Global losses estimated at $50 trillion

As the front line of the financial services industry, advisors are well aware that the current investment climate is among the worst in history. Now the data are in to support that.

The global financial crisis sparked by interest rate resets in the American sub-prime mortgage market has now burned through $50 trillion U.S. in global financial assets, according to a study by Asian Development Bank, entitled Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?

Nearly 20% of that total came out of Asia, making the region the hardest hit among emerging markets, with $9.6 trillion — just over one year of the region’s GDP — being lost.

“This is by far the most serious crisis to hit the world economy since the Great Depression. While this crisis originated in the U.S. and some European countries, by now no region or country is insulated,” says ADB president Haruhiko Kuroda. “I am afraid things may get worse before they get better. However, I remain confident that Asia will be one of the first regions to emerge from it, and it will emerge stronger than ever before.”

Asia has been hit particularly hard because of the incredible pace of growth over the half decade. As cash poured into the continent, particularly China and India, the ratio of financial assets to GDP shot up from 250% in 2003 to 370% by 2007.

On the other side of the Pacific, the same ratio in Latin America rose by 30%, and the downturn has wiped out “only” $2.1 trillion, or 57% of the region’s GDP.

Clearly, the report points out, claims that emerging economies had decoupled from the U.S. have proven optimistic. A global recovery may begin either in late 2009 or early 2010, according to the ADB.

“Most emerging market economies, including in developing Asia and Latin America, are at a crossroads, and the next 12 to 18 months will be very difficult,” the study says. “However, there has been no destruction of physical and human capital, boding well for a strong recovery, possibly more cautious and sustainable, after the adjustments in the financial markets are worked through over the next year or so.”

The ADB estimates measure the losses in equity and bond markets, including those backed by mortgages and other assets, and the depreciation of many currencies against the U.S. dollar. Financial derivatives, such as credit default swaps that further multiplied the size of the financial markets, were not included in the calculation.

(03/09/09)