##ers who could not repay, lenders much further afield were affected. it is against this backdrop that forecasters are bringing down their growth estimates for 2008 in some of the major countries, and policy makers there are growing more concerned about downside risks to growth. suppose then that the g7 group faces the prospect of softer growth in 2008 due at least in part to these financial factors. there will be spillovers from this via trade. but is the financial shock also common to the emerging world, and to asia in particular – a region that has been a spur to global growth in recent years? to date, at least, it would appear not. asian investors appear to have relatively small exposures to the sub prime loans per se. banks in the region typically rely less than their developed country counterparts on wholesale funding, so the liquidity squeeze has been less of a problem for them. the cost of debt to asian borrowers, as measured by sovereign bond yields, has not risen much at all. nor has the cost of equity capital, if the levels of asian share price indices are anything to go by. the economic growth of most of east asia has to date remained pretty solid as well. none of that is any guarantee of plain sailing in the future. nonetheless, it is a good start to weathering whatever the effects of slower growth in the developed world might be. if the financial shock that some of the g7 economies have experienced, and which they fear could intensify, has not been replicated in asia, then the effects on asia should be limited mainly to those coming through the trade channel, and perhaps via general business confidence linkages. the trade channel remains important, of course, for some key asian countries. there has been a big rise in intra asian trade over the past decade, but much of that trade is basically a production chain whose output is still destined for the major country markets. so developments outside the region are still very important. but some moderation in the externally generated part of growth is a manageable issue for asian policy makers. in countries where inflation has been a little on the high side, they can allow it to reduce pressure on prices. in other cases, they would be in a position to allow more expansionary settings for domestic demand. much hinges on events in china, an economy that now has a very prominent effect on conditions in the asian region. over the past couple of years the chinese economy has continued to boom, asset prices have surged and

be trade spillovers from the weaker us economy to the developing world and to other developed countries in due course, even though there is not a lot of evidence of such an effect in the data we have as yet. the spillovers will not just be from the us either. the fact that the euro area appears to be slowing a bit, with the uk also expected to slow before long, means that the core industrial countries as a group may, over the period ahead, impart noticeably less impetus to global growth than they have in recent years. how big a difference that will ultimately make we cannot know for sure, given the apparent increased internal dynamism of much of the emerging world, and given that we do not know what policy responses those countries may make. but the bigger question is the extent to which a range of countries also experience the same shock as the us. it is in answering this question that we need to consider the financial events of the past year or so. the essential elements are well known by an audience in this city. over some years, the availability of credit increased in many countries. in the us in particular this phenomenon saw a large extension of credit into the sub prime space in the housing market. this was all aided by the securitisation process and the search for yield, which had its genesis in the high saving rates in other parts of the world. while most of these sub prime borrowers have in fact been servicing their loans quite adequately, flaws in the process saw standards slip towards the end of this cycle. as the problems came to light, pressure came to bear on various entities. institutions with exposure to sub prime mortgage assets, holders and intending issuers of structured products in general, sivs, conduits and other intermediaries that relied on wholesale funding were all tested. core banking institutions that sponsored off balance sheet entities very quickly found funding pressures transferred back to them. doubts over asset quality, uncertainty over funding and generally reduced appetite for risk suddenly erupted last august into a scramble for liquidity. these pressures have been seen in most of the developed economies, though they have been most acute in the us, the uk, the euro area and canada. for at least some of the g7 economies, then, these events would appear to have the characteristic of a common shock, in the form of a rise in the market cost of finance and, in some cases, perhaps, the possibility of a wider withdrawal of credit. even though it was american borrow