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Against the tide: There’s more crunch to come

The effects of the sub-prime crisis are spreading and could cost 2.5% of world GDP. Emerging market economies will not be immune.

We are in a bear market for risk assets. Numerous hits to the financial sector are still to come that will keep global liquidity shrinking and asset prices under pressure.

Central bank actions have been successful in normalizing inter-bank rates and Federal Reserve chairman Ben Bernanke will make more interest rate cuts. Also, the US administration has introduced a large fiscal policy boost. But the credit crunch is not over and it will continue to weaken the real economy and the balance sheets of the financial sector.

Losses in the financial sector from the sub-prime crisis have reached $150 billion. Many US financial institutions have had to recapitalize themselves through funding from strategic investors (turning to the foreign sovereign wealth funds), cutting dividends, undertaking share buybacks and cutting the workforce.

But there is still much further to go. Although Libor spreads have narrowed, the crunch in the rest of the credit markets has intensified, as measured by the yield spreads for corporate debt over government paper and by the spreads for the cost of getting protection against debt defaults in the credit derivatives markets.

The final bill to the global financial sector from the sub-prime crisis and its spread into prime mortgage, consumer and corporate debt markets could reach $1.3

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