Corporate balance sheets need to be de-levered and banking systems need to be restructured and recapitalized in a pro-active and timely manner, or insolvent banks and corporations will continue to be an enormous macroeconomic weight on the economy and a serious obstacle to recovery. What do emerging market economies need to do?
First, on the equity side, the value of equities can change for two reasons: because market participants adopt a new view of future profits or because market participants apply a different set of discount factors to those expected profits, where the discount factors incorporate both risk-free interest rates and equity premiums.