Financial crisis

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See also bailout and Financial Crisis Inquiry Commission.


Financial crisis causes?

Who saw it coming and the primacy of accounting

Many analysts blame the financial crisis on at least three interrelated causes:

  1. Rapid growth and subsequent collapse of U.S. house prices;
  2. a general decline in mortgage underwriting standards, reflected in a growing proportion of home purchases financed by nonprime mortgages; and
  3. widespread mismanagement of financial risks by firms engaged in originating, distributing, and investing in mortgages, mortgage-backed securities, and derivative financial instruments.

Mortgage delinquencies and foreclosures rose sharply after U.S. house prices peaked and began to fall in early 2007. Banks and other financial intermediaries then began to experience large losses on their holdings of nonprime residential mortgages and mortgage-backed securities.

By August 2007, these losses sparked a widespread loss of confidence in banks and other financial intermediaries, as investors suddenly became much less willing to bear credit risks. Banks tightened their lending standards, which reduced the availability of loans and increased their cost. As investors retreated to the safety of government bonds and other low-risk securities, the market yields on risky debt securities were driven up relative to yields on U.S. Treasury securities.

Investor concerns intensified during 2008 as financial losses continued to mount. The crisis reached a boiling point in September 2008 when the bankruptcy of Lehman Brothers and near-bankruptcy of American International Group (AIG) sparked panic selling in the stock market and drove the yields on risky securities sharply higher relative to those on risk-free securities.

Fraud task force established

Today, by executive order, President Obama established an interagency Financial Fraud Enforcement Task Force, which supersedes the Corporate Fraud Task Force established in 2002. Led by the Department of Justice, the task force will be chaired by the Attorney General and composed of senior-level officials from a variety of departments, agencies and offices. According to the executive order, the mission and functions of the task force will be to:

  • provide advice to the Attorney General for the investigation and prosecution of cases of bank, mortgage, loan, and lending fraud; securities and commodities fraud; retirement plan fraud; mail and wire fraud; tax crimes; money laundering; False Claims Act violations; unfair competition; discrimination; and other financial crimes and violations (hereinafter financial crimes and violations), when such cases are determined by the Attorney General, for purposes of the order, to be significant;
  • make recommendations to the Attorney General, from time to time, for action to enhance cooperation among Federal, State, local, tribal, and territorial authorities responsible for the investigation and prosecution of significant financial crimes and violations; and
  • coordinate law enforcement operations with representatives of State, local, tribal, and territorial law enforcement.

To announce the establishment of the task force, Attorney General Eric Holder was joined today by Treasury Secretary Tim Geithner, Housing and Urban Development Secretary Shaun Donovan and SEC Enforcement Division Director Robert Khuzami, who represented SEC Chairwoman Mary Schapiro.

According to Mr. Holder, “the Task Force is designed to strengthen our collective efforts -- in conjunction with our federal, state, and local partners -- to investigate and prosecute significant financial crimes relating to the current financial crisis; to recover ill-gotten gains; and to ensure just and effective punishment for those who perpetrate financial crimes.” He also noted that “this Task Force’s mission is not just to hold accountable those who helped bring about the last financial meltdown, but to prevent another meltdown from happening.”

Secretary Donovan emphasized the importance of an “interconnected and multi-dimensional response.” According to Donovan, “no one agency is going to be able to stop financial fraud. This Task Force will build upon many of the inter-agency collaborations already underway to protect consumers and restore confidence.”

Mr. Khuzami agreed, stating that “[the Task Force] is a way for us to mount an even better organized and more collaborative response to the pain and losses caused by the financial crisis. [It] will improve our chances of identifying wrongdoers and thus restoring confidence in our markets.”

In his remarks, Secretary Geithner acknowledged the need for “comprehensive financial reform” but also stressed the importance of “a much more aggressive strategy of enforcement.” He stated that “President Obama is committed to … bringing a more aggressive, preemptive and proactive approach, across federal agencies and alongside state governments, to stop trends in financial fraud as early as possible” and that “the task force is designed to help do that.”

The Financial Fraud Enforcement Task Force will meet for the first time in the next 30 days.

Crisis timeline -- St. Louis Fed

Crisis timeline -- NY Fed

The domestic timeline begins in June 2007, showing the lead-up to and development of the crisis as well as subsequent government responses.

The timeline is divided into three sections:

  • Federal Reserve policy actions,
  • other policy actions,
  • and market events.

It provides an overview of the major turning points and shows how policy has responded to evolving market conditions.

Timeline prepared by the Federal Reserve Bank of New York, the PDF links through to underlying media and and public references.

Panic of 2007

  • Source: What the Fed Did and Why Joseph S. Tracy, Executive Vice President, Federal Reserve Bank of New York, Remarks at the Westchester County Bankers Association, Tarrytown, New York, June 25, 2010

"...The failure of the clearinghouse system in 1907 was a catalyst for the formation of the Federal Reserve System and its power as a lender of last resort.

The problem of deposit runs was effectively solved in 1934 with the institution of deposit insurance. Insurance solves the public goods and coordination failure problems discussed above. A depositor need not invest resources in determining which bank is a safe place to put his funds. Additionally, the depositor is guaranteed to get his funds back regardless of whether other depositors decide to withdraw their funds.

The moral hazard problems created by deposit insurance necessitated that the banks covered be subject to supervision and that a mechanism was established so that problem banks could be resolved quickly in order to safeguard the taxpayers’ money.

There are many parallels between the Panic of 1907 and the events of 2007. In both cases, credit intermediation had shifted outside of the core banking sector.

An investment boom preceded each panic—the earlier in copper and the later in housing—with much of the credit being funded by sources outside of any existing liquidity protections.

When the bubbles began to deflate and prices began to fall, loan defaults quickly developed precipitating funding runs on the institutions involved in extending this credit.

What seemed like large liquidity buffers by individual firms were quickly drawn down. Funding withdrawals precipitated asset sales, which put further downward pressure on asset prices.

The resulting credit contractions adversely affected the real economy, setting up an adverse feedback loop that exacerbated the initial losses..."

IMF's "Technical Note on Crisis Management Arrangements" of the US


Events since August 2007 have tested arrangements for crisis management and financial stability in the U.S. In a framework of multiple, statutorily independent agencies, these arrangements were largely informal. Once the crisis broke, the agencies managed to coordinate effectively to improvise solutions to the problems they faced and were able to contain the crisis. However, the crisis also revealed shortcomings in arrangements ahead of the crisis, both in the framework for identification of systemic threats and in the limitations of the tools at the disposal of the U.S agencies to deal with failing institutions. These shortcomings, which should be judged in the context of a crisis of unprecedented scope and size, contributed to a situation that proved to be enormously costly in terms of economic and financial disruption and the scale of public intervention.

Specifically, the main shortcomings in the U.S. crisis management arrangements highlighted by the crisis are:

  • The absence of formal responsibility for financial stability, individually or collectively, or a systematic interagency approach to monitoring and addressing potential systemic risks;
  • Legal hurdles to information collection and obstacles to information-sharing among the agencies which hampers assessment of systemic risks;
  • Absence of authority to require functional regulators to change their rules to address an identified and emerging systemic risk;
  • Crisis management tools that have lagged behind the complexities of the U.S. financial system that the agencies have to manage.

These deficiencies are recognized and addressed in the regulatory reforms under discussion in Congress. The recommendations in this paper push in the same direction but differ on some specifics. It is recommended that the U.S. agencies should:

  • Clarify the responsibilities of the agencies that are expected to contribute to the delivery of financial stability and establish a formal council of the regulatory agencies, the Fed, and the Treasury to serve as the systemic risk regulator (SRR) with a mandate for financial stability. significant potential risks are identified, the body should also consider whether, and if so how, these should be mitigated by regulatory or other changes (e.g., development of market infrastructure). The council should also oversee a continuous program of work on crisis preparation including ensuring that effective coordination and information-sharing arrangements are in place and that crisis management tools remain up-to-date and are tested to meet any potential risks to financial stability identified.
  • Clarify how responsibility for systemic risk oversight will be discharged, both for monitoring systemic risks and, where necessary, introducing regulatory changes to address these.

Providing the council with the power to demand information and require regulatory and/or supervisory action, after consultation with the appropriate prudential regulator, as well as assigning one agency as its agent and lead executor would avoid the dissipation of responsibility within a committee structure. The lead executor would most naturally be the Fed considering the close relationship between monetary stability and financial stability, the Fed’s daily interaction with key market participants in carrying out monetary policy and its role as operator and overseer of key payment systems and as liquidity provider to the banking system, as well as its current role as the consolidated supervisor of bank holding companies.

  • Define principles for future access to emergency liquidity assistance for banks and non-banks in light of the wider access to central bank liquidity support provided during the crisis. Ensure capacity to provide liquidity support in crisis situations is not so circumscribed as to be ineffective. Review prudential liquidity requirements for any institutions with potential access to liquidity support.
  • Review the funding arrangements for the deposit insurance fund by removing the ceiling on the size of the fund or increasing its size, to address the procyclicality in the current arrangements and to target premiums that take account of systemic risk.
  • Adopt a comprehensive resolution regime for dealing with the failure of large financial firms in an orderly manner and one that appropriately incentivizes shareholders and debt-holders through a sharing of losses. Resolution arrangements need to be credible with management, shareholders and the market and provide for adequate access to funding to allow both an orderly resolution and the mitigation of systemic risk. Ex ante resolution plans (“living wills”) are one device to help promote this credibility. If the agencies conclude that a group’s plan is not credible, higher prudential requirements should be imposed or the group should be

required to change the plan or its size and/or structure.

  • Ensure that all financial groups that are potentially systemic are subject to effective consolidated supervision and to prudential requirements (larger capital or liquidity buffers) that reflect the risk they bring to the system.
  • As part of resolution planning, arrangements for the resolution of cross-border groups and the compatibility of resolution arrangements in different countries should be reviewed in conjunction with the authorities from those countries. If, as a result of the review, the credibility of the resolution arrangements is doubtful then the U.S. agencies should consider requiring revisions in resolution plans, increased prudential requirements, or changes in group structures.
  • Within the proposed council on financial stability (SRR), responsibilities should be established among the agencies for coordinating with authorities overseas, building on existing practices and responsibilities among the agencies. The council should also ensure that the Financial Stability Forum (FSF) Principles for Cross-Border Coordination in Crisis Management are implemented by the U.S. agencies.

This body or should meet regularly (at least quarterly) to discuss potential risks to financial stability. Risk assessment should be comprehensive and cross-sectoral with periodic stress tests2 to check the capacity of financial institutions to withstand severe shocks.

How did some see it coming?

"Who saw it coming and the primacy of accounting Financial Times Alphaville, July 13, 2009

"... Dirk J Bezemer of Groningen University attempts to show that certain contrarian economic models — and economists — anticipated the credit crisis and the ensuing recession. In contrast, mainstream economic models, and by extension most economists, did not.

The analysts [presented in the table above] belie the notion that ‘no one saw this coming’, or that those who did were either professional doomsayers or lucky guessers. But there is a more important, constructive contribution. An analysis of these cases allows for the identification of any common underlying analytical framework, which apparently helps detect threats of instability.

Surveying these assessments and forecasts, there appears to be a set of interrelated elements central and common to the contrarians’ thinking. This comprises a concern with financial assets as distinct from real-sector assets, with the credit flows that finance both forms of wealth, with the debt growth accompanying growth in financial wealth, and with the accounting relation between the financial and real economy.

These are what Dirk Bezemer calls accounting or flow of funds views of the economy. They have certain Austrian School characteristics, like a distinction between financial wealth and real assets, as well as the separate representation of stocks and flows, and modelling the financial sector separately from the real economy. Those are in contrast to traditional neoclassical economic models which tend to focus on equilibriums, according to Bezemer."

Bubbles never discussed at the Fed Open Market Meetings

"... In addition, BIS' chief economist - William White - and others within BIS - repeatedly warned the Federal Reserve and other central banks that they were setting the world economy up for a fall by blowing bubbles and then using "using gimmicks and palliatives" which "will only make things worse".

As Spiegel wrote last July:

White and his team of experts observed the real estate bubble developing in the United States. They criticized the increasingly impenetrable securitization business, vehemently pointed out the perils of risky loans and provided evidence of the lack of credibility of the rating agencies. In their view, the reason for the lack of restraint in the financial markets was that there was simply too much cheap money available on the market...

As far back as 2003, White implored central bankers to rethink their strategies, noting that instability in the financial markets had triggered inflation, the "villain" in the global economy...

In the restrained world of central bankers, it would have been difficult for White to express himself more clearly...

It was probably the biggest failure of the world's central bankers since the founding of the BIS in 1930. They knew everything and did nothing. Their gigantic machinery of analysis kept spitting out new scenarios of doom, but they might as well have been transmitted directly into space... In their report, the BIS experts derisively described the techniques of rating agencies like Moody's and Standard & Poor's as "relatively crude" and noted that "some caution is in order in relation to the reliability of the results."...

In January 2005, the BIS's Committee on the Global Financial System sounded the alarm once again, noting that the risks associated with structured financial products were not being "fully appreciated by market participants." Extreme market events, the experts argued, could "have unanticipated systemic consequences."

They also cautioned against putting too much faith in the rating agencies, which suffered from a fatal flaw. Because the rating agencies were being paid by the companies they rated, the committee argued, there was a risk that they might rate some companies too highly and be reluctant to lower the ratings of others that should have been downgraded.

These comments show that the central bankers knew exactly what was going on, a full two-and-a-half years before the big bang. All the ingredients of the looming disaster had been neatly laid out on the table in front of them: defective rating agencies, loans repackaged to the point of being unrecognizable, dubious practices of American mortgage lenders, the risks of low-interest policies. But no action was taken. Meanwhile, the Fed continued to raise interest rates in nothing more than tiny increments...

The Fed chairman was not even impressed by a letter the Mortgage Insurance Companies of America (MICA), a trade association of US mortgage providers, sent to the Fed on Sept. 23, 2005. In the letter, MICA warned that it was "very concerned" about some of the risky lending practices being applied in the US real estate market. The experts even speculated that the Fed might be operating on the basis of incorrect data. Despite a sharp increase in mortgages being approved for low-income borrowers, most banks were reporting to the Fed that they had not lowered their lending standards. According to a study MICA cited entitled "This Powder Keg Is Going to Blow," there was no secondary market for these "nuclear mortgages."...

William White and his Basel team were dumbstruck. The central bankers were simply ignoring their warnings. Didn't they understand what they were being told? Or was it that they simply didn't want to understand?

Yet, White said in a short, must-see talk last week that former long-time St. Louis Fed president William Poole told him that there was never even a whisper of these basic concepts at a single FOMC meeting.

"Why One Bubble Burst Deserves Another"

Lehman Brothers collapsed one year ago. The U.S. government refused a bailout and warned other financial institutions to be careful. The government felt other institutions had already severed their dealings with Lehman's investment network, and that a collapse could be walled in.

Little did the government realize that the whole financial system was one giant Lehman. The securities firm borrowed short-term money to punt in risky and illiquid assets. The debt market supported the financial sector, believing the government would bail out everyone in a crisis. But when Lehman was allowed to collapse, the market's faith was shaken.

The debt market refused to roll over financing for financial institutions. Of course, financial institutions couldn't unload assets to pay off debts. The whole financial system started teetering. Eventually, governments and central banks were forced to bail out everyone with direct lending or guarantees.

The Lehman collapse strategy backfired. Governments were forced to make implicit guarantees explicit. Ever since, no one has dared argue about letting a major financial institution go bankrupt. The debt market is supporting financial institutions again only because they are confident in government guarantees. The government lost in the Lehman saga, and Wall Street won.

So Lehman died in vain. Today, governments and central banks are celebrating their victorious stabilizing of the global financial system. To achieve the same, they could have saved Lehman with US$ 50 billion. Instead, they have spent trillions of dollars -- probably more than US$ 10 trillion when we get the final tally -- to reach the same objective. Meanwhile, a broader goal to reform the financial system has seen absolutely no progress.

First, let's look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 -- about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding.

Bank of England estimates $200T lost global output cost

Counting the Systemic Cost

One important dimension of the debate concerns the social costs of systemic risk. Determining the scale of these social costs provides a measure of the task ahead. It helps calibrate the intervention necessary to tackle systemic risk, whether through regulation or restrictions. So how big a pollutant is banking?

There is a large literature measuring the costs of past financial crises. This is typically done by evaluating either the fiscal or the foregone output costs of crisis. On either measure, the costs of past financial crises appear to be large and long-lived, often in excess of 10% of pre-crisis GDP.

What about the present crisis?

The narrowest fiscal interpretation of the cost of crisis would be given by the wealth transfer from the government to the banks as a result of the bailout. Plainly, there is a large degree of uncertainty about the eventual loss governments may face. But in the US, this is currently estimated to be around $100 billion, or less than 1% of US GDP. For US taxpayers, these losses are (almost exactly) a $100 billion question. In the UK, the direct cost may be less than £20 billion, or little more than 1% of GDP.

Assuming a systemic crisis occurs every 20 years, recouping these costs from banks would not place an unbearable strain on their finances. The tax charge on US banks would be less than $5 billion per year, on UK banks less than £1 billion per year. Total pre-tax profits earned by US and UK banks in 2009 alone were around $60 billion and £23 billion respectively.

But these direct fiscal costs are almost certainly an underestimate of the damage to the wider economy which has resulted from the crisis – the true social costs of crisis. World output in 2009 is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis. In the UK, the equivalent output loss is around 10%. In money terms, that translates into output losses of $4 trillion and £140 billion respectively.

Moreover, some of these GDP losses are expected to persist. Evidence from past crises suggests that crisis-induced output losses are permanent, or at least persistent, in their impact on the level of output if not its growth rate. If GDP losses are permanent, the present value cost of crisis will exceed significantly today’s cost.

By way of illustration, Table 1 looks at the present value of output losses for the world and the UK assuming different fractions of the 2009 loss are permanent - 100%, 50% and 25%. It also assumes, somewhat arbitrarily, that future GDP is discounted at a rate of 5% per year and that trend GDP growth is 3%. Present value losses are shown as a fraction of output in 2009.

As Table 1 shows, these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.

It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.

IMF's "Reconstructing the World Economy"

Co-organized by the Korea Development Institute (KDI) and the International Monetary Fund (IMF), with the support of the Presidential Committee for the G-20 Summit, Ministry of Strategy and Economy, Financial Services Commission, and Bank of Korea. The purpose of this high-level conference is for policymakers and academics from the Asian region and from G20 countries to discuss forward-looking economic and financial issues of interest to the international community.

Swiss write economic history by exposing execs to liability

Swiss newspapers on Thursday morning were full of praise for UBS shareholders who voted to hold 2007 executives partially responsible for the bank’s near collapse.

Commentators say the decision not to exonerate former CEO Marcel Ospel and other top managers of allowing the bank to suffer record losses and reputational damage is nothing short of historic.

“Shareholders yesterday preferred honesty over immediate profit,” the Geneva-based Le Temps newspaper said in an article titled, “Shareholder courage”.

“It was a courageous and responsible decision.”

During the big bank’s annual shareholder meeting in Basel, some 4,700 stockholders representing 1.7 billion shares, voted by a margin of 53 per cent to reject recommendations by the current board to absolve executives from all responsibility for the bank’s staggering subprime losses that prompted a SFr60 billion federal bailout.

The decision means former managers are now exposed to potential lawsuits.

“This is something that no one for a long time thought possible,” said Blick.

“By standing up to the board, the owners of UBS have written economic history.”

China's response

"Since reforming and opening up its economy, China has created an economic miracle. Its average annual rate of GDP growth over the past three decades was 9.8 per cent. This unprecedented growth vastly improved the living standards of the Chinese people. In the period 2002–2007, China registered an average annual growth rate of 10.5 per cent, while the inflation rate was kept under 2 per cent. This period can be said to be the best period over the past three decades as far as macroeconomic performance is concerned.

In 2007, China’s GDP growth rate was 13 per cent. In 2008 China’s GDP growth fell gradually at first, and then after the Lehman Brothers fiasco, fell in a dramatic fashion. In the first half of 2008 China was still able to manage an annual growth rate of 10.4 per cent. In the third and fourth quarters, the rate fell to 9 per cent and 6.8 per cent respectively. In the first quarter of 2009, the growth rate fell further to 6.1 per cent.

With hindsight, the turning point of China’s growth happened in September 2008, after the Lehman Brothers’ bankruptcy. The monthly growth rate of industrial products better reflects the changing fortunes of the Chinese economy. In August and September 2008, the growth rate of industrial products was 14.7 per cent and 11.4 per cent respectively. It dropped to 8.2 per cent and 5.4 per cent in October and November 2008. In February 2008, China’s CPI hit 8.7 per cent, the highest in more than a decade. But the CPI index fell to 2 per cent in November and has remained negative since then, though sequential CPI growth has turned positive recently.

The fall of the Producer Price Index since August 2008 was even more dramatic.

There is no doubt whatsoever that the single most important impact of the global financial crisis on the Chinese economy came from the fall in global demand which reflected China’s extremely high export dependency. Indeed, China’s export dependency is the highest among the major world economies. China’s export to GDP ratio in 2007 was 35 per cent. In November 2008 exports shrank by 2.2 per cent over the year, compared with a positive growth rate of 25 per cent in September. The fall of exports may have cut GDP growth 3 by percentage points. If its indirect impact is included, it may have shaved more than 5 percentage points off China’s 2008 growth rate...

(Page 15) The stimulus package

... Faced with the dramatic fall of GDP growth, the Chinese Government took action swiftly. In November 2008, the Government introduced a Rmb4 trillion stimulus package for 2009 and 2010. The prescribed dosage of the stimulus is very large, at 14 per cent of GDP in 2008. In March 2009, the People’s Congress approved the Government’s new budget for 2009. According to this budget, in 2009, total government expenditure (central plus local) would be 7.635 trillion Yuan, up 22.1 per cent over the previous year. In 2009, the total government deficit would be 950 billion Yuan (US$139 billion), the highest in six decades, compared with 111 billion Yuan in 2008. The Central Government deficit will be 750 billion Yuan, 570 billion Yuan more than last year. The State Council will allow local governments to issue 200 billion Yuan worth of government bonds through the Ministry of Finance.

The expected budget deficit will be about 3 per cent of GDP in 2009. The expansionary fiscal policy has been a great success, and it played a pivotal role in stabilizing and reviving the economy. However, the success of China’s stimulus package is not surprising at all. I have been very confident all along that China will be able to achieve a growth rate as high as 8 per cent. The reason is very simple — China has a very good fiscal position. As long as the Government so wishes, China can spend its way out of the slowdown, as long as it is affordable for the country.

China can afford such an expansionary fiscal policy. Over the past decade, China’s budget deficit was very low, and in 2007 and 2008, it ran a small budget surplus and a small budget deficit of 0.4 per cent of GDP respectively. As a result, China’s debt should only be about 20 per cent of GDP even after the stimulus. It is easy to see that there is plenty of room for the Chinese Government to use expansionary fiscal policy to supplement the lack of demand caused by the fall in export demand and, to a lesser degree, the fall in non-governmental investment demand.

The Central Government finances one-quarter of the 4 trillion RMB package, in the form of direct grants and interest rate subsidies. In the case of a Central Government-sponsored project, with the approval of the National Development and Reform Commission (NDRC), the Ministry of Finance provides all the funding for the registered capital. Bank credit is the second most important source of finance for the stimulus package. Local governments proposed their own stimulus packages of 18 trillion Yuan. The Central Government will issue 200 billion Yuan in government bonds on behalf of local governments. Commercial bank credit is expected to be the most important source of finance for the local-government proposed projects.


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