Portrait of the Crisis: Risks and Opportunities for Investors

Hung TranIIF, Counsellor and Senior Director of Capital Markets

and Emerging Markets Policy

Garanti Masters Private Banking Conference

Istanbul, Turkey

April 17, 2009

2

Main Themes

1. Perceived tail risk of economic and financial meltdown has diminished

2. Risk appetite has revived: risk assets have outperformed YTD

3. Most EMs and HG corporates could provide stabilization

4. Weaknesses in key sectors:

• HY corporates: sharply rising default rates, collapsing recovery rates

• Households: becoming more leveraged, more pressure to reduce debt

• Life insurance companies: facing solvency problems

• Pension funds: seriously underfunded

• Banks: funding situation and pre-tax/pre-provision earnings improved, but troubled assets/capital adequacy remain serious challenges

5. Key risks: threats to senior bank debt could trigger another spike in risk aversion

3

Outperformance of Risk Assets Year-to-date

-13,1-1,9

3,17,07,1

11,3

-6,3

12,2

16,5

10-year U.S. TreasuryEM local bonds

U.S. HG corporatesEM HG corporates

EM sovereign bondsEM HY corporates

U.S. HY corporates

Mature marketsEmerging markets

percent

Equities*

Fixed Income

* Returns in US$ terms.

4

Equity Market Volatility*

0

20

40

60

80

Oca.07 Haz.07 Kas.07 Nis.08 Eyl.08 Şub.09

percent

* VIX index of implied volatility of S&P 500 index options.

5

Mature and Emerging Market Equities*

index, end-2007=100

* MSCI indices (US$ returns).

Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09

6

Emerging Market Sovereign and Corporate Bonds

0

200

400

600

800

1,000

Oca-07 Haz-07 Kas-07 Nis-08 Eyl-08 Şub-09

EMBIG (sovereigns)

CEMBI Broad (corporates)

spread over U.S. Treasuries, basis points

7

Emerging Market Currency Index

97

100

103

106

109

112

115

Oca.07 Haz.07 Kas.07 Nis.08 Eyl.08 Şub.09

index, Jan 2, 2007=100

8

Central & Eastern Europe Currency Peg CountriesCurrent Account Balances

-30

-25

-20

-15

-10

-5

0

2000 2001 2002 2003 2004 2005 2006 2007 2008e 2009f

Baltics

Bulgaria

CE-3 average

percent of GDP

e = estimate; f = forecast.* IIF estimates and forecasts (where available); otherwise IMF or European Commission estimates and forecasts.

9

Selected Central & Eastern Europe Currencies

-40

-30

-20

-10

0

10

Haz.08 Ağu.08 Eki.08 Ara.08 Şub.09 Nis.09

Czech Republic

Hungary

Poland

Romania

percent change since end May 2008*

* Change vis-à-vis euro.

10

Global Corporate Bond Issuance

0

200

400

600

800

1.000

2006Q1 2007Q1 2008Q1 2009Q10

20

40

60

80

100High grade (left axis) High yield (right axis)

US$ billions

Source: Thomson Financial; IIF calculations.

US$ billions

11

U.S. Nonfarm Nonfinancial Corporate Cash Holdings*

0

300

600

900

1.200

1.500

1952 1958 1964 1970 1976 1982 1988 1994 2000 20062

3

4

5

6Current dollar value (left axis)

Relative to total assets (right axis)

US$ billions

* Cash defined as foreign deposits, checkable deposits and currency, time and savings deposits, and money market fund shares. Tangible assets at market value or replacement cost.

percent

12

U.S. Household Debt

4

8

12

16

20

24

28

1952 1958 1964 1970 1976 1982 1988 1994 2000 2006

percent of net worth

13

U.S. Household Debt

20

40

60

80

100

1952 1958 1964 1970 1976 1982 1988 1994 2000 2006

percent of GDP

14

High-yield Bond Annual Recovery Rates

0

10

20

30

40

50

60

70

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Average, 1982-2009

percent

15

Global High-yield Bond Default Rates and Spreads

0

4

8

12

16

1999 2001 2003 2005 2007 20090

500

1.000

1.500

2.000Default rate* (left axis)

High-yield spread (right axis)

percent basis points

* 12-month issue-weighted, history and forecast (dashed line).

16

Solvency Ratios of U.S. Insurance Companies

0

10

20

30

40

50

2000 2002 2004 2006 20085

6

7

8

9

10

Property/casualty (left axis)

Monoline (left axis)

Life (right axis)

percent percent

17

Global Pension Assets

25

3028

2522

201617

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006 2007 2008e

OECD Non-OECD Estimate

US$ trillions

e = estimate.

18

Term Interbank and Expected Overnight Interest Rates*

0

100

200

300

400

Haz.07 Eki.07 Şub.08 Haz.08 Eki.08 Şub.09

U.S.U.K.Eurozone

Dec 12 -coordinated central bank liquidity measures announced

Mar 17 -Fed approves financing for the purchase of Bear Stearns

Sep 15 -Lehman Brothers files for bankruptcy

basis points

* Spread between 3-month Libor/euribor and 3-month overnight index swaps (OIS).

19

Fed’s Central Bank U.S. Dollar Liquidity Swap Lines

0

100

200

300

400

500

600

Ara.07 Mar.08 Haz.08 Eyl.08 Ara.08 Mar.09

US$ billions

20

Losses and Capital Raised by Financial Institutions

35,7

389,3869,8

AmericasEurope

Asia

Total: $1,295 bn

US$ billions

* Since beginning of 2007; includes writedowns and credit losses. ** Since July 2007.

Losses*US$ billions

Capital Raised**

69,5

646,2396,4 Americas

Europe

Asia

Total: $1,112 bn

21

U.S. and European Debt Outstandingand Estimated Losses

0

3

6

9

12

15

U.S.securitizedassets andcorporate

bonds*

U.S. financialsectorloans**

Eurozonecorporate

debt

Europeansecuritized

assets

Exposure ofBIS reporting

banks todevelopingcountries

Total potential mark-to-market or loan lossesBalance of outstandings

US$ trillions

* Includes ABS, ABS CDOs, prime MBS, CMBS, corporate debt and CLOs.** Includes subprime and prime mortgages, and consumer, corporate and leveraged loans.

22

U.S. Fixed-rate Credit Card ABS Spreads*

0

500

1.000

1.500

2.000

2.500

Haz.07 Eki.07 Şub.08 Haz.08 Eki.08 Şub.09

AAA A BBB

basis points

* 5-year bonds; spread to swaps.

23

U.S. AAA-rated Student Loan ABS Spreads*

0

100

200

300

400

Haz.07 Eki.07 Şub.08 Haz.08 Eki.08 Şub.09

3 year 5 year 10 year

basis points

* Spread to Libor.

24

U.S. AAA-rated Fixed-rate Auto ABS Spreads*

0

200

400

600

800

1.000

Haz.07 Eki.07 Şub.08 Haz.08 Eki.08 Şub.09

Prime Near-prime

basis points

* 3-year bonds; spread to swaps.

25

U.S. Mortgage Delinquencies*

0

10

20

30

40

2005 2006 2007 2008 2009

All Prime

Alt-A Subprime

percent of loans outstanding

* Includes only non-agency mortgages; 30+ days delinquent, bank owned, or in foreclosure.

26

Cost of Protection Against Default onU.S. Home Equity ABS*

0

20

40

60

80

100

Haz.07 Eki.07 Şub.08 Haz.08 Eki.08 Şub.09

AAA AA A

percentage of par

* ABX.HE 2007-01 indices.

27

Commercial Real Estate Lending and Core Capitalat U.S. Banks and Thrifts

0,0

0,4

0,8

1,2

1,6

1992 1994 1996 1998 2000 2002 2004 2006 2008

Commercial real estate loans

Tier 1 capital

US$ trillions

28

Cost of Protection Against Default on U.S. CMBS*

0

1.000

2.000

3.000

4.000

5.000

Haz.07 Kas.07 Nis.08 Eyl.08 Şub.09

AAA AA BBB

basis points

* CMBX.NA.3 index spreads.

29

Capital Ratios of U.S. Commercial Banks*

7

8

9

10

11

12

2000 2002 2004 2006 2008

percent

* Asset-weighted average for sample of 12 U.S. commercial banks.

Tier 1 Capital Ratiopercent

Common Equity to Assets

5,5

6,0

6,5

7,0

7,5

8,0

2000 2002 2004 2006 2008

30

Capital Ratios of U.K. and European Banks*

7,5

8,0

8,5

9,0

9,5

10,0

2000 2002 2004 2006 2008

percent

* Asset-weighted average for sample of 12 U.K. and European commercial banks.

Tier 1 Capital Ratiopercent

Common Equity to Assets

2,0

2,5

3,0

3,5

4,0

4,5

2000 2002 2004 2006 2008

31

Cost of Protection Against Default on Large Banks*

0

75

150

225

300

375

Oca.07 Haz.07 Kas.07 Nis.08 Eyl.08 Şub.090

40

80

120

160Spread** (right axis)

Subordinated debt (left axis)

Senior debt (left axis)

basis points basis points

* Asset-weighted average of 5-year CDS spreads for a selection of 14 U.S., U.K., European and Japanese banks.** Subordinated debt less senior debt.

Portrait of the Crisis: Risks and Opportunities for Investors

Hung TranIIF, Counsellor and Senior Director of Capital Markets

and Emerging Markets Policy

Garanti Masters Private Banking Conference Istanbul, TurkeyApril 17, 2009