Chart 1: Volatility of GDP and CPI Real GDP Growth  Per cent 5  CPI 4  3  2  1  0 79 81 83 85 87 89 91 93 95 97 99 01 03 05  BIS Review 84/2007  7  Chart 2: GDP and CPI fan charts from May 2006 Inflation Report  Chart 3: Corporate bond spreads Basis points 80  Basis points 350  High Yield corporations (RHS)  70  300  60  250  50  200  40 150  30 Emerging markets (RHS) 20 10  100  Investment Grade corportations (LHS)  50  0  0 Jan  2006  Apr  Jul  Oct  Jan  Apr  Jul  2007  Chart 4: Financial market liquidity  8  BIS Review 84/2007  Chart 5: Corporate bond spreads Basis points 180 High Yield corporations (RHS)  Basis points 900 800  160 140  700  Emerging markets (RHS)  120  600  100  500  80  400  60  300  40  200  Investment Grade corportations (LHS)  20  100 0  0 00  01  02  03  04  05  06  07  Chart 6: US sub-prime arrears Per cent  2000 2001 2002 2003 2004 2005 2006  12 10 8 6 4 2 0  0  5  10  15 20 25 30 Age in months  35  40  45  50  Chart 7: Spreads on ABX index Basis point s 3500 3000 2500 BBB-  2000 1500  BBB 1000 A  500 0  Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 2006  BIS Review 84/2007  07  9  Chart 8: Real LBO loan issuance United Kingdom United States Rest of Western Europe Rest of world  $ billions, 2006 prices 300 250 200 150 100 50 0  86 88  90  92  94 96  98  00  06 (b)  02 04  Chart 9: Corporate bond, leveraged loans and sub-prime markets $ US and European leveraged loan markets US sub-prime European sub investment-grade bond US sub investment-grade bond European investment-grade bond US investment-grade bond  12000  10000  8000  6000  4000  2000  0 2002  2003  2004  2005  2006  Chart 10: Breakeven inflation forward rates % June MP C  4 3.75 3.5  20 year 10 year  3.25 3 5 year  2.75 2.5  May-06  10  Jul-06  Oct-06  Jan-07  Apr-07  BIS Review 84/2007  Chart 11: Inflation gaps Percentage changes on a year earlier 2.5 RPI-CPI 2.0 1.5 1.0 0.5 RPIX-CPI 0.0 -0.5 00  01  02  03  04  05  06  07  Chart 12: Official exchange reserves Ot her (Indonesia, Malaysia, P hilippines, T $ bn India 3500 Singapore Hong Kong 3000 Korea T aiwan 2500 Japan China OP EC, Rus, Kaz 2000 1500 1000 500  Dec00  Dec01  Dec02  Dec03  Dec04  Dec05  Dec06  Mar07  Chart 13: Lending to individuals % change oya  20 Unsecure d (16%)  18 16 14 12 10  Total  8 6 4 2  1994  BIS Review 84/2007  1996  1998  2000  2002  2004  2006  11  Chart 14: Commercial property capital values growth 30  Percentage change on previous year  25 20 15 10 5+ 0 5  -  10 15 20 80  12  83  86  89  92  95  98  01  04  07  BIS Review 84/2007

However, unlike Hong Kong, the $ exchange rate could and did adjust down  BIS Review 93/1999  2  relative to the $ in line with its trading partners. This extra degree of freedom helped to soften the impact of the sharp regional slowdown and depreciation of its neighbours’ currencies. In addition, the Government sought to make prompt and direct adjustments to the real economy, cutting taxes and levies, reducing the CPF contributions with the support of unions and workers and building capabilities for the longer term. These measures helped see Singapore through the storm and are now enabling Singapore to recover, together with the rest of the region. Lessons from the crisis When the Asian currency crisis first broke out, many observers blamed the “Asian model”. But then other emerging markets, even the developed world, came under fire. It became clear that the problem was not just Asia, but also weaknesses in the structure of the global financial system. There is general agreement on what the key weaknesses were, but not yet on their solutions. Very broadly, I identify five issues: •  Capital controls – can they help? •  Exchange rate regimes – fixed or floating? •  Hedge funds – what do they imply for global systemic stability? •  Global financial supervision – is this possible? •  Strengthening domestic institutions – a prerequisite to participation in the global system. Capital controls This crisis has prompted a reconsideration of the merits of capital controls.