European Economy Report


Published on

The effect of sub prime crisis on European economy

1 Like
  • Be the first to comment

No Downloads
Total Views
On Slideshare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

European Economy Report

  1. 1. THE IMPACT OF THE US ECONOMIC CRISIS ON THE EUROPEAN ECONOMY Group Members: Dhrushil Jhaveri(22) Ramya Narayanaswamy(38) Pallavi Bhat(6) Sarabjit Singh Ajmani(2) Vikrant Alimchandani(3) Ganesh Dabholkar(11)
  2. 2. TABLES OF CONTENTS 1. European Economy: An Overview 2. U.S. Subprime Crisis 3. European Subprime Crisis 4. EuroArea Statistics 5. Impact Of U.S. Subprime Crisis on Europe 6. Banking and Recapitalisation 7. World’s Safest Banks 8. A Future Outlook References
  3. 3. EUROPEAN ECONOMY: An Overview European economy is the world’s largest economy if it is treated as a single economy. This economy produces $13 trillion per year, which is about the size as the US economy. Per capita, it is much smaller, as it is made up of 710 million people (in the 48 European states) versus almost exactly half that in the US. The European Union was formed in 1993 which is composed of 27 independent sovereign countries which are known as member states: Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. The main reason for this union to be formed was to establish a common single market, consisting of a customs union, a single currency (adopted by 12 of the original 15 member states), a Common Agricultural Policy and a Common Fisheries Policy. The most common currency within Europe is the Euro, the currency of the European Union. The 12 countries adopting this common currency include Belgium, Austria, France, Finland, Luxembourg, Ireland, Netherlands, Germany, Portugal, Italy, Greece and Spain. Some nations still use their own currencies, such as The UK, Russia, Denmark, Norway, Poland, and others. Each EU member's central bank is part of the European System of Central Banks, and in addition, those that use the Euro are part of the European Union's central bank, the European Central Bank. Some currencies are pegged to the Euro, like those from Estonia, Lithuania, Bulgaria, Cape Verde, and Bosnia and Herzegovina. Therefore, any financial shocks that affect the Euro will have immediate and identical effects on these countries’ currencies. The Euro has made the collective economies of Europe behave much like one economy, yet most of its countries have their own stock exchanges. There are also two pan-European exchanges, the Euronext and OMX.
  4. 4. U.S. SUBPRIME CRISIS After the collapse of the US stock market in 2000, the NASDAQ dropped 80% and the US government feared a deflationary depression. So in 2001 the US government took quick and decisive action and flooded the US with money to prevent a depression from developing. This included high number of subprime loans. Subprime lending, which started in the United States in the 1990s, involves granting mortgage loans to customers with a weak credit history or poor creditworthiness (as opposed to traditional customers, known as “prime” or “A-rated” borrowers). As the interest rates were much lower then, many such loans were issued. Banks do not to loan money to those who can’t repay them and they knew that customers who “took advantage” of subprime mortgages were at high risk of default, so they sold their subprime loans. Moreover Wall Street bundled these debts (now financial securities) with higher rated AAA debt and called CDOs, collateralized debt obligations, and sold trillions of dollars of 30% subprime but AAA rated CDOs to unsuspecting buyers. Now as the interest rates started rising, many of these sub prime borrowers defaulted at their payments making the financial institutions incur huge losses. Moreover due to the globalisation, the majority of these were bought by European and Asian investors and institutions seeking downstream revenues; but instead of downstream revenues, they will be absorbing unexpected and significant losses. America is now the world’s #1 debtor, because America needs over $1 trillion in foreign investment capital each year to pay its bills. This Economic crisis has not just has an impact in the USA, but its effects are spreading world over.
  5. 5. EUROPEAN SUBPRIME CRISIS European banks were lending to emerging countries which could not pay. Europe’s sub- prime crisis has now come home as heavily-indebted nations of the eastern bloc – Hungary, Ukraine, Belarus, Bulgaria, and The Baltic states – are collapsing one by one into the arms of the IMF. “Icelandisation” as it has been named is the new spectre stalking Europe. According to the Bank for International Settlements, western European banks have lent more than $1.5trn to Eastern Europe. Austria has loans equivalent to 80 per cent of GDP and stands to make huge losses as Hungary and Ukraine collapse. Other European countries implicated in global sub-prime include Spain, which has loaned immense sums ($316bn) to Latin American countries such as Argentina. Latvia was at the height of the credit bubble 18 months ago. Though it has hardly any industry, energy and few natural resources, foreign banks like Swedbank irrationally lent money to Latvia and made it awash with credit.
  6. 6. EUROAREA STATISTICS (Source: ECB Monthly Bulletin Nov 2008) Inflation Euro area HICP (Harmonised Index of Consumer Prices) inflation has continued to fall from its peak in the middle of the year, standing at 3.6% in September 2008 and, according to Eurostat’s flash estimate, 3.2% in October. Recent falls in prices for commodities and the ongoing weakening in demand suggest that annual HICP inflation rates will continue to decline in the coming months, reaching levels in line with price stability in the course of 2009. Stronger downside movements in HICP inflation resulting from base effects cannot be excluded around the middle of next year, but these would be short-lived. Looking through such volatility, upside risks to price stability over the medium term is alleviating. GDP growth Compared with the previous SPF(Survey of Professional Forecasters) round, expectations for real GDP growth have been revised down sharply for each of the years in the period 2008-10, with the most significant downward revision (of 1.0 percentage point) being for 2009. This represents the largest revision from one round to the next for the “next calendar year forecast” since the start of the SPF in 1999, with almost all of the respondents revising down their GDP growth forecasts for 2009. The main factor behind the weaker outlook is cited as being the current financial market developments and their direct and indirect impact on activity. Respondents expect growth in exports, investment and private consumption to be weaker owing to financial market developments, deterioration in consumer and business sentiment, slowdown in the global economy and a worsening in labour market conditions. Factors cited as providing some support for activity are policy interventions by monetary authorities and governments, a weaker euro exchange rate and lower commodity prices.
  7. 7. Industrial Producer Prices Eurozone IPP declined from May to August 2008. In September 2008 the annual rate of change in total industrial producer prices (excluding construction) declined to 7.9% from 8.5% in August. The annual growth rate of PPI energy declined to 20.2% in September, from 22.6% in August. The latest data on firms’ price-setting behaviour from the Purchasing Managers’ Index signal an ongoing easing in short-term inflationary pressures in recent months; price pressures eased considerably in October in both the manufacturing and services industries. Economic Sentiment Indicator The economic sentiment indicator is composed of the industrial, services, consumer, construction and retail trade confidence indicators. The industrial confidence indicator has a weight of 40%, the services confidence indicator a weight of 30%, the consumer confidence indicator a weight of 20% and the two other indicators a weight of 5% each. Economic sentiment indicator fell 10% from September to October 2008. Industrial confidence declined a record 18% YOY in October, coupled with a decline of 24% in consumer confidence, 20% in construction confidence, 13% in retail trade confidence and 9% in services confidence. Unemployment The unemployment rate has increased since the start of 2008 and, according to surveys, employment expectations have moderated. Unemployment was at a record 11.69 million for October 2008 at 7.5%.
  8. 8. Credit Crises (Source: October 2008 bank lending survey for the euro area conducted by the Euro system) In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for loans to enterprises increased significantly (by 22 percentage points, to 65%). The most important factors behind the net tightening have been expectations about future economic activity and the industry or firm-specific outlook. The impact of banks’ ability to access market financing also contributed to the net tightening. The net tightening of credit standards continued to be stronger for large enterprises (68%, compared with 44% in the second quarter) than for SMEs (56%, compared with 34% in the second quarter). Net demand for loans to enterprises declined considerably and continued to be negative in the third quarter of 2008,-26%, compared with -16% in the second quarter. The negative net demand was driven by a decline in financing needs for fixed investment (to -36%, from -20% in the second quarter) and by a continued negative contribution to loan demand stemming from mergers and acquisitions and corporate restructuring (-32%, compared with -27% in the second quarter).
  9. 9. In addition, internal financing continued to contribute to a reduction in the net demand for loans to enterprises, but less so than in the second quarter. By contrast, debt securities issuance continued to contribute positively to the net demand for loans to enterprises, reflecting market conditions and the increased cost of market-based debt financing. In terms of borrower size, while net loan demand was negative for both large firms and SMEs, it was somewhat weaker for large firms, in line with the results for previous quarters. For the fourth quarter of 2008, net demand for loans to enterprises is expected to be less negative (-8%) than in the third quarter.
  10. 10. In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for loans to households for house purchase increased somewhat (to 36%, from 30% in the second quarter). Expectations regarding general economic activity and housing market prospects continued to be the main factors contributing to the net tightening of credit standards. In the third quarter of 2008 the net percentage of banks reporting a tightening of credit standards for consumer credit and other lending continued to increase (30%, up from 24% in the previous quarter). At the same time, the net tightening of credit standards for consumer credit and other lending remained at a lower level than that reported for loans to households for house purchase.. The main factor behind the further increase in the net tightening was banks’ perception of risk, mainly related to expectations regarding general economic activity and the creditworthiness of consumers. As regards the terms and conditions for consumer credit, banks reported a net increase in the margins on both average and riskier loans (to 32% and
  11. 11. 38% respectively) For the fourth quarter of 2008, credit standards for consumer credit and other lending to households are expected to be tightened further (to 43%) compared with the third quarter. Equity markets Between end-September and 5 November broad stock price indices declined significantly worldwide. In the euro area prices fell by 12%, while the US markets shed 18%. The developments reflect increased market concerns about the health of the banking sector and the stability of the financial system. The potential fallout from the ongoing crisis on the real economy also weighed on equity valuations. Against this background, stock market uncertainty, as measured by implied volatility, increased to levels not observed since the 1987 stock market crash. Over the same period, stock prices in Japan, as measured by the Nikkei 225 index, fell by 15%. While the trend in stock markets was clearly down over the past month, daily stock market returns were highly volatile both in the euro area and the United States. Stock market developments in October were initially impacted by uncertainty regarding the approval of the US Treasury’s proposed USD 700 billion Troubled Asset Relief Program (TARP) resulting in sharp stock market losses. In addition, government-sponsored rescue plans were initiated for a number of European financial institutions, underlining a spreading of the financial turmoil beyond the US banking sector. These developments resulted in highly volatile stock market developments. On 8 October a coordinated rate cut by the ECB, together with the Federal Reserve, the Bank of England, the Bank of Canada, the Swiss National Bank and Sveriges Riksbank, led to a short rebound in stock markets. However, volatility quickly re-emerged and the downward
  12. 12. trend in stock market prices continued. In mid-October governments intervened with a range of measures to support and stabilize the financial system. Among other things, they provided deposit guarantees to private account holders, offered guarantee schemes for interbank lending, took bank recapitalization measures and undertook efforts to strengthen bank liquidity. Uncertainty continued to weigh on markets however. In the euro area, the heaviest losses occurred in the financial sector, although the non- financial sector also experienced significant losses. Overall, the non-financial sector declined by around 17%and 9% in the United States and the euro area respectively, while the share prices of the financial industry decreased by about 14% in both the United States and the euro area. The negative stock market trend during October was compounded by earnings developments. Actual annual earnings growth, computed in terms of earnings per share of the Dow Jones EURO STOXX index, was negative for the second month in a row, falling to -4% in October. Financial account of the Euro Area In the three-month period to August 2008, the euro area combined direct and portfolio investment account recorded average monthly net outflows of €8.4 billion, owing to net outflows in foreign direct investment, equity portfolio investment and money market instruments, which were only partly compensated by the large net inflows in bonds and notes. The latter development might be attributable to the yield differentials between euro area and US long-term bonds and notes. In July and August, cross-border portfolio equity investment activity was muted possibly owing to the sharp deterioration in the corporate earnings growth outlook in OECD countries. Moreover, in August, both euro area residents and non-residents repatriated part of their equity portfolio investment abroad, reflecting heightened investor risk aversion. From a longer-term perspective, combined direct and portfolio investment recorded net outflows of €133.7 billion in the 12-month period to August 2008, compared with net inflows of €166.7 billion a year earlier, owing to smaller net portfolio investment inflows. The financial turmoil which started in early August 2007 as a result of the US sub-prime mortgage crisis has led to uncertainty in financial markets, resulting in global portfolio reallocation decisions which have had an impact on euro area cross-border portfolio investment flows. Specifically, both euro area portfolio investment abroad (asset flows) and
  13. 13. foreign portfolio investment in the euro area (liability flows) were on an upward trend until July 2007. The outbreak of the financial turmoil interrupted these trends. From July 2007 to August 2008 both assets and liabilities contracted on a 12-month cumulated basis; particularly, non-resident investors reduced their portfolio flow in the euro area. Therefore, net portfolio investment flows were reduced from €342 billion in the 12- month period to July 2007 to €55 billion in the 12-month period to August 2008, owing mainly to the reduction of net equity inflows. In particular, global investors reduced their investment in euro area equities. As for foreign direct investment activity, cumulative net outflows in direct investment increased in the 12-month period to August 2008 compared with a year earlier, from €175.8 billion to €188.5 billion, partly owing to the strong euro exchange rate. This both made it more expensive for foreign investors to invest in euro area equity capital and favoured euro area investment abroad. EXCHANGE RATES (Source: ECB Monthly Bulletin, Nov 2008) On 5 November 2008 the nominal effective exchange rate of the euro – as measured against the currencies of 22 of the euro area’s important trading partners – stood 8.3% below its level at the end of July and 1.8% lower than its 2007 average. US DOLLAR v/s EURO In recent months the euro has depreciated vis-à-vis the US dollar amid high volatility. It depreciated particularly sharply in October, reaching its lowest level in more than two years. At the same time, expected volatility reached historical peaks. The sharp depreciation of the euro in October occurred at the same time as stock markets plunged in an environment of heightened global risk aversion. It appears that the weakening of the euro can be partly explained by the massive repatriation of foreign investments into the United States. Amid reduced liquidity in money markets, another factor weakening the euro has been reported to emanate from large dollar purchases required to service very large cross-border bank liabilities denominated in US dollars. In this context some European banks with US dollar needs reportedly found it cheaper to borrow in euro and subsequently exchange these funds into US dollars. The decision of the US Federal Open Market Committee to cut the federal funds rate in October had only a
  14. 14. limited impact on the US dollar exchange rate. On 5 November 2008 the euro traded at USD 1.29, 17.6% below its level at the end of July and 6.1% weaker than its average level in 2007. JAPANESE YEN v/s EURO In October, the euro depreciated significantly more vis-à-vis the Japanese currency than against the US dollar. The rapid depreciation of the euro against the yen has occurred against the backdrop of a historically strong increase in expected exchange rate volatility. This development has supported the yen as it has reduced the attractiveness of borrowing yen as a means of funding carry trade strategies, i.e. trades that consist of borrowing in a low-yielding currency (such as the yen) and investing in a high-yielding currency. The decision of the Bank of Japan to lower its target rate by 20 basis points did not have a notable impact on the Japanese currency. Overall, the euro has weakened by 24.6% against the yen since the end of July to trade at JPY 127.4 on 5 November. IMPACT OF U.S. SUBPRIME CRISIS ON EUROPE The Crisis in US has had an impact on the European economy in many ways. The US financial crises hit Germany particularly hard when a proposed bailout there for Hype Real Estate fell through resulting in a colossal bankruptcy (400 billion Euro). This news led to the German Chancellor put a guarantee on all German savings, similar to Ireland who did it sometime ago. The shocks have been felt far and wide in Europe. Greece and Ireland have been forced to nationalize all of their banks, while the Dutch bank Fortis and Icelandic bank Landsbanki also have been nationalised. In fact, Iceland’s banking industry is on the verge of collapse and also it has been felt that there would be a decline in the standard of living in Iceland. Russia has undergone huge shocks with its markets falling to long-time lows, and even being closed. Eurozone: The entire economy of the European Union has declined by 0.1 percent in the first quarter. A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.
  15. 15. In the eurozone as a whole, industrial production fell 1.9 percent in May, the sharpest one- month decline for the region since the exchange rate crisis in 1992. European car sales fell 7.8 percent in May compared with a year earlier. Retail sales fell by 0.6 percent in June from the May level and by 3.1 percent from June in the previous year. The eurozone's economy was reported to have declined by 0.2 percent. Apart from these major impacts, there are various areas where the European nations have been affected, which is discussed subsequently. Iceland: Iceland has been a mixed economy with high levels of free trade and government intervention. However today in the current economic crisis it is facing, Iceland's parliament responded by approving a bill giving the Government wide-ranging powers over the banks, including the ability to seize their assets, force them to merge or compel them to sell off their overseas subsidiaries. The Icelandic currency Króna has declined 40% against the euro during 2008 and has experienced inflation of 14%. Iceland's interest rates have been raised to 15.5% to deal with the high inflation. This depreciation in currency value has put pressure on banks in Iceland, which are largely dependent on foreign debt. On September 29, 2008 Iceland's Glitnir was effectively nationalized after the Icelandic government acquired 75% of the bank's stock. From October 2008, credit lines to Icelandic banks have been cut off and the government has been looking to other countries for sources of liquidity. The Iceland’s parliament has also taken control of and nationalized Iceland's second largest bank, Landsbanki, on October 8, 2008. Moreover it has extended a £400m loan to the nation's largest bank, Kaupthing, so as to strengthen the institution's balance sheet. Iceland's GDP is expected by economists to shrink at least 10 percent as a result of the crisis, putting Iceland by some measure in an economic depression. United Kingdom: The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis. The Ernst & Young Item club predicted growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to only 0.2 percent, and forecast a two-year drop in investment. Nationwide the housing prices in July fell 8.1 percent
  16. 16. from the previous year. Housing prices declined by 1.7 percent in July, double the decline recorded in June. The Bank of England reported that mortgage approvals fell by a record of nearly 70 percent. Output (manufacturing sector) in the United Kingdom has declined by 0.5% quarter on quarter in the third quarter of 2008, after stagnating in the second quarter. This is the first time in 16 years that the economy has contracted on a quarter-on-quarter basis. The number of companies that went into administration in May–July was 938, an increase of 60 percent compared with the same period in 2007. The number of company liquidations in the second quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. In the investment sector, investors have been shunning the pound because of anticipated losses from the UK property crash. Sterling has fallen 28 per cent this year, further than in the Exchange Rate Mechanism crisis of 1992, when interest rates rose to 15 per cent. The government had hoped that a devalued pound would stimulate exports and pull Britain out of recession, (as happened after Black Wednesday 16 years ago), but the economic climate today is different. The world is not willing to buy products or services as it did then. Thus Britain's current account deficit of 6 per cent is a major economic issue. On 8 October 2008 the Bank of England’s Monetary Policy Committee, in coordination with other central banks, decided to cut its main policy rate by 50 basis points to 4.5%. On 6 November it decided to make a further reduction by 150 basis points to 3.0%. This decision was taken against the background of a substantial shift in the prospects for inflation in the United Kingdom and a very marked deterioration in the outlook for domestic and global economic activity. Germany : Germany, the world's third largest economy in USD exchange-rate terms, the fifth largest by purchasing power parity (PPP) and the largest economy in Europe, recorded negative growth for a second consecutive quarter in the third quarter. The Federal Statistical Office stated in November 2008 that gross domestic product contracted by 0.5 percent in the third quarter, putting Europe's largest economy in recession for the first time in five years. In Germany officials are warning the economy could contract by as much as 1.5 percent in the second quarter because of declining export orders. Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade. The German Chamber of Industry and
  17. 17. Commerce has warned of up to 200,000 job losses in coming months. German retails sales fell 1.4 percent in June more than any expectations. France: The Euro zone's second-largest economy has shown an unexpected rise in the GDP by 0.14 percent in the third quarter, avoiding a possible "technical recession." According to the Finance Minster of France, increased household spending and company investments are two big drivers that have pushed France to pass Germany and Britain. Household spending increased 0.2 percent in the third quarter after zero growth in the previous quarter, according to a report released Friday by the French statistics institute INSEE However, the OECD forecast on 14th November 2008 states that the French economy will shrink 0.4 percent in 2009, altering its previous prediction of 1.5 percent growth. This recession is expected to push unemployment from 7.3 percent this year to 8.2 percent in 2009 and 8.7 percent in 2010, the OECD predicted. Spain: The year-on-year growth rate of GDP in Q3 declined by 0.9 pp to 0.9%, a figure representing a slightly negative quarter-on-quarter rate of –0.2%. Behind this further deceleration in output is the significant fall in the rate of increase of national demand to 0.3% year-on-year, to which all its components contributed, especially residential investment and household consumption. Also a sharp correction of activity in the construction sector and the decline in value added in manufacturing continued, while a process of job destruction began that spread to the various productive branches, except services. Although 18.5 per cent of the Spanish economy has always been housing-related, in Castilla- La Mancha 69 percent of all houses built over the past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house prices by 2011. Although Spain has avoided recession in the first half of 2008, unemployment in the country has risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in May. Spain's factory output fell 5.5 percent in May. It has seen a 7.9 percent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent. Morgan Stanley reports states a 40 percent chance of a 0.5 percent contraction of the Spanish economy in 2009, with a risk of an even more extreme 1.4 percent contraction in 2009. According to Spanish automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the same time
  18. 18. in 2007, the third consecutive monthly drop of over 20 percent. Spain's government forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009. Ireland: Ireland in the first quarter of 2008 reported a contraction in GDP of 1.5 percent, its first economic contraction since it began reporting by quarter and first recorded contraction since 1983. However, Ireland's Central Statistics Office reported growth in GNP of about 0.8 per cent. The global crisis has mandated Ireland to nationalise all its banks. Also rumours of panicked withdrawals from banks spooked the stock market and the Irish government has offered a two-year blanket guarantee on all deposits and bank debt. In Northern Ireland, house sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of Ireland and housing prices fell on average by 4 percent. Analysts have predicted Ireland's economy will contract further in the rest of the year. A report from NCB Stockbrokers predicts gross national product will fall by 1 percent in 2008 and by 0.4 percent in 2009 due to a decline in multinationals hit by the global economic slowdown. An economist from NCB said non-residential investment would fall by 5 percent in 2008 and by 12 percent in 2009. Ireland's GDP saw a contraction in the second quarter by 0.5 percent making Ireland the first member of the Euro zone to enter a recession.
  19. 19. BANKING AND RECAPITALISATION: The collapse of Lehman destroyed the last vestiges of confidence in the banking sector and has spread bank credit default swap worldwide. But the real damage is the havoc it has wreaked in the money markets. The default of Lehman holdings caused the collapse of the Reserve Primary money market fund. Following this, other money market funds – which play a crucial role in buying the commercial paper issued by corporations to fund their activities on a daily basis – have stopped investments, effectively destroying the short-term paper market. Northern Rock, which was an eminent mortgage lender, took refuge in the Bank of England for purposes of emergency financing in the month of September, 2007. Germany's IKB Deutsche Industrie bank accepted USD$11.1 billion from the Government as a bailout pertaining to its various United States mortgage investments which further shows effect of the global meltdown on euro area. BNP Paribas, the French Bank was compelled to stop all withdrawals from a fund of USD$2.2 billion pertaining to investment funds as the true value of the investment portfolios could not be ascertained. Germany's second-biggest bank Commerzbank has said it would
  20. 20. take a €8.2 billion injection from the state and another €15 billion in guaranteed funding to secure refinancing. It posted a third quarter net loss of €285 milion. Lloyds stepped in to buy HBOS in a government-brokered deal after HBOS was hit by a global financial crisis and concerns about its exposure to Britain's weakening housing market. Britain's biggest home lender HBOS Plc raised its hit from the value of risky assets and bad loans to over Ł5 billion ($8.14 billion) as its takeover partner Lloyds TSB predicted a sharp fall in profits French bank Societe general reported an 83.7% fall in the third quarter profit, however stated that it was strong enough to withstand the global financial crisis. Many governments have hence gone in for recapitalisations of their banks. B&B is the second British bank to be nationalized since the global credit crunch began last year. Belgium will put in 4.7-billion euros, the Netherlands 4-billion euros and Luxembourg 2.5-billion euros, the latter in the form of a convertible loan, to retrieve Fortis, the biggest private employer in Belgium. Its nationalisation impedes Britain’s takeover of Northern rock, the mortgage lender. The French state plans to lend 10.5 billion euros to the country’s top six banks before the end of the year. The government had earmarked 360 billion euros as part of an international effort to help banks survive the worst financial crisis since the Great Depression. The money will be raised from a 40 billion euro recapitalization fund that was part of that plan. The loans come with conditions attached, including lending targets, a higher interest rate and rules of conduct regarding director remuneration. The Dutch government has injected 10 billion euro cash into the ING financial and insurance group after ING asked for help to bolster its capital position to provide a buffer against the ongoing financial crisis. Dutch State now would hold an 8.5 percent stake in the bank as well two seats on the board and a say in executive pay after this deal. Like other European governments and the United States the Dutch have backed bank loans to try to calm the credit market.The Dutch have also recently nationalised Fortis and ABN AMRO. France and Belgium have also given a $9 billion lifeline to Dexia, a Belgian-French lender
  21. 21. Switzerland’s top two banks have taken emergency measures to shore up their finances. Credit Suisse is raising new funds from private investors while the Swiss government has taken 9.3 percent stake in UBS for four billion euros. UBS will also unload billions of euros worth of toxic assets into a new fund backed by the Swiss central bank to boost investor confidence. Credit Suisse, which made a quarterly net loss of about 850 million euros following more writedowns on risky assets. It is getting 6.5 billion euros from investors including Qatar and Israel and is not seeking government help currently. As states by experts, Ireland will need to recapitalise its banks in near future because exposure to the falling property market will otherwise undermine their capital bases. Currently the Irish government has offered a blanket guarantee for up to 485 billion euros ($620 billion) worth of bank debt but it has maintained that any direct state investment in Irish banks would remain a last resort. World’s Safest Banks: Then And Now Rank 2007 2008 SAFEST BANKS COUNTRY SAFEST BANKS COUNTRY 1 Caisse des Depots et France Caisse des Depots et France Consignations(CDC) Consignations(CDC) 2 Bank Nederlandse The Bank Nederlandse The Gemeenten (BNG) Netherlands Gemeenten (BNG) Netherlands 3 Landwirtschaftliche Germany Landwirtschaftliche Germany Rentenbank Rentenbank 4 Rabobank The Rabobank The Netherlands Netherlands 5 Landeskreditbank Germany Landeskreditbank Germany Baden-Wuerttemberg- Baden-Wuerttemberg- Foderbank Foderbank
  22. 22. 6 United USB Switzerland Lloyds TSB Kingdom 7 France Lloyds TSB United BNP Paribas Kingdom 8 Dexia Belgium Wells Fargo United states 9 Wells Fargo United States Barclays Bank United Kingdom 10 NRW Bank Germany BNP Paribas France A FUTURE OUTLOOK The outlook for economic activity is extraordinarily uncertain, in large part stemming from the intensification and broadening of the financial market turmoil. The latest survey data confirm that momentum in economic activity in the euro area has weakened significantly, with sluggish domestic and external demand and tighter financing conditions. The aim of the measures adopted by governments to deal with the financial turmoil should be to support trust in the financial system and help to prevent undue constraints in the supply of credit to companies and households. A number of downside risks to economic activity identified earlier have now materialised – particularly those stemming from the financial market tensions. Other downside risks continue to relate to disorderly developments due to global imbalances and rising protectionist pressures, as well as to the possibility of renewed increases in commodity prices. The developed countries of the world must realise that it is unsafe to lend money without having a complete knowledge of the credibility of the debtor. This financial crisis in decades has made it clear that coordination between central banks and regulators is necessary. Consolidation and M&A would be the road ahead for the financial sector. As rightly said by Matthew Kirkby, the global head of equity origination at Royal Bank of Scotland, “The challenge, for all of us, is that the actions that brought us success over the last decade are unlikely to bring us success in a radically different situation. There will be
  23. 23. winners even in these trying times, we will have to wait and see if countries like India and China emerge stronger from this financial crisis. References • ECB Monthly Bulletin November 2008 • Darryl Robert Schoon- “How To Survive The Crisis And Prosper In The Process” • s_by_05_in_Q3/article • worse-than-expected-in-2009-826287.html • • d_by_us_financial_crisis.html • • recession-1016643.html •
  24. 24. • our-economy-iceland-complains-976905.html • • html • b90a-c920d2cc6a71 • _2008.pdf?PHPSESSID=25ce1a32eea1dca9c1c8049ab5b49de0