Global growth and sovereign debt concerns drive markets

In a "Special Feature" in the last Bank of International Settlements' Quarterly Review, Sep. 2011, [1]  two of BIS staff publish "Global growth and sovereign debt concerns drive markets," where they confirm the already known BIS view of several trends and facts:

1  Without credible plans to restore long-term fiscal sustainability, sovereign debt in several euro area and other advanced countries may no longer be regarded as having zero credit risk.

2  [I]n many advanced economies, government debt levels are expected to continue to rise over coming years, due to high fiscal deficits and rising pension and health care costs.

3  Moreover, the level of economic output, which underpins debt servicing capacity, is unlikely to return to its pre-crisis trend any time soon.

4  Sovereign risk premia could thus be persistently higher and more volatile in the future.

There is much dispute regarding the first point, of course. The US Executive is trying to get Congress to approve a further stimulus package, and IMF's Christine Lagarde said last week that "In many corners" of the world austerity was pushed "in too harsh a way," without letting economic growth take root, according to the WSJ. [2]



References

[1]  Michael Davies and Tim Ng: Global growth and sovereign debt concerns drive markets. BIS Quarterly Review, Sep. 2011. http://www.bis.org/publ/qtrpdf/r_qt1109.htm

[2]  Sudeep Reddy: Three Buttons the IMF Could Push. Wall Street Journal, Monday, Sep 19, 2011, page 12.

Assessing Systemic Trade Interconnectedness - An Empirical Approach

Assessing Systemic Trade Interconnectedness - An Empirical Approach. By Luca Errico & Alexander Massara

Summary: The paper focuses on systemically important jurisdictions in the global trade network, complementing recent IMF work on systemically important financial sectors. Using the IMF’s Direction of Trade Statistics (DOTS) database and network analysis, the paper develops a framework for ranking jurisdictions based on trade size and trade interconnectedness indicators using data for 2000 and 2010. The results show a near perfect overlap between the top 25 systemically important trade and financial jurisdictions, suggesting that these ought to be the focus of risk-based surveillance on cross-border spillovers and contagion. In addition, a number of extensions to the approach are developed that can provide a better understanding of trade dynamics at the bilateral, regional, and global levels.


Conclusions

The paper has laid out our approach for assessing systemic trade interconnectedness using network analysis and the IMF’s DOTS database. Our results uncover several stylized facts offering additional insights into the changing patterns of global trade over the decade 2000-2010.  We also have shown possible applications of our approach to gain a better understanding of trade dynamics across world regions and the overlapping of trade and financial sectors of systemic importance in the top 25 jurisdictions. Our approach lends itself easily to a wide range of analytical exercises addressing specific global trade issues, as well as global (trade and financial) interconnectedness issues.

The use of DOTS has lent robustness to our analysis by providing uniform data for 169 jurisdictions representing almost 100 percent of total world trade in both the year 2000 and the year 2010. Additionally, the quarterly updating of DOTS makes it possible to recalibrate our findings to track global trade developments on a timely basis.

From a policy perspective, jurisdictions hosting both systemic trade and financial sectors would seem to be the natural focus of risk-based surveillance on cross-border spillovers and contagion.  The analysis underscores that these jurisdictions display the strongest inter-sectoral interconnectedness to the global economy. As such, they have the highest potential for transmitting disturbances to other jurisdictions or to systemic stability via either the trade or financial channel or indeed both channels simultaneously. These jurisdictions would thus seem to warrant particular attention and further analysis on the risks associated with their activities, especially when carried out through systemically important financial institutions and nonfinancial corporations.

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