## Timeline for Financial Sector Actions, October 2008–May 2009

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---

### I. CRISIS PROPAGATION
- Collapse of Lehman Brothers in September 2008 marked intensification and internationalization of the shock; S5 consultations were conducted during the deepest and most highly synchronized global recession in modern times.
- Sources of the shock differed across systemic economies, explaining differing emphasis on bank support, macroeconomic stimulus, and structural reforms.
- Key cross-border and market integration observations:
  - Three systemic economies—the Euro area, the United States, and the United Kingdom—account for over two-thirds of gross capital flows.
  - The U.K.’s banking sector is large and highly internationalized, at "500 percent of GDP", contributing to transmission of systemic banking concerns.
  - China and Japan had limited exposure to toxic U.S. assets and limited international financial integration, containing direct banking impact.
- Transmission channels and country-specific effects:
  - China, Japan, and parts of the Euro area were hardest hit by the collapse in global trade through trade links with the United States and Europe and sudden stops in spending on highly-traded consumer durables and investment goods.
  - Japan experienced additional bank stress from falling values of bank holdings of clients’ equities.
  - Rapid exchange rate changes magnified shocks in Japan and provided a buffer for the United Kingdom:
    - Appreciation of the yen due to unwinding carry trades and repatriation of capital; amplified by relatively low turnover in the Japanese foreign exchange market.
    - Sterling depreciated sharply as the U.K. experienced the largest swing in financial flows, with inflows and outflows falling by almost half of the U.K.’s annual GDP in the last quarter of 2008 alone.
    - Safe-haven portfolio flows into the United States boosted demand for government paper, producing an effective dollar appreciation after the Lehman collapse.
  - Administrative capital account measures and renminbi stabilization in mid-2008 limited the impact on China’s external accounts and produced a modest nominal effective appreciation.

### II. CRISIS RESPONSE
- General patterns:
  - Rapid spillovers across highly integrated financial markets produced an initial uncoordinated rush to provide bank protection, followed by a slower but more synchronized provision of macroeconomic support.
  - The Euro area introduced policy more slowly due to its multicountry policy framework and emphasis on exit strategies.
- Bank protection and guarantees:
  - Rush to bolster deposit guarantees and protect other bank liabilities largely reflected spillover risks from a run on wholesale bank funding.
  - The United States moved almost immediately to raise deposit guarantee limits in mid-September 2008; money market mutual funds were also protected.
  - Ireland provided blanket liability guarantees to its highly exposed banks in late September 2008; many Euro area countries and the U.K. followed quickly, sometimes by verbal commitments.
  - Differences in legal frameworks influenced approaches to capital injections and nationalization:
    - The United Kingdom nationalized some weak banks.
    - In the United States, key insurers and quasi-public GSEs were taken over, but authorities preferred not to use common equity when injecting bank capital.
    - Euro area laws in some countries required agreement of financial institutions and shareholders, limiting options.
- Bank recapitalization and toxic assets:
  - Staff concerns that U.S. and European banks could be substantially undercapitalized; GFSR calculations used tangible common equity metrics to estimate capital needs.
  - Officials preferred wider regulatory definitions of capital (including hybrid instruments) and narrower concepts of risk-weighted assets, leading to lower official capital-need estimates.
  - Slow progress in removing toxic assets due to valuation uncertainty, stigma, and complexity of structured-product resolution:
    - U.S. guarantees on certain impaired assets did not fully restore market confidence.
    - Limited take-up of leveraged financing for toxic-asset sales and limited use of asset insurance schemes in the U.K.
    - EU harmonized bank-resolution guidelines but left details (bad bank, guarantees, hybrid schemes) to national authorities.
    - Some countries began setting up "bad banks," including Ireland and Germany (national and bank-specific initiatives, respectively).
- Macroeconomic support and coordination:
  - Monetary authorities coordinated interest-rate cuts (e.g., multi-country cut in October), and all S5 central banks cut policy rates significantly though Euro area easing was slower.
  - Fiscal stimulus showed relative uniformity once automatic stabilizers were included and bank support excluded:
    - Leadership by the Fund and G-20 helped generate commitments and avoid free-riding.
    - Euro area discretionary fiscal stimulus commitments were relatively slow due to large automatic stabilizers and Stability and Growth Pact constraints.
  - Fiscal measures depiction: Discretionary Measures versus Automatic Stabilizers summarized as average change in 2009-10 vs. 2007 baseline (in percent of GDP) for Euro 3, US, UK, Japan, China.
- Unconventional monetary policies and balance-sheet measures:
  - All S5 central banks used unconventional policies tailored to local conditions to support financial intermediation.
  - Euro area relied heavily on large-scale repo operations with extended maturities and expanded collateral classes.
  - United States launched targeted loan programs and large outright purchases (quantitative easing), with a Fed focus on mortgage-backed securities to support mortgage lending.
  - Bank of England implemented quantitative easing more conservatively, mainly buying government securities with a government guarantee to cover balance-sheet losses.
  - Bank of Japan and the European Central Bank engaged in more limited asset purchases given lower disfunctionality (Japan) and concerns about exit strategies (ECB).
  - Public funds were also used to reduce nonfinancial balance-sheet strains:
    - U.S. programs to assist the housing market and household balance sheets; use of GSEs to revive mortgage lending and loan-restructuring programs.
    - Japan expanded government-funded loan guarantees to SMEs.
    - U.K. introduced credit guarantees for SMEs.
- Implementation trade-offs:
  - Diversity of treatments across economies complicated consistent assessment of capital needs.
  - Institutional setups and financial structure differences affected the effectiveness of liquidity and asset-purchase operations.

### III. CRISIS EXIT
- Overall recovery concerns and policy trade-offs:
  - S5 Article IV reports suggested that achieving a robust recovery will require bolder policies than announced to date.
  - Major concerns in U.S., Euro area, and U.K. reports: lending constraints at undercapitalized banks could delay recovery and reduce efficacy of macro stimulus, potentially increasing pressure to extend stimulus and undermining policy credibility and potential output.
  - China: emphasized early exit from highly successful monetary easing to avoid risks of rapid credit growth producing further overcapacity in export-oriented sectors and worsening credit quality.
  - Japan: faces the challenge of restructuring SME balance sheets and lowering a high government debt ratio.
  - Staff advice emphasized policy consistency and structural reforms needed to create a robust and sustainable recovery and to avoid pitfalls from inadequate global demand or a return to unsustainable external imbalances.
- Exit from macro stimulus:
  - Reports highlighted the need to design and communicate exit strategies, particularly in multi-country settings like the Euro area where coordination and legal constraints shaped timing and scale.
  - Priority to fix underlying problems post-crisis:
    - U.S.: address collapse in demand for securitized U.S. mortgages and housing-market issues.
    - Japan: restructure SME balance sheets.

### Risks from undercapitalized banks and exiting support
- Undercapitalized banks foregoing government aid to avoid associated stigma could risk the recovery.
- Private bank interest in public capital is waning, reflected in:
  - Low take-up of Euro area capitalization schemes.
  - Desire of some U.S. banks to repay capital injections.
- Diversity of financial support approaches, uncertainty about adequate capital ratios, and large spillovers if market confidence is undermined argue for care and coordination in exiting guarantee programs.
- Past experience suggests exit will be slow (see Table 2).
- Given the size and number of U.S. bank and liquidity support programs, the U.S. report emphasized the importance of clearly communicating plans for exiting exceptional support.

### Exit from unconventional monetary policies
- Exit from unconventional monetary policies, particularly in the United States, may be lengthy and limit freedom to act swiftly on policy rates.
- Staff view:
  - Exit policies do not pose technical challenges.
  - Unwinding direct asset purchases could be complicated by:
    - Large public financing needs.
    - Problems in securitization markets (mainly in the United States).
    - Potential balance sheet losses.
  - Gradualism, and possibly coordination, may be needed to minimize market disruption, including in currency markets.

### Fiscal sustainability and central bank independence
- The U.K. report emphasized preserving central bank independence given market concerns about fiscal dominance.
- Staff fiscal projections (Figure 6), based on relatively conservative assessments of potential output growth and future interest rates, indicate:
  - Already-high U.S., Euro area, and U.K. gross public debt-to-GDP ratios could spiral to almost 100 percent of GDP in the medium term.
  - Japan could reach 240 percent in the medium term (140 percent even on a net basis).
- Large contingent liabilities from financial guarantees provide further upside risks, most notably in the United Kingdom, though the ultimate fiscal cost is difficult to judge.
- A firm commitment to central bank independence from the government is key to preserving credibility in price stability.

### Fiscal consolidation and avoiding a debt–growth vicious cycle
- Advanced economy reports argued credible fiscal consolidation plans could help avoid a vicious cycle between government debt and potential output.
- With China an exception due to relatively stable projected debt ratios, other staff reports worried that higher expected debt could:
  - Raise borrowing costs.
  - Slow potential output growth.
  - Further raise expected debt.
- Country-specific policy messaging:
  - United Kingdom: despite agreement on the need for future fiscal adjustment, additional concrete measures were needed.
  - United States and Japan: discussion linked to supportive role of policy frameworks using debt targets and/or tight limits on the overall deficit to achieve a gradual future fall in the debt ratio.
  - Euro area: staff emphasized importance of members focusing more on lowering public debt ratios, including through national budgetary rules, within the international treaty fiscal framework.

### Restoring and rebalancing growth — underlying tensions
- S5 reports present consistent policies for robust recovery; major concern is recovery will be slowed by lack of global demand.
- Current WEO forecasts imply S5 external balances increase steadily over time (S5 economies sell more goods than they buy).
- The rising difference between S5 supply and demand is not offset elsewhere, implying an increasing proportion of global output may have no outlet.
- Drivers of stronger S5 external position:
  - Rapid growth in China.
  - Erosion in the U.S. current account deficit.
- Specific numeric impacts and projections:
  - China’s current account surplus remains around 10 percent of GDP.
  - China’s dynamic growth adds some ½ percent of world GDP to net global saving in 2014 relative to 2008.
  - A similar boost to global net saving comes from reduction in the (absolute) size of advanced economy imbalances.
- Implication: current policies and constellation of exchange rates may not be sufficient to ensure rebalancing of global demand needed for robust global expansion.

### Risks to potential growth from delayed recovery
- A delayed recovery due to lack of demand could further slow S5 potential growth.
- Existing downward revisions to potential output and current account imbalances reflect:
  - Projected increase in the cost of capital as government debt ratios rise and banks hold more prudent capital cushions.
  - Reevaluation of financial intermediation efficiency.
- A slower recovery would further lower potential output via:
  - Lowering business investment due to continuing slack.
  - Gradual erosion of workers’ unused skills.
  - Rising concerns over fiscal sustainability.

### Risks of extending stimulus beyond 2010
- Artificially boosting global demand by extending U.S./European stimulus after 2010 could:
  - Boost short-term growth.
  - Undermine growth potential by straining government deficits and returning global current account imbalances.
  - Risk disorderly exchange rate adjustment across major currencies.
  - Increase risk premiums and the cost of capital, undermining potential growth.

### Policy recommendations for a robust recovery (staff’s recommended strategy)
- Major surplus countries (China as well as Japan) should rebalance demand towards domestic consumption to become less reliant on exports and investment for growth.
  - China priorities:
    - Reduce households’ precautionary saving by expanding social protection and market alternatives to self-insurance.
    - For the corporate sector: raise the cost of capital, lower corporate saving, and support financial development.
  - Japan priorities:
    - Further deregulation of the agricultural and services sectors (medical, child and elderly care).
    - Financial market development to support rebalancing.
- Euro area and Japan should continue and preferably accelerate structural reforms to boost growth by improving labor and product market flexibility.
  - Euro area focus: further labor market reforms.
  - Japan focus: addressing product market rigidities.
- All countries should reform financial markets to ensure stable intermediation and appropriate pricing of risk:
  - General reform agenda: stronger resolution frameworks, tighter cross-border collaboration, less pro-cyclical capital regulatory frameworks, wider perimeter of regulation to avoid gaps, better stress testing, and higher capital (where warranted).
  - Country-specific proposals:
    - United States and United Kingdom: address mismatched incentives in securitized assets via specific capital charges, systemic risk taxes, and (in the U.K. in particular) better disclosure.
    - Euro area: better coordinate national supervision on rules, data, practices, and dispute mediation.
    - China: improve allocation of capital and raise household income through financial liberalization; officials more cautious than staff about risks to financial stability and hence speed of implementation.
    - Japan: improve allocation of domestic saving and tools for corporate restructuring, particularly of SMEs.

### Exchange rate and external adjustment considerations
- The package would be more effective if accompanied by a real effective renminbi appreciation, offset by Euro and dollar depreciation.
- Using the framework from the Consultative Group on Exchange Rates and viewing pound and yen as close to equilibrium after crisis-driven adjustments, the main counterparty to modest dollar and Euro overvaluation in real effective terms is renminbi undervaluation.
- China authorities stressed rebalancing cannot be achieved merely through exchange rate changes; structural policies are also required.
- Elsewhere, floating exchange rates were not seen as a policy lever, and there was little policy dialogue.

### International coordination and surveillance
- Achieving ambitious and diverse structural adjustment across major countries will be challenging.
- The Fund’s multilateral consultation experience underlines difficulties in achieving international coordination even when policy contours are agreed.
- Areas where surveillance could foster coordination:
  - Greater emphasis on examining consistency of external sector projections.
  - Identifying the size of needed rebalancing of global demand.
  - Discussing international implications of policy actions or policy inflexibilities.

*Source: IMF staff reports and S5 Article IV consultations as summarized in the provided content unit.*

### 1. Timeline for Financial Sector Actions, October 2008–May 2009.................................18

### 1. Timeline for Financial Sector Actions, October 2008–May 2009.................................18

### I. CRISIS PROPAGATION
- Collapse of Lehman Brothers in September 2008 marked intensification and internationalization of the shock; S5 consultations were conducted during the deepest and most highly synchronized global recession in modern times.
- Sources of the shock differed across systemic economies, explaining differing emphasis on bank support, macroeconomic stimulus, and structural reforms.
- Key cross-border and market integration observations:
  - Three systemic economies—the Euro area, the United States, and the United Kingdom—account for over two-thirds of gross capital flows.
  - The U.K.’s banking sector is large and highly internationalized, at "500 percent of GDP", contributing to transmission of systemic banking concerns.
  - China and Japan had limited exposure to toxic U.S. assets and limited international financial integration, containing direct banking impact.
- Transmission channels and country-specific effects:
  - China, Japan, and parts of the Euro area were hardest hit by the collapse in global trade through trade links with the United States and Europe and sudden stops in spending on highly-traded consumer durables and investment goods.
  - Japan experienced additional bank stress from falling values of bank holdings of clients’ equities.
  - Rapid exchange rate changes magnified shocks in Japan and provided a buffer for the United Kingdom:
    - Appreciation of the yen due to unwinding carry trades and repatriation of capital; amplified by relatively low turnover in the Japanese foreign exchange market.
    - Sterling depreciated sharply as the U.K. experienced the largest swing in financial flows, with inflows and outflows falling by almost half of the U.K.’s annual GDP in the last quarter of 2008 alone.
    - Safe-haven portfolio flows into the United States boosted demand for government paper, producing an effective dollar appreciation after the Lehman collapse.
  - Administrative capital account measures and renminbi stabilization in mid-2008 limited the impact on China’s external accounts and produced a modest nominal effective appreciation.

### II. CRISIS RESPONSE
- General patterns:
  - Rapid spillovers across highly integrated financial markets produced an initial uncoordinated rush to provide bank protection, followed by a slower but more synchronized provision of macroeconomic support.
  - The Euro area introduced policy more slowly due to its multicountry policy framework and emphasis on exit strategies.
- Bank protection and guarantees:
  - Rush to bolster deposit guarantees and protect other bank liabilities largely reflected spillover risks from a run on wholesale bank funding.
  - The United States moved almost immediately to raise deposit guarantee limits in mid-September 2008; money market mutual funds were also protected.
  - Ireland provided blanket liability guarantees to its highly exposed banks in late September 2008; many Euro area countries and the U.K. followed quickly, sometimes by verbal commitments.
  - Differences in legal frameworks influenced approaches to capital injections and nationalization:
    - The United Kingdom nationalized some weak banks.
    - In the United States, key insurers and quasi-public GSEs were taken over, but authorities preferred not to use common equity when injecting bank capital.
    - Euro area laws in some countries required agreement of financial institutions and shareholders, limiting options.
- Bank recapitalization and toxic assets:
  - Staff concerns that U.S. and European banks could be substantially undercapitalized; GFSR calculations used tangible common equity metrics to estimate capital needs.
  - Officials preferred wider regulatory definitions of capital (including hybrid instruments) and narrower concepts of risk-weighted assets, leading to lower official capital-need estimates.
  - Slow progress in removing toxic assets due to valuation uncertainty, stigma, and complexity of structured-product resolution:
    - U.S. guarantees on certain impaired assets did not fully restore market confidence.
    - Limited take-up of leveraged financing for toxic-asset sales and limited use of asset insurance schemes in the U.K.
    - EU harmonized bank-resolution guidelines but left details (bad bank, guarantees, hybrid schemes) to national authorities.
    - Some countries began setting up "bad banks," including Ireland and Germany (national and bank-specific initiatives, respectively).
- Macroeconomic support and coordination:
  - Monetary authorities coordinated interest-rate cuts (e.g., multi-country cut in October), and all S5 central banks cut policy rates significantly though Euro area easing was slower.
  - Fiscal stimulus showed relative uniformity once automatic stabilizers were included and bank support excluded:
    - Leadership by the Fund and G-20 helped generate commitments and avoid free-riding.
    - Euro area discretionary fiscal stimulus commitments were relatively slow due to large automatic stabilizers and Stability and Growth Pact constraints.
  - Fiscal measures depiction: Discretionary Measures versus Automatic Stabilizers summarized as average change in 2009-10 vs. 2007 baseline (in percent of GDP) for Euro 3, US, UK, Japan, China.
- Unconventional monetary policies and balance-sheet measures:
  - All S5 central banks used unconventional policies tailored to local conditions to support financial intermediation.
  - Euro area relied heavily on large-scale repo operations with extended maturities and expanded collateral classes.
  - United States launched targeted loan programs and large outright purchases (quantitative easing), with a Fed focus on mortgage-backed securities to support mortgage lending.
  - Bank of England implemented quantitative easing more conservatively, mainly buying government securities with a government guarantee to cover balance-sheet losses.
  - Bank of Japan and the European Central Bank engaged in more limited asset purchases given lower disfunctionality (Japan) and concerns about exit strategies (ECB).
  - Public funds were also used to reduce nonfinancial balance-sheet strains:
    - U.S. programs to assist the housing market and household balance sheets; use of GSEs to revive mortgage lending and loan-restructuring programs.
    - Japan expanded government-funded loan guarantees to SMEs.
    - U.K. introduced credit guarantees for SMEs.
- Implementation trade-offs:
  - Diversity of treatments across economies complicated consistent assessment of capital needs.
  - Institutional setups and financial structure differences affected the effectiveness of liquidity and asset-purchase operations.

### III. CRISIS EXIT
- Overall recovery concerns and policy trade-offs:
  - S5 Article IV reports suggested that achieving a robust recovery will require bolder policies than announced to date.
  - Major concerns in U.S., Euro area, and U.K. reports: lending constraints at undercapitalized banks could delay recovery and reduce efficacy of macro stimulus, potentially increasing pressure to extend stimulus and undermining policy credibility and potential output.
  - China: emphasized early exit from highly successful monetary easing to avoid risks of rapid credit growth producing further overcapacity in export-oriented sectors and worsening credit quality.
  - Japan: faces the challenge of restructuring SME balance sheets and lowering a high government debt ratio.
  - Staff advice emphasized policy consistency and structural reforms needed to create a robust and sustainable recovery and to avoid pitfalls from inadequate global demand or a return to unsustainable external imbalances.
- Exit from macro stimulus:
  - Reports highlighted the need to design and communicate exit strategies, particularly in multi-country settings like the Euro area where coordination and legal constraints shaped timing and scale.
  - Priority to fix underlying problems post-crisis:
    - U.S.: address collapse in demand for securitized U.S. mortgages and housing-market issues.
    - Japan: restructure SME balance sheets.

*Source: IMF staff reports and S5 Article IV consultations as summarized in the provided content unit.*

### 17. The U.S., Euro area, and U.K. reports highlighted the risks to recovery if

### _081409 - 17. The U.S., Euro area, and U.K. reports highlighted the risks to recovery if

### Risks from undercapitalized banks and exiting support
- Undercapitalized banks foregoing government aid to avoid associated stigma could risk the recovery.
- Private bank interest in public capital is waning, reflected in:
  - Low take-up of Euro area capitalization schemes.
  - Desire of some U.S. banks to repay capital injections.
- Diversity of financial support approaches, uncertainty about adequate capital ratios, and large spillovers if market confidence is undermined argue for care and coordination in exiting guarantee programs.
- Past experience suggests exit will be slow (see Table 2).
- Given the size and number of U.S. bank and liquidity support programs, the U.S. report emphasized the importance of clearly communicating plans for exiting exceptional support.

### Exit from unconventional monetary policies
- Exit from unconventional monetary policies, particularly in the United States, may be lengthy and limit freedom to act swiftly on policy rates.
- Staff view:
  - Exit policies do not pose technical challenges.
  - Unwinding direct asset purchases could be complicated by:
    - Large public financing needs.
    - Problems in securitization markets (mainly in the United States).
    - Potential balance sheet losses.
  - Gradualism, and possibly coordination, may be needed to minimize market disruption, including in currency markets.

### Fiscal sustainability and central bank independence
- The U.K. report emphasized preserving central bank independence given market concerns about fiscal dominance.
- Staff fiscal projections (Figure 6), based on relatively conservative assessments of potential output growth and future interest rates, indicate:
  - Already-high U.S., Euro area, and U.K. gross public debt-to-GDP ratios could spiral to almost 100 percent of GDP in the medium term.
  - Japan could reach 240 percent in the medium term (140 percent even on a net basis).
- Large contingent liabilities from financial guarantees provide further upside risks, most notably in the United Kingdom, though the ultimate fiscal cost is difficult to judge.
- A firm commitment to central bank independence from the government is key to preserving credibility in price stability.

### Fiscal consolidation and avoiding a debt–growth vicious cycle
- Advanced economy reports argued credible fiscal consolidation plans could help avoid a vicious cycle between government debt and potential output.
- With China an exception due to relatively stable projected debt ratios, other staff reports worried that higher expected debt could:
  - Raise borrowing costs.
  - Slow potential output growth.
  - Further raise expected debt.
- Country-specific policy messaging:
  - United Kingdom: despite agreement on the need for future fiscal adjustment, additional concrete measures were needed.
  - United States and Japan: discussion linked to supportive role of policy frameworks using debt targets and/or tight limits on the overall deficit to achieve a gradual future fall in the debt ratio.
  - Euro area: staff emphasized importance of members focusing more on lowering public debt ratios, including through national budgetary rules, within the international treaty fiscal framework.

### Restoring and rebalancing growth — underlying tensions
- S5 reports present consistent policies for robust recovery; major concern is recovery will be slowed by lack of global demand.
- Current WEO forecasts imply S5 external balances increase steadily over time (S5 economies sell more goods than they buy).
- The rising difference between S5 supply and demand is not offset elsewhere, implying an increasing proportion of global output may have no outlet.
- Drivers of stronger S5 external position:
  - Rapid growth in China.
  - Erosion in the U.S. current account deficit.
- Specific numeric impacts and projections:
  - China’s current account surplus remains around 10 percent of GDP.
  - China’s dynamic growth adds some ½ percent of world GDP to net global saving in 2014 relative to 2008.
  - A similar boost to global net saving comes from reduction in the (absolute) size of advanced economy imbalances.
- Implication: current policies and constellation of exchange rates may not be sufficient to ensure rebalancing of global demand needed for robust global expansion.

### Risks to potential growth from delayed recovery
- A delayed recovery due to lack of demand could further slow S5 potential growth.
- Existing downward revisions to potential output and current account imbalances reflect:
  - Projected increase in the cost of capital as government debt ratios rise and banks hold more prudent capital cushions.
  - Reevaluation of financial intermediation efficiency.
- A slower recovery would further lower potential output via:
  - Lowering business investment due to continuing slack.
  - Gradual erosion of workers’ unused skills.
  - Rising concerns over fiscal sustainability.

### Risks of extending stimulus beyond 2010
- Artificially boosting global demand by extending U.S./European stimulus after 2010 could:
  - Boost short-term growth.
  - Undermine growth potential by straining government deficits and returning global current account imbalances.
  - Risk disorderly exchange rate adjustment across major currencies.
  - Increase risk premiums and the cost of capital, undermining potential growth.

### Policy recommendations for a robust recovery (staff’s recommended strategy)
- Major surplus countries (China as well as Japan) should rebalance demand towards domestic consumption to become less reliant on exports and investment for growth.
  - China priorities:
    - Reduce households’ precautionary saving by expanding social protection and market alternatives to self-insurance.
    - For the corporate sector: raise the cost of capital, lower corporate saving, and support financial development.
  - Japan priorities:
    - Further deregulation of the agricultural and services sectors (medical, child and elderly care).
    - Financial market development to support rebalancing.
- Euro area and Japan should continue and preferably accelerate structural reforms to boost growth by improving labor and product market flexibility.
  - Euro area focus: further labor market reforms.
  - Japan focus: addressing product market rigidities.
- All countries should reform financial markets to ensure stable intermediation and appropriate pricing of risk:
  - General reform agenda: stronger resolution frameworks, tighter cross-border collaboration, less pro-cyclical capital regulatory frameworks, wider perimeter of regulation to avoid gaps, better stress testing, and higher capital (where warranted).
  - Country-specific proposals:
    - United States and United Kingdom: address mismatched incentives in securitized assets via specific capital charges, systemic risk taxes, and (in the U.K. in particular) better disclosure.
    - Euro area: better coordinate national supervision on rules, data, practices, and dispute mediation.
    - China: improve allocation of capital and raise household income through financial liberalization; officials more cautious than staff about risks to financial stability and hence speed of implementation.
    - Japan: improve allocation of domestic saving and tools for corporate restructuring, particularly of SMEs.

### Exchange rate and external adjustment considerations
- The package would be more effective if accompanied by a real effective renminbi appreciation, offset by Euro and dollar depreciation.
- Using the framework from the Consultative Group on Exchange Rates and viewing pound and yen as close to equilibrium after crisis-driven adjustments, the main counterparty to modest dollar and Euro overvaluation in real effective terms is renminbi undervaluation.
- China authorities stressed rebalancing cannot be achieved merely through exchange rate changes; structural policies are also required.
- Elsewhere, floating exchange rates were not seen as a policy lever, and there was little policy dialogue.

### International coordination and surveillance
- Achieving ambitious and diverse structural adjustment across major countries will be challenging.
- The Fund’s multilateral consultation experience underlines difficulties in achieving international coordination even when policy contours are agreed.
- Areas where surveillance could foster coordination:
  - Greater emphasis on examining consistency of external sector projections.
  - Identifying the size of needed rebalancing of global demand.
  - Discussing international implications of policy actions or policy inflexibilities.

*Source: WEO; Fund staff calculations; IFS data; BIS data; World Federation of Exchanges; and Fund staff analysis as presented in the provided content.*

### 2. The shaded areas indicate projections (for Fall 2009 WEO).

### _081409 - 2. The shaded areas indicate projections (for Fall 2009 WEO).

### Figure 7 — Trends in Current Account Balances, Saving and Investment
- WEO forecasts project a fall in the absolute size of current accounts in the advanced countries, while the Chinese surplus remains high.
- Presentation dimensions shown in the figure:
  - "Relative to own GDP" and "Relative to world GDP" panels.
  - Time axis labels: 1998 2002 2006 2010 2014.
  - Vertical scale labels appearing in the figure:
    - Saving: 0 10 20 30 40 50 60 (relative scale) and 0.0 2.0 4.0 6.0 8.0 (percent scale).
    - Investment: 0 10 20 30 40 50 60 (relative scale) and 0.0 2.0 4.0 6.0 8.0 (percent scale).
    - Current Account Balance: -10 -6 -2 2 6 10 14 (relative scale) and -2 -1 0 1 2 (percent scale).
  - Country labels shown in the figure: China, Japan, Euro Area, UK, US.
- Sources: WEO and Fund staff calculations.
- Note in figure: "The shaded areas indicate projections."

### Figure 8 — Projected Potential Real Output Growth and Current Account Balance
- Summary statement from figure: The crisis has lowered estimates of potential growth as the cost of capital rises, reflecting a combination of less effective financial intermediation and higher government debt. The pullback from intermediation is also likely to reduce external imbalances.
- Presentation dimensions shown in the figure:
  - Panels for countries: US, UK, Euro, Japan, China.
  - Time axis labels: 2005 2007 2009 2011 2013.
  - Variables displayed and their vertical scale labels (as shown):
    - Potential Real Output Growth (in percent): 0 1 2 3 4 (for US, UK, Euro, Japan panels); 6 8 10 12 14 (for China panel).
    - Current Account Balance (in percent of GDP): US: -8 -6 -4 -2 0; UK: -8 -6 -4 -2 0; Euro: -4 -2 0 2 4; Japan: 0 2 4 6 8; China: 6 8 10 12 14.
    - Actual Real Output Growth (in percent) is referenced in figure legend.
- Sources: IFS and Fund staff calculations.
- Note in figure: "The shaded areas indicate projections (for Fall 2009 WEO)."

### Annex: Timeline of the Crisis
- Definition guidance: The definition of "the crisis" period is complex as it involves market events and macroeconomic developments that evolved across countries over a couple years. The five systemic economies have experienced the crisis with varying levels of severity over its course.
- Key chronology and events listed:
  - "The U.S. housing downturn was underway by late-2006, with U.S. home prices peaking in the mid-2006 according to the Case-Shiller indices."
  - "The housing downturn revealed the nature of some 'toxic assets' in off-balance sheet entities in early 2007. The potential systemic effects of these assets on the banking sector did not become apparent until Bear Stearns had to rescue one of its hedge funds in June, and BNP Paribas froze three of its funds in August 2007. The need for exceptional support for the banking sector in Europe became apparent at Northern Rock and a few German banks in late 2007."
  - "Real U.S. GDP declined every quarter starting in Q3 2008, when oil prices peaked. The NBER later declared that the U.S. recession began in December 2007."
  - "Bear Stearns collapsed in March 2008, but its Federal Reserve-aided purchase by JP Morgan was initially seen as a reprieve. Only in September 2008, with Lehman Brothers’ bankruptcy, did a consensus emerge that a global crisis had unfolded."
- Clarifying note: "Unless otherwise stated, what is meant by 'the crisis' in this paper is the internationalization of financial and macroeconomic turmoil that took place after the collapse of Lehman Brothers."

*Source: Fall 2009 WEO figures and annex as presented in the provided PDF content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/eng/2009/_081409.pdf_