to reduce the cost of loans, above all as a result of the compression of illiquidity premiums. the complexity of structured instruments was coupled, however, with a lack of transparency, in particular as regards their valuation ( in which a crucial role was played by rating agencies, without any particular control by regulatory authorities or information providers ), by means of statistical models and often carried out on the basis of incomplete and insufficient data. we can now say – unfortunately well into the financial crisis – that opportunistic behaviour by managers, fueled by a distorted system of incentives, especially with reference to executive compensation, led to the creation of unnecessarily complex and opaque financial assets, with the effect of preventing a correct assessment of creditworthiness and often causing excessive risk - taking. the unsustainable growth of external imbalances in this context more and more in recent years the model of growth of the world economy was based on a growing imbalance between a steadily declining us saving rate ( negative for the household sector ) and highly positive rates for china and other emerging countries ( as well as japan ). this led to large external deficits for the united states and huge surpluses for the rapidly growing countries, which served to finance the twin ( budget and external current account ) deficits of the united states. this was soon recognized since the unsustainability of growing current account imbalances was evident, even though variations in the value of financial assets and liabilities contributed to reducing the explosive expansion of the country ’ s net external position ( figure 1 ). the risks associated with such a growth model, in which the rapid expansion of the world ’ s largest economy was financed with capital from the rest of the world, including, somewhat paradoxically, emerging and developing countries, had been stressed repeatedly and from many sides, although there was no lack of less alarmed observers and analyses suggesting that what appeared to be fundamental imbalances in the external accounts were the result of sustainable developments. at all events, the analyses produced by government and international institutions regularly pointed to the possibility that those imbalances might give rise to rapid and disorderly adjustments, with sudden realignments of the external value of the dollar and abrupt falls in us domestic demand, as the main threat to stable growth of the world economy. in the end, the financial crisis was not provoked by a flight from the dollar but by the slump in the us housing market and the consequent depreciation of structured

kingdom united states 2008q4 + 7. 5 % sources : based on fhfa, nationwide and national statistics. for the methodology, see finicelli, a., “ house price developments and fundamentals in the united states, banca d ’ italia, questioni di economia e finanza, no. 7, 2007. note : ( 1 ) equilibrium level = 100. the theoretical level of house prices is equal to the ratio of rents to the user cost. the latter is given by the sum of interest payments on mortgage loans, maintenance costs and property taxes, net of the expected increase in house prices. figure 7 : average absolute error in the gdp growth rate in the period 1999 - 2007 : comparison between the main forecasters ( percentage points ; the transparent histogram refers to the error made in the forecast for 2008 ) forecast following year forecast current year 2. 5 1. 5 1. 15 0. 92 0. 97 1. 13 1. 00 0. 5 0. 30 bank of italy 0. 34 prometeia 0. 35 0. 43 consensus imf 0. 49 ec consensus imf bank of prometeia italy ec note : average of the forecasts made in the spring and autumn of each year by the bank of italy, prometeia, consensus economics, the international monetary fund and the european commission. figure 8 : revision of the gdp growth estimates for 2008 : italy and the euro area 2. 0 1. 8 italy 1. 5 1. 5 1. 0 euro area 1. 6 1. 2 1. 2 0. 9 0. 5 0. 6 0. 4 0. 0 - 0. 5 - 0. 5 - 1. 0 january 2008 april 2008 july 2008 october 2008 january 2009 source : consensus economics. note : the gdp growth rate in 2008 for italy was - 1 per cent and for the euro area it was 0. 7 per cent. figure 9 : revision of the gdp growth estimates for 2009 : italy and the euro area 2. 5 2. 0 italy euro area 1. 5 1. 7 1. 5 1. 0 1. 2 1. 1 0. 5 0. 8 0. 5 0. 0 - 0. 5 - 1. 0 - 1. 5 - 1. 4 - 1. 6 - 2. 0 january 2008 april 2008 july 2008 october 2008 january 2009 source : consensus economics. figure 10 : breakdown of the gdp forecasting error for italy in 2008 0. 4