Global financial crisis

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Global financial crisis

  1. 1. Global Financial Crisis
  2. 2. Meaning of Global Financial Crisis The term financial crisis is applied broadly to a variety of situations Usually, some financial institutions or assets suddenly lose a large part of their value– Banking Panics (and recessions)– Stock market crashes– Bursting of financial bubblesAnd biggest organizations
  3. 3. How Did All This Happen? From 1820 to 1970, every decade U.S. workers experienced a rising level of wagesIn the 1970s this came to an end; real wages stopped rising and they have never resumed sinceU.S. workers became more productive, but got paid the same; wages began to stagnate and declineThe gap between labor and capital grew bigger
  4. 4. Contd…The large corporations made huge profits and had much money at their disposalThey bought other corporations (mergers and acquisitions) and they put their money into banksThe banks loaned that money (with interest) to workers who didn’t have money to consumeThis was done to raise their purchasing power because their wages weren’t enough to buy things
  5. 5. Then What ?Since employers no longer raised workers’ wages, the workers had to go into debt to surviveDebt went up and up and things got out of controlThe banks continued to loan money through new loans (secondary mortgages) at high interest rates, and this was a profit bonanza for the banksAs corporations increasingly began to invest abroad (outsourcing production and services), U.S. workers lost their jobs, and this led to greater unemployment and underemployment
  6. 6. Summing upProximate causes Sub-prime lending Originate and distribute model Financial engineering, derivatives Credit rating agencies Lax regulation Large global imbalances Fundamental cause Excessively accommodative monetary policy in the US and other advanced economies (2002-04)
  7. 7. Timeline• Fed ignores pleas for investigating sub-prime lending – 2001 to 2004• HSBCs Mortgage chief resigns after losses hit $10.5 Billion – Feb. 2007• Bernanke says the housing sector "is a concern, but at this point we dont see it as being a broad financial concern or a major factor in assessing the course of the economy." - Feb. 2007
  8. 8. Timeline• UBS shuts sub-prime lending unit and GMAC announces huge mortgage related losses – May 2007• Countrywide Financial (largest US mortgage lender) avoids bankruptcy by taking $11.5 Billion loan• Freddie Mac posts $2 Billion Loss – Nov. 2007
  9. 9. 2008Banks face losses of $900 Billion• Jobs lost across the board across many industriesCollapse of major Wall Street firms begins with Bear Stearns and continues thru to Leyman Brothers. Others?Global liquidity issues know no boundariesOil and commodities go thru the roof and then crater
  10. 10. Current scenario of USA GDP 2011- 1.8% 2012- 2.3% 2013- 2% (P) US housing market remained in depression From 6.5% of GDP To 1.9% of GDP President Obama declared Cut in Government spending by $85 billion Cutback in defense spending by 13% Cutback in non defense programs by 9% Fall in durable goods orders by 5.8% The US government has created over 100,000 jobs but still well below required 200,000
  11. 11. Cash flow and interestHigh oil prices are presenting a significant headwind to US economyWhile the federal reserve continues to try to stimulate it with durable near zero interest ratesOverall GDP growth , income , consumption all are in positive but are growing at below trend ratesPresident Obama recently presented his fiscal budget which would likely to increase deficit
  12. 12. The republicans encountered the budget to cut spending and reform entitlementsThe payroll and bush tax cuts are set to expire just as reduction in jobless benefitsThe debt ceiling may need to be lifted again the growth impulse contribution from foreign trade was positive for a while in year 2011While trade and current account balances risks remaining in strong under combination of US demands for imports and rising oil prices
  13. 13. Impact on the UKUnemployment increased by 164,000 between May and August 2008; almost a 10 % rise from 1.63 millionMost hard hit is London where number of jobless looking for jobs increased by 42 % in September 2008Some estimates put 1.5 million additional unemployment generated by end-2010 leading to an unemployment rate of 10% from current 5.7 %.
  14. 14. Problems in Euro ZoneStarted in-Oct 2009 in GreeceIts immediate causes lie with the US crisis of 2007-09Greek GDP had its worst decline with -6.9% in 2011The result in euro zone was sovereign debt crisisPIIGS->Portugal ,Italy ,Ireland ,Greece ,SpainInterest rate surged on government bonds
  15. 15. In July 2011 European leaders agreed to cut rate of interest which Ireland was paying on its EU/IMF bailout loan from 6% to 3.5%In Feb. 2012 ECB & IMF agreed to provide a second bailout package of €130 billionEuro group on 9 June 2012 grants Spain a financial support package of up to €100 billionLower tax returns and higher budget deficitOn July 26 Ireland returns to financial market by selling €5 billion in long-term government bonds
  16. 16. MeasuresAusterity measures like higher taxes and lower expenses Bailout packages from ECB & IMF for stabilizing their economiesPaying less than 4% on new debt which is incurringPrivate sector rescheduling and restructuring
  17. 17. Other measuresGovernment responded swiftly and decisively to save the systemCentral banks stepped in and provided liquidity to the banking system to keep it functioningExpanded the money supplyGovernment provided bailout for major financial institutions to avert their collapseGovernment also cut taxes and raised spending to prevent economy from falling into recession
  18. 18. Impact on India•$16 Billion outflow from India in 2008•Inflation at 12%•$291 Billion – Indian FX reserves as of 03 Oct.•Indian Oil Corp costs to rise 70% to $45 Billion•Industrial growth plummets to 1.3% in August•Sensex down ~50% in 2008•Sensex up ~50% from 2004 Indian Rupee depreciated 1$=55
  19. 19. What not happened here • No subprime • No toxic derivatives • No bank losses threatening capital • No bank credit crunch • No mistrust between banks
  20. 20. Our Problemsflows Reduction in CapitalPressure on BoPStock marketsMonetary and liquidity impactTemporary impact on MFs/NBFCs (Sept-Oct)Reduction in flow from non-banksPerceptions of credit crunch Contd.
  21. 21. Impact on Developing NationsTrade And Trade Prices:Growth in China and India has increased imports and pushed up the demand for copper, oil and other natural resources, which has led to greater exports and higher pricesRemittances:Remittances to developing countries will decline. There will be fewer economic migrants coming to developed countries Contd.
  22. 22. Foreign Direct Investment (FDI) And Equity Investment : while 2007 was a record year for FDI to developing countriesCommercial Lending:Banks under pressure in developed countries may not be able to lend as much as they have done in the past.
  23. 23. Summing upWeaker export revenueFurther pressures on current accounts and balance of paymentLower investment and growth ratesLost employmentThere could also be social effectsLower growth translating into higher poverty
  24. 24. Current Scenario Across the GlobeThe world is trying to recover from aftermath of great recession with India and China leadingThe world bank projects global GDP to expand between 3.3 and 3.7% in 2012Developing economies are expected to grow between 6.7 and 6.2%High income countries expected to grow at 2.4% and 3%
  25. 25. Measures taken by RBIExpanding rupee liquidity Reduction in CRR (400 bps) & SLR (100 bps) Special Repo window under LAF for banks on-lending to NBFCs, HFCs & MFS Special Refinance to banks without collateral Unwinding of MSS – buyback OMOs – pre-announced calendarCut in repo (425 bps) and reverse repo (275 bps) rates.Existing instruments – enough flexibility Contd.
  26. 26. Managing Forex liquidity NRE and FCNR(B) deposits: interest rate ceilings raised ECB norms relaxed Allowing corporates to buy back FCCBs Rupee-dollar swap facility for banks with overseas branchesEncouraging Flow of credit
  27. 27. Lessons From Crisis Avoid high volatility in monetary policy Appropriate response of monetary policy to asset prices Manage capital flow volatility Look for signs of over leveraging Active dynamic financial regulation − Capital buffers, dynamic provisioning − Look for regulatory arbitrage incentives/ possibilities
  28. 28. (Re)SourcesBusiness Week, What will the crisis mean for venture capital?, Sarah Lacy, 09 Oct. 2008 http://bit.ly/3A43xXYahoo Finance Charts and Historical dataMeltdown 2008, TerranceDC, Oct. 2008, http://bit.ly/4gRiwhSequoia Capital Presentation to Portfolio Companies - http://bit.ly/16F8WKGoogleRBI WebsiteTeknatus Blog http://www.teknatus.com/blog/pjainwww.imf.com

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