Fears of a pronounced slowdown in China have eased, and indicators point to a stabilization of output. Other emerging Asian economies are also signaling an improvement. In Latin America, the strong growth of Peru contrasts with the deceleration in Colombia and slow growth in Brazil and Argentina. The growth rates of other developed economies and commodity exporters have been affected by fiscal processes and lower prices of some of their exports, simultaneously with high current-account deficits. From December, the baseline scenario of this Report corrects the growth projection for our trading partners upward to an average of 3.9% in the forecast horizon, the first upward revision in over a year. Global financial conditions have improved in recent months, partly reflecting a perception of lower probability of occurrence of extreme scenarios, particularly in the U.S., after learning that only some of the drastic fiscal adjustments previously approved will take effect. The greater confidence was reflected in greater preference for variable-income assets in developed economies, where long-term interest rates and stock prices have risen. The U.S. dollar has appreciated since December, mainly against the yen, reflecting expectations of a more expansionary monetary policy in Japan. Most of the currencies of emerging economies, including the Chilean peso, have appreciated against the dollar in the same time span. BIS central bankers’ speeches  3  The gasoline price has risen substantially this year so far, largely because of supply-side factors. This results in an upward revision of its forecast for this year and next.

During the 19th century, debt appears to have played just this role. Depositor flight and bank runs came thick and fast, operating as an effective disciplining device on shareholders and managers. That is why unlimited liability remained a prize asset until the end of the 19th century. This quasi-disciplining role of debt persisted up to the Great Depression. Calomiris and Mason (1997) find that debt and equity prices did a reasonable job of distinguishing good and bad banks during the Chicago banking panic of 1932. Indeed, they signalled distress fully six months prior to banks’ failure. As the 20th century progressed, however, evidence of debt disciplining became patchier. Studies in the 1980s typically failed to find balance sheet risk having a significant impact on banks’ subordinated debt spreads (Gorton and Santomero (1990)). Evidence from the 1990s was more encouraging (Flannery and Sorescu (1996), Morgan and Stiroh (1999)). But even then the link was weaker among larger banks, with little evidence of market prices influencing banks’ risk decisions (Bliss and Flannery (2002)). Nowhere was the ineffectiveness of debtor discipline better illustrated than in the run-up to the recent financial crisis. Chart 6 plots CDS premia for a sample of 33 large international banks over the period 2002 to 2011. It partitions the sample into “crisis” and “no crisis” banks, where the former are institutions subject to government intervention during the crisis. CDS premia for all banks fell dramatically between 2002 and 2007, on average by around three-quarters.