These ABSs are in the balance sheets of non-banking financial entities (NBFEs) throughout the world, such as hedge funds agencies, or financial vehicles tied to banks, the latter particularly in Europe. Although the main global banks do not seem to be directly and significantly exposed to this component of mortgage loan risk in the US, they do have indirect exposures through credit lines or guarantees to NBFEs and in Europe they also have direct exposure to financial vehicles or conduits that they own. As these ABSs are illiquid, no direct information exists on their market value, which restricts the access to the market for NBFE trade securities that have – or are suspected to have – ABSs backed by sub-prime mortgage loans among their assets. This uncertainty has eroded insurance companies and pension funds’ appetite for buying NBFEs’ trade securities, which has substantially raised costs and reduced access to financing, hindering the renewal of their liabilities. Thus, the central point of this adjustment is located in the ABS-backed trade securities’ market and in NBFEs that have – or are suspected to have – large investments in ABSs backed by sub-prime mortgages. In addition, in face of the difficulties to renewing their traditional funding sources and investors’ redemption claims, occasionally these agencies or funds have been forced to make aggressive changes in their investing and financing strategies by selling off assets, using their commercial banking credit lines, raising capital contributions or resorting to sponsor banks’ guarantees.

Such a strong figure is based on strong corporate profits, favorable financing conditions, the progressive exhaustion of output gaps and good prospects for growth. Private consumption remains robust, with annual growth in a range of 6.5%-8% for several quarters already. Consumption rests on the sustained growth in salaried employment, a substantial drop in the unemployment rate and favorable financial conditions. This, despite higher energy prices and deteriorated consumer expectations. Exports of goods and services have also continued to gain strength, going from an annual average growth rate of 4.3% in the second half of 2006, to 9.4% the first quarter of this year, to 11.8% the second quarter. Among these, agricultural-forestry and manufacturing products stand out, with volumes growing around 10% annually in the first half this year (Figure 1)  BIS Review 97/2007  1  Figure 1: Contribution to GDP growth (real annual change, percentage)  (*) Goods and service exports minus goods and service imports. Source: Central Bank of Chile. Renewed dynamism of output has come hand in hand with a remarkable improvement of the labor market, with significant job creation and an important reduction in the seasonallyadjusted unemployment rate. The main news has come from the inflation side. In effect, in the past six months, the prices of non-perishable foods (e.g., grains, oils, powdered milk) have shown sharp rises. More recently, there was another unexpected and unusually large rise in perishable foods, which was weather related and should be temporary, together with increases in energy prices rates, including liquid fuels and electricity.