularly affecting the emerging market in developing countries. And then the third potential source of pressure is labor costs, particularly in the advanced countries. If you look at the United States, you see some increase in compensation, but also a slowdown in productivity over time, so that labor costs have begun to accelerate. In Europe and Japan, this is less of an issue at this point.
But looking ahead, with unemployment coming down to cyclical lows across the advanced economies, it would not be surprising to see some pick-up in wage pressures in those economies, too. So, again, we see that as a potential risk for inflation. So as I said before, at this point these inflation risks seem reasonably well contained, but there are concerns that inflation pressures may be picking up, and central banks will need to respond quickly and in a forward looking way to these pressures. And, indeed, if you look at market expectations for central bank actions, the yield curves are pricing in increases and interest rates in many countries.
QUESTIONER: Can you repeat these, I'm sorry? Central bank needs to act quickly?
MR. COLLYNS: Central banks need to respond to inflation pressures as they materialize, but in a forward looking way. And it's interesting, if you look at the financial markets, the yield curves, they are now pricing in increasing interest rates for a number of central banks. For example, for the European Central Bank, markets are now expecting another 50 basis point increase in interest rates through the end of this year.
MS. STANKOVA: And we have a question from the Online Media Briefing Center: Could you talk about your forecast for the second half of the year in the United States? Some economists are not too optimistic. They see consumers getting tired and the drop in home prices may limit spending. You say the U.S. economy should "regain momentum"?
MR. COLLYNS: Yes; I mean there are a number of forces acting on the U.S. economy and that leads to some fluctuations in quarter to quarter growth. The first quarter of this year was very weak. We're expecting quite a sharp bounce back in the second quarter. We'll find the numbers out on Friday. But growth may well be over 3 percent in the second quarter. So the average growth in the first half of the year may be around 2 percentage points. We're expecting a pick up in the second half of the year to maybe 2½-2¾ percentage points growth in the second half. This will reflect a combination of various factors. One is increasing strength from business investment. There was a period of weakness in business investment toward the final part of last year, and into 2007. But various data we're getting from growth in durable goods orders, for example, show signs of a pick up. It's also I think apparent that the inventory cycle, which was a factor behind the sharp reduction of growth in the first quarter, has turned around and will no longer be subtracting from growth in the second half of the year. Also, export performance in the U.S. has been very strong and should be supported by the continuing depreciation of the U.S. dollar that we have seen in recent months. So there are a number of areas of strength.
The housing sector will continue to be a drag on the economy. Our forecast, in fact, envisions a continuing decline in residential investment through 2008. So it's not adding to growth. But the reduction in growth coming from the housing sector should nevertheless diminish. There's a deceleration in the downturn. For example, if you look at housing starts, the annual rate of housing starts is not quite as negative now as it was a few months ago.
Of course, in that area there's a lot of risk. That's one of the areas of downside concern that we do have for the U.S. economy. Consumption I guess is the most important. It's over 60 percent of the U.S. demand. I don't think U.S. consumers are getting tired, I think U.S. consumers are vigorous. But, of course, there are many factors that affect how they will behave.
In the second quarter of this year, there was probably a reduction in consumption growth, largely reflecting the sharp increase in energy prices coming from both rising oil prices, but also the increase in the spread of gasoline prices over crude prices because of refinery outages.
In recent weeks, gasoline prices in the U.S. have stabilized. And assuming there's no further oil price spike, we don't see energy prices subtracting from consumption growth as they did in the second quarter. And we see continuing employment growth, we see strong equity prices, and these are factors that should help to support consumption growth. So overall, we do see consumption contributing to growth, we see overall GDP growth in the second half as being well sustained. But I do acknowledge that there are a number of risks to that and we will be watching carefully to see how they unfold.
MS. STANKOVA: And if we could follow-up on the Media Briefing Center with another question: Could you please describe the progress being made in unwinding global imbalances?
MR. COLLYNS: Well, we do think that there is progress being made. This issue was reviewed in some detail in our last World Economic Outlook report in April, and again, we'll come back to it in our next report, so the details are there.
I think the progress is most obvious in the U.S., where there has been a decline in the current account deficit, from over 6 percent of GDP to under 6 percent of GDP. And the turn around is most obvious if you look at the non-oil balance of trade. We also see progress in terms of policies. The multilateral consultation that the Fund hosted over the past year has provided a venue for a discussion of the issues and I think has been a very helpful mechanism that ended with the various participants in the multilateral consultation, the main countries in the global economy which have a role in the global imbalances. Each of those participants indicated their policy actions which they are taking that will contribute to reducing the global imbalances.
So we see that the implementation of these policies will help going forward to further reduce global imbalances. Again, it's something that will need to be implemented well and we will be following in our world economic outlook.
QUESTIONER: I wonder if you could talk a little bit about China? Obviously, a major revision upwards in the growth for China this year and next. One of the risks made a couple of years ago, we were talking about China coming in for some sort of landing, it doesn't seem like it-if it touched down, I missed it.
MR. COLLYNS: Right.
QUESTIONER: So I wonder what the risks are.
MR. COLLYNS: Well, China is certainly going from strength to strength at this point, it's hitting on all cylinders. A continued very strong growth of investment and exports, but we're also seeing a strong increase in consumption, it seems, with retail sales growing 16 percent year on year in June.
And I think that's a very welcome sign, because it shows that some progress is now being made towards increasing household consumption, which, over time, should help to lead to a rebalancing of China's economy. We have been concerned that China has relied excessively on investment and exports, that does create risks of potential overinvestment and risks related to its very large payments surplus. So we do see some encouraging signs.
I'd also note that profitability remains very strong in China, and that is one of the factors that's driving the strong growth of investment. So based on the strong readings that we have seen, we have marked up our forecast quite substantially.
We do expect some slowing in the second half of the year and into next year. The Chinese authorities are concerned that the very rapid pace of growth could lead to some overheating pressures and to some over investment. Inflation has been rising. Although so far the rising inflation is solely due to food prices. We don't see an increase in the rate of increase of manufactured prices, so it's perhaps less of a concern than it would be otherwise.
But we do have these long-standing concerns that it's important that the Chinese economy not grow at a rate that could create problems in the future from excessive investment and is consistent with production potential in the economy and also achieves this rebalancing of demand. And it remains to be seen how well and how smooth that will occur, but for now at least we see sustained strong growth in the Chinese economy.
QUESTIONER: When you say the Chinese-very rapid increase in the growth of [inaudible] share those concerns.
MR. COLLYNS: Yes; but this is a concern we have looking forward. As I said, we don't see it in the inflation numbers yet outside the food prices, and there are specific reasons in the agricultural sector that explain that. But nevertheless, with such very strong growth, if you have retail consumption growing very fast at the same time as investment continues to grow very fast, the combination of that is putting increasing pressure on resources in the economy.
QUESTIONER: The retail sales, those are nominal or real figures, just out of ...?
MR. COLLYNS: I'm not sure, but I think they're nominal. You can't translate directly from retail sales to consumption, but it's an indicator of the rising strength of that sector, which I think is encouraging. But it does add to the tension.
QUESTIONER: I have two questions, but I came late, so maybe if you have addressed those. Actually, the internet connection is not working, so people are not seeing this. And that's why I came late, running from my office.
So, two questions: one, I see that you have increased your forecast for Latin America, and so I wonder if you could elaborate on that, what are the reasons for that, and also for Mr. Caruana in the report here, it mentions the concern about regarding overly rapid borrowing in emerging markets, and I wonder if you could explain a little bit on that, what markets are you referring to? I was wondering if Latin America, for example, is one of the areas where you are concerned? Thank you.
MR. COLLYNS: On Latin America, at this point we're not in a position to provide the details of a country by country breakdown beyond what's provided in the table. What you see in the table is, there's been a marginal increase in the overall growth in the Western Hemisphere countries, but a reduction in Mexico specifically.
Mexico has been affected by some spillovers from the U.S. slowdown, given the very close linkages between the Mexican and the U.S. economies. But that slow down has largely passed as the U.S. manufacturing sector has begun to revive. That's also helping the Mexican economy. But given the weakness in the earlier part of the year, we've revised our forecast. Elsewhere we see continuing signs of strength. In Brazil, we haven't actually changed our projections, but certainly our projections are being justified by the recent numbers and private forecasters are now increasing their forecasts to be more in line with ours, which I think before were a little bit above consensus.
Overall, Western Hemisphere countries are benefiting from continuing strong commodity prices, from continuing favorable financial conditions in the global economy, and continuing strong global demand.
QUESTIONER: There was a second question.
MR. COLLYNS: Well, I said at the beginning that regarding the emerging markets, first we see that emerging markets continue to have strong fundamentals, but at the same time, we also see that there are some vulnerabilities that still persist, and the vulnerabilities that we are paying attention to are those when there are flows that are financing rapid credit growth, and in addition to that, there are some exposures to foreign exchange risk. So these are the kind of countries that we think requires to pay attention. And I wouldn't like to generalize too much because each country has different circumstances. But these countries, more than Latin America, we were thinking in areas such as emerging Europe and some in Central Asia, these where you can find these kind of situations.
MS. STANKOVA: And the question from the Media Briefing Center: Can you expand on the comment in the Financial Market Update that credit markets remain volatile in the period ahead? What are you expecting and could it create more instability in the markets?
MR. CARUANA: First of all, volatility has been very low for a long time, so we are now experiencing some volatility that basically we are returning to almost around average volatility, for example, if we measure it by the VIX index. Second, yes, we think that there is some volatility, still volatility, and I was explaining that part of the market risk that we have been localizing in the subprime, in the leverage loan market have translated to securities that contain, that are based on that risk. And the adjustment process has not finished, so it would be normal to expect volatility in those markets.
I think, and I would like to repeat that it would be very important that markets continue to do what they have been doing so far, that is discriminating what are the real risks that each security contains.
QUESTIONER: You've increased your forecast on Germany, and I was wondering what are the reasons for that?
MR. COLLYNS: Yes, in fact, we've increased our Germany forecast rather substantially by 0.8 percentage points. The main reason for that is it seems that the impact of the VAT increase in the beginning of this year has been much less substantial than we had anticipated. What we had expected to happen was that there would be a substantial shift in activity from the first quarter of this year to the fourth quarter of last year, as consumers tried to avoid the tax increase. To some extent that did happen, but businesses anticipated this effect in their own production and inventory behavior. So the overall effect on the economy of this shift was substantially less than we had thought.
In addition to that, the underlying drivers of the German expansion, which have been investments and exports over the past couple of years, have continued to do extremely well. We still see great strength in those areas. So as a result, we now expect a much more gradual slowdown in Germany than we had previously anticipated. So our new projections are 2.8 percent growth last year coming down to 2.6 percent this year and 2.4 percent next year.
QUESTIONER: Was it like mainly the VAT tax effect that has been less big than what you thought or is it the overall investment and export?
MR. COLLYNS: It's a combination.
QUESTIONER: It's a combination, there's no...okay.
QUESTIONER: I just need to go back to that question about China-the PPI and the market exchange rate, just to clarify. You said that in PPI represents 15 percent of the global economy, only 5 percent in terms of market rate, so I assume that means it's much, but now the question that was asked was, how much does it represent of the actual increase in growth, I'm sorry, I understood you to say around a fourth, but was that in PPI or not?
MR. COLLYNS: That's in PPP-purchasing power parity.
QUESTIONER: And then you said when you add China and Russia and India, it's more like half?
MR. COLLYNS: More like half, yes. Tim, do you have a precise number on that, is that about right?
MR CALLEN: I don't have an exact number on it, but I think, yes, Charles is right in the ballpark, I mean it's about 50 percent of the-and here we're talking about the annual growth rate, not the increase relative to the April projections. So we're talking about out of the 5.2 percent annual growth rate for 2007.
QUESTIONER: I see in the Euro area with a projected-where you updated your estimate of growth. First of all, if you could elaborate on that, what do you think is driving this in the euro area? And also, if you could give me a comment on Italy, why Italy is only keeping position?
MR. COLLYNS: The main driver for the increase in the Euro area growth rate is this upward revision in Germany that I've already discussed. Another part of the story is Spain and France. In Spain, we see growth slowing, but less than we had previously expected. Spain is an economy where we have had concerns that growth is rather lopsided with very strong growth of domestic demand, way stronger than residential investment, but also a very wide current account deficit, and overheating concerns. There has been some easing of this domestic demand growth, but it hasn't happened as much as we had expected. So we've raised our forecast for Spain.
In France, we've also raised our forecast a little bit, and I think that reflects in part at least the proposals from the new President that will boost disposable income during the second half of the year. In Italy, as you say, at this point we left our projections unchanged, but we will, of course, be continuing to follow closely what's happening in Italy, and by the Fall, we may have revised our view, but at this point, we've kept at least the projections unchanged.
QUESTIONER: On this issue on Spain, I mean your forecast says that the activity is higher than you expected, I mean do you still think that the economy-we've had those overheating concerns still-do you think that the economy is growing at a faster rate than it should?
MR. COLLYNS: Yes, we do have those concerns, and we think that it will be important for the government to show fiscal restraint as one contribution to slowing the growth of aggregate demand. And we continue to encourage steps on the supply side of the economy to increase competitiveness and to increase productivity growth so that Spain is able to address its current account, that's a very large current account deficit, as well as raising supply to be more in line with demand growth.
QUESTIONER: Could I please ask about oil and commodity prices generally? I'm wondering what the actual price of oil is in your basket, and that you're still predicting a slight decline in oil prices in '07. What's the date that you made these projections? And then the rest of the commodity prices, you've revised up by 10 percent-the growth of commodity prices in '07-but you're still seeing a decline in '08. Why do you see a decline in commodity prices in '08?
MR. COLLYNS: On the oil price, we set the oil price baseline when we start the projection exercise. We tell our desks this is the oil price baseline that you should be using for your projections. We then revise it if actual oil prices deviate very substantially from that baseline. In recent weeks, oil prices have been somewhat stronger than our baseline. I think they're around 5 percentage points higher than the baseline at this point for 2007. But that hasn't been sufficient for us to actually revise our baseline.
But you're right, at this point, the 2007 oil prices look likely to be somewhat higher than 2006, not slightly lower. So if we were updating that number, we would boost it up a little bit. So when we come to do our full WEO forecast, you may well see a somewhat higher oil price baseline.
On the non-fuel prices, as you say, we are expecting a decline in 2008. I believe this is both in metals and in food prices. To some extent, all these commodity prices have been pushed up by strong growth of domestic demand around the world, and that is a force that is going to be continuing in 2008, as well as in 2007. We do anticipate there will be improved supply conditions around the world in 2008. As I mentioned before, part of the reason why food prices this year have spiked upwards has been because of poor weather conditions that have dampened harvests around the world. With more normal harvests, that should increase food supplies that will help dampen food prices. We also expect to see metal prices coming down as a result of increasing mining capacity in response to the very high increases in metal prices in the past few years. So the combination of those factors explains why we're expecting a decline in prices next year.
QUESTIONER: Just a question about France. The measures you were referring to, the first measures by the President, is it the law that has been discussed at the Parliament this summer, the fiscal ...
MR. COLLYNS: Right.
QUESTIONER: And you think it's going to have an impact as early as the second half of the year?
MR. COLLYNS: I think it may. It's always difficult to know exactly what the timing of the measures are going to be. They haven't been passed at this point. It also depends on how consumers respond to the expectation of these changes. But I think it is clear that the proposed measures would tend to have a stimulative effective on household behavior either the second half of this year or into 2008.
QUESTIONER: One more: on the credit side, is there any reason to believe that the sort of, you know, the search for yield and the loose credit standards that we saw in subprime and then as you pointed out you saw in LBOs and leverage loans, that that didn't sort of extend to other credits, which you seem to be arguing here, but it seemed like there was sort of a wholesale search for yield, and therefore, a wholesale sort of maybe easing of credit and a wholesale sort of less attention paid to risks than should have been, and I don't quite understand why you said you don't feel that we'll be-since that seemed to have been across the board, why you sort of can argue, well, it can only be in these very weak areas that we'll see some pull back. Why won't we see some pull back in these other areas, maybe less so, but-I'm not sure I'm making myself clear.
MR. CARUANA: Yes, I think these two areas are where we have seen the weakening of standards that have become very, very evident, the area of the subprime and the leverage loans. And this could happen, but to a much lower extent in other areas. And there may be some indications. There have been some indications, for example, in the-that there has been also some of this, but really, it has been to a lower extent. So that's what the information so far has indicated. In addition to that, what we have seen is that there has been some, I would say, improvement in all of that. As I mentioned, in some of these loans and the convenance of the loans, there has been more demand on the part of investors to improve these conditions. And also, I think in the subprime, there has been clearly some market discipline and a weakening of credit standards have stopped and it has become evident that there has been a positive reaction in terms of improving these credit standards.
So that doesn't mean that there will not come additional news, and some of this news would be more the materialization of the risk taking in the past than in some cases new risks, but it will-as I said, the adjustment process has not concluded, and all the resets are coming, and it will be intense in this year and during a good part of next year. So, again, the process has not concluded.
MS. STANKOVA: I think at this stage we will close the briefing. Many thanks to our speakers. Tomorrow is another opportunity to follow up at the press briefing with Masood Ahmed. Thank you for coming. Also, we will post the broadcast quality video files on News Market, where they are available for broadcast press free of charge. Thank you.
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