credit risk related to the specific borrower. this turns out to be important for two reasons. first, the growing popularity and liquidity of libor indexed contracts led to an expanded use of libor to circumstances in which the credit risk of large banks was not clearly relevant. for example, a speculative position about the future of short - term rates is predominately based on one ’ s view about the path of short - term interest rates, rather than how bank counterparty risk might change and affect borrowing costs. despite this shortcoming, libor remained popular because the benefit of its deeper market liquidity was viewed as more important than the added complication that libor included an element of counterparty risk. 4 second, variations in libor submissions across the submitting banks at a point in time for a given maturity should mainly reflect differences in the counterparty credit risk, since the riskfree component is common to all submitters. this is important because it means that variations in submissions may be interpreted as reflecting variations in underlying counterparty risk. this is particularly important when the libor submissions process is transparent and the market is under stress, which was the case during the financial crisis. how libor worked in practice now that i have described how libor was intended to work in concept, how did it work in practice? it turns out that unappreciated design weaknesses and incentive structures at certain large submitting banks, in combination with the phenomenal success of reference rates, undermined the system. conflicts and problems emerged both at the bank level and at the individual submitter level. investigations are on - going to determine the scale and full extent of these problems, but i would like to discuss a few of the well - documented problems. let ’ s start at the level of banks that submit estimates. the enforcement actions and investigations into potential libor manipulation have shown that, at times, individual institutions faced incentives to understate their hypothetical borrowing rates in order to avoid the perception that they might have higher counterparty credit risk. some of the reported misdeeds occurred during the heart of the financial crisis when market participants faced considerable uncertainty about the health of particular institutions. this uncertainty was manifest in a wide range of financial market prices for financial institutions – low and volatile equity prices, record cds spreads and greater variation in borrowing costs across different libor - submitting banks. at that time, the bba was publishing firm - specific contributions to libor from submitting banks. given this

interbank premiums in developed markets. the peso, with swings, stands now close to its levels at the statistical cutoff of june ’ s report. in light of these developments, output figures for the second quarter and advanced indicators for the third – which are still weak in developed economies –, the baseline scenario revises downward by 0. 2 percentage points the world growth estimate for 2011, and by half a percentage point the one for next year ( table 1 ). the biggest change is for the u. s., where, aside from the low growth seen thus far, there is the incidence of foreseeable fiscal adjustments after the approval of the higher limit for public borrowing. growth in the eurozone is still expected to be slow. also, it is foreseen that the weakening of the developed world will have an impact on emerging economies which, in any case, will continue to outperform their developed counterparts. this projected world growth forecast is lower than consensus, which at the closing of this report probably does not reflect the full effect of current financial turmoil. nonetheless, incoming reports by investment banks do carry significant downward corrections for these developed economies, in line with the assumptions that make up our baseline scenario. as i said, concerns about an overheating of the emerging world and its consequences on inflation have subsided. adjustments already made to the monetary policies of several economies, the weakening of the global economy, and the recent drop in commodity prices are behind this assessment. so, several countries have already suspended their cycles of policy rate increases and, in general, market expectations have adjusted to expect a flattened rate. in the developed economies, it is most likely that monetary policy will hold on to – or possibly even intensify – its current degree of expansiveness for some time. the federal reserve has just announced its intention to keep the fed funds rate at a minimum at least through mid - 2013 ( figure 11 ). all these facts combined will result in that the external impulse that the chilean economy will be receiving over the coming quarters will be milder than previously estimated. on one hand, the worsened global performance will have a negative impact on our trading partners ’ economies. however, they will continue to grow above their 2000 – 2007 average. the change in composition and weight of this group of countries, where emerging economies – especially china – have sharply increased their share, explains this result. while in 2000 emerging economies weighed less than one third in the group of chile ’ s trading partners,