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Major
Variables
Recovery Boom Recession Depression
1. Industrial
production
Gradual
increase
Rapid increase Decline Rapid ...
6. Employment Gradual
increase
Rapid increase Starts falling Falls rapidly
7. Wage rate Improvement Rapid increase
but les...
8. Bank credit Liberal loans
and
satisfactory
demand for
advances
improvement
Liberal loans
and high
demand for
advances
S...
12. Inventory
stock
Gradual
decline
Very little Gradual
increase
High level
13. Business
failure
Smaller in
number
Hardly ...
Country GDP growth rate
2006 2007 2008 2009
(forecast)
United states 2.8 2.0 1.4 -0.7
Germany 3.0 2.5 1.7 -0.8
United king...
 A situation in which the wealth of a nation or State or
country experiences a sudden downturn brought on by
a financial ...
 Primarily involved in the financial sector.
 It refers to the lack of money and credit for banks and
other financial in...
 A financial crisis is a situation in which the value of
financial institutions or assets drops rapidly. A financial
cris...
 All the crises were preceded by “long periods of rapid
credit growth, low risk premiums.
 abundant availability of liqu...
 A fiscal crisis refers to governments struggling to repay its debt
and struggling to borrow enough money to meet its bud...
 Recession, leads to a rise in government borrowing.
 Governments receive lower tax (unemployment) and
spend more on ben...
 A sovereign debt crisis is generally defined as
economic and financial problems caused by the
(perceived) inability of a...
 The core of the debt crisis lie the peripheral countries of
Greece, Ireland, Spain and Portugal. While these countries
o...
 A currency crisis is when serious doubt exists as to
whether a country's central bank has sufficient
foreign exchange re...
Economic Crisis
Credit crisis
Involves financial sector e.g US subprime
Wider implication leads to financial crisis
Financ...
Crisis Type Originating
Countries
Origin of
Problems
Manifestation Trigger Exchange Rate
Regime
Remarks
Latin American Eme...
 Asian Financial crisis - stemmed from inappropriate borrowing
by the private sector. Due to high rates of economic growt...
 Late 1980s, excess liquidity in the financial system caused an
asset and stockmarket bubble. People with spare cash boug...
•High structural debt before crisis. Exacerbated by ageing
population in many European countries.
•Recession causing sharp...
 Greece borrowed heavily in
 international capital markets to fund government
budget and current account deficits. The p...
 The Greek government formally requested financial
assistance from the 16 member states of the Eurozone and
the Internati...
 Driven
 down by such fears, global stock markets plunged sharply on
May 6, 2010, and the euro fell to a
 15-month low ...
 October 2009, the Papandreou government has unveiled
four separate
 packages of fiscal austerity measures aimed at brin...
 Between 2001, when Greece adopted the euro as its
currency, and 2008,
 Greece’s reported budget deficits averaged 5% pe...
 The fact that it had “built a financial house of cards”.
“Iceland represents an extreme case of a huge financial
system ...
 Portugal’s weaknesses have been a large public debt and a
high budget deficit.
 Rapid economic growth before joining th...
 Brexit is an abbreviation of "British exit", which refers
to the June 23, 2016 referendum by British voters to
exit the ...
 After leaving the EU, the UK would lose unrestricted
access to the Single Market, and preferential access to 53
non-EU m...
 The UK would also continue to face additional barriers
on third-country markets to which preferential access
was lost as...
 member of the European Union (EU) in 1973, GDP per
capita in the United
 Kingdom (UK) has doubled, outpacing other affl...
 The UK labour and product markets are amongst the most flexible in the
OECD, which suggests that EU regulations are not ...
 :Brexit would continue to generate substantial structural
changes in the economy, reflecting the new relationship
with t...
Economy
 The economic pros and cons of Brexit have been hotly debated. According to an
OECD analysis of Britain’s economi...
Contemporary Issues
Contemporary Issues
Contemporary Issues
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Contemporary Issues

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A situation in which the wealth of a nation or State or country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling national output, a drying up of liquidity and inflation/deflation. An economic crisis can take the form of a recession or depression.

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Contemporary Issues

  1. 1. Major Variables Recovery Boom Recession Depression 1. Industrial production Gradual increase Rapid increase Decline Rapid decline 2. Commodity prices -do- Rapid increase Decline Rapid decline 3. Cost of production Gradual increase Rapid increase, but slower than rise in prices of goods and services Gradual decline Rapid decline, but slower than commodity prices. 4. Profits Satisfactory level High Gradual decline Negligible profits or losses 5. Investment Replacement of existing capital equipment High Falls slowly Falls rapidly
  2. 2. 6. Employment Gradual increase Rapid increase Starts falling Falls rapidly 7. Wage rate Improvement Rapid increase but less than the in rise in prices of goods and services Starts falling Falls rapidly than the commodity prices but less Major Variables Recovery Boom Recession Depression
  3. 3. 8. Bank credit Liberal loans and satisfactory demand for advances improvement Liberal loans and high demand for advances Starts falling Falls rapidly 9. Bank Reserves Improvement Rapid increase Suffer a setback Falls rapidly 10. Discount Rates A little improvement Rapid increase Gradual decline Falls rapidly 11. Speculation activity Gradual increase At high level Minimum possible Hardly any Major Variables Recovery Boom Recession Depression
  4. 4. 12. Inventory stock Gradual decline Very little Gradual increase High level 13. Business failure Smaller in number Hardly any Small in number Large in number 14. Business expectations Optimism coupled with cautious decision making Highly optimistic Pessimistic with cautious decision making Highly pessimistic Major Variables Recovery Boom Recession Depression
  5. 5. Country GDP growth rate 2006 2007 2008 2009 (forecast) United states 2.8 2.0 1.4 -0.7 Germany 3.0 2.5 1.7 -0.8 United kingdom 2.8 3.0 0.8 -1.3 Japan 2.4 2.1 0.5 -0.2 India 9.7 8.7 7.8 6.3/ 5.8 * Source: IMF and ES 2007 – 08, * - World bank
  6. 6.  A situation in which the wealth of a nation or State or country experiences a sudden downturn brought on by a financial crisis. An economy facing an economic crisis will most likely experience a falling national output, a drying up of liquidity and inflation/deflation. An economic crisis can take the form of a recession or depression.
  7. 7.  Primarily involved in the financial sector.  It refers to the lack of money and credit for banks and other financial institutions and rely on borrowing money on money markets,  Due to loan default and a collapse in confidence, banks are reluctant to lend.  Example Lehman Brothers - US subprime crisis  From perspective of borrower you may notice that lending becomes a little more expensive as banks seek to recover their profit margins. (This may be offset by cuts in base rate or other monetary interventions by CB
  8. 8.  A financial crisis is a situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution.
  9. 9.  All the crises were preceded by “long periods of rapid credit growth, low risk premiums.  abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector”.
  10. 10.  A fiscal crisis refers to governments struggling to repay its debt and struggling to borrow enough money to meet its budget deficit.  If markets fear governments have borrowed too much, and there is little chance of repayments, there will be a selling of the government bonds, pushing up interest rates and giving government bonds a very low credit rating.  It then becomes a difficult cycle to break. Markets won’t lend. Governments have to cut deficit by slashing spending.  Slashing spending can cause a fall in GDP and hence even lower tax revenues. A fiscal crisis, usually involves governments seeking outside help such as IMF intervention.  E.g. European Fiscal Crisis.
  11. 11.  Recession, leads to a rise in government borrowing.  Governments receive lower tax (unemployment) and spend more on benefits  In many Eurozone economies, this rapid rise in government borrowing, worried markets. Therefore, investors sold bonds, causing interest rates to rise.  This led to a debt crisis, with greater pressure on governments to reduce spending and budget deficits.  :
  12. 12.  A sovereign debt crisis is generally defined as economic and financial problems caused by the (perceived) inability of a country to pay its public debt. This usually happens when a country reaches critical high debt levels and suffers from (perceived) low economic growth.
  13. 13.  The core of the debt crisis lie the peripheral countries of Greece, Ireland, Spain and Portugal. While these countries only account for approximately 13% of total Eurozone GDP The European debt crisis (often also referred to as the Eurozone crisis or the European sovereign debt crisis) is a multi-year debt crisis that has been taking place in the European Union since the end of 2009. Several eurozone member states (Greece, Portugal, Ireland, Spain and Cyprus) were unable to repay or refinance their government debt or to bail out over-indebted banks under their national supervision without the assistance of third parties like other Eurozone countries, the European Central Bank (ECB), or the International Monetary Fund (IMF).
  14. 14.  A currency crisis is when serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate.  Accompanied by a speculative attack in the foreign exchange market.  Results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency.  A currency crisis is a type of financial crisis
  15. 15. Economic Crisis Credit crisis Involves financial sector e.g US subprime Wider implication leads to financial crisis Financial crisis Involves mortgage/ defaults/bank losses/declined bank lending Shortage of credit impacts economy (Real) fall in GDP/ Economic output Leads to debt crisis pressure to reduce spending and budget deficit. Govt receives lower tax and increases expenditure for revival Fiscal crisis Govt struggling to repay debt and to borrow money to meet budget deficit Involves govt seeking help from IMF Sovereign Debt Currency crisis Rapid fall in the value of currency e.g iceland Can be the result of fiscal crisis Hyperinflation/supply side shock Zimbabwe case/Rapid rise in Crude oil prices
  16. 16. Crisis Type Originating Countries Origin of Problems Manifestation Trigger Exchange Rate Regime Remarks Latin American Emerging Markets (Latin American 1982; India 1991); Small advanced country (Greece 2010 Onwards) Government Borrowing Current Account Details Speculative Attack and Exchange Rate collapse Fixed Rate Greece was part of Euro, So trigger was sharp rise in interest rates. Asian Financial Crisis Emerging Markets (East Asia 1997-9; Eastern Europe 2008; Fragile Five 2013); Small Advanced Country (Spain 2010) Corporate Borrowing Asset Price Bubbles; High Corporate Leverage “Sudden Stop” of capital flows and exchange are collapse Fixed Rate Fragile Five had flexible exchange rates. Spain was part of Euro. Japan Systematically Important Corporate Borrowing Asset Price Bubbles; High Corporate Leverage Asset price collapse Floating Exchange Rate Yen appreciated after crisis Global Financial Crisis Systematically Important (US 2008) Bank and Consumer Borrowing Asset Price Bubble in housing Correction in asset prices Flexible exchange rate US Dollar Appreciated The Next Systematically Important Corporate Borrowing Rising debt asset price bubbles “Sudden Stop” with potential for sharp exchange rate decline Managed Float Crisis Country’s Currency could depreciate substantially
  17. 17.  Asian Financial crisis - stemmed from inappropriate borrowing by the private sector. Due to high rates of economic growth and a booming economy, private firms and corporations looked to finance speculative investment projects. However, firms overstretched themselves and a combination of factors caused a depreciation in the exchange rate as they struggled to meet the payments.  Foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 1993-96  Countries like Thailand, Indonesia, South Korea had large current account deficits.  Financial deregulation encouraged more loans and helped to create asset bubbles.  Booming economy and booming property markets encouraged expansive borrowing by firms.
  18. 18.  Late 1980s, excess liquidity in the financial system caused an asset and stockmarket bubble. People with spare cash bought assets and shares causing them to rise.  Late1980s, the Japanese monetary authorities were worried about inflation and so doubled interest rates. They were then slow to reduce them.  This caused a fall in house and share prices, which lasted 10 years. It is one of the longest bear markets on record.  Higher interest rates and slumping asset values caused an increase in loan defaults.  Loan defaults were compounded because Japanese banks had made a series of bad lending decisions.  Stagnation
  19. 19. •High structural debt before crisis. Exacerbated by ageing population in many European countries. •Recession causing sharp rising in budget deficit. •Credit crunch causes losses for Commercial banks. •Investors much more cautious and fearful of default in all types of debt. •Southern European economies uncompetitive (higher labour costs) but can’t devalue to restore competitiveness. This causes lower growth and lower tax revenues in these countries. •No Lender of last resort (like in UK and US) makes markets nervous of holding Eurozone debt. European Sovereign Debt Crisis
  20. 20.  Greece borrowed heavily in  international capital markets to fund government budget and current account deficits. The profligacy of the government, weak revenue collection, and structural rigidities in Greece’seconomy are typically cited as major factors behind Greece’s accumulation of debt
  21. 21.  The Greek government formally requested financial assistance from the 16 member states of the Eurozone and the International Monetary Fund(IMF), and a €110 billion (about $145 billion) package was announced on May 2, 2010.  The package aims to prevent Greece from defaulting on its debt obligations and to stem contagion ofGreece’s crisis to other European countries, including Portugal, Spain, Ireland, and Italy.  Despite the substantial size of the package, some economists are concerned that the Eurozone/IMFpackage might not be enough to prevent Greece from defaulting on, or restructuring, its debt, oreven from leaving the Eurozone. Greece’s debt crisis threatened to widen across Europe, as bondspreads for several European countries spiked and depreciation of the euro began to accelerate
  22. 22.  Driven  down by such fears, global stock markets plunged sharply on May 6, 2010, and the euro fell to a  15-month low against the dollar. Seeking to head off the possibility of contagion to countries such  as Portugal and Spain, EU finance ministers agreed to a broader €500 billion (about $686 billion)  “European Financial Stabilization Mechanism” on May 9, 2010. Some analysts assert that such a  bold, large-scale move had become an urgent imperative for the EU in order to break the  momentum of a gathering European financial crisis. Investors reacted positively to the  announcement of the new agreement, with global stock markets rebounding on May 10, 2010, to  re-gain the sharp losses of the week before.
  23. 23.  October 2009, the Papandreou government has unveiled four separate  packages of fiscal austerity measures aimed at bringing Greece’s government deficit down froman estimated 13.6% of GDP in 2009 to below 3% by 2014.33  emphasized the need for longer-term structuralreforms to the Greek economy. enhancing employment and  economic growth, fostering increased private sector development, and supporting research,  technology, and innovation.
  24. 24.  Between 2001, when Greece adopted the euro as its currency, and 2008,  Greece’s reported budget deficits averaged 5% per year, compared to a Eurozone average of 2%,  and current account deficits averaged 9% per year, compared to a Eurozone average of 1%.10 In  2009, Greece’s budget deficit is estimated to have been more than 13% of GDP  Greece’s reliance on external financing for funding budget and current account deficits left its  economy highly vulnerable to shifts in investor confidence.
  25. 25.  The fact that it had “built a financial house of cards”. “Iceland represents an extreme case of a huge financial system towering over a small economy”.  Behind the encouraging image of low unemployment, income per person above the average in the European Union, huge investments in green energy and inflows of foreign investment, the country’s 3 largest banks and its households built huge amounts of debt.  The credit crisis was enough to make Iceland’s banking system, its credit rating and its currency all collapse at the same time.  As a result, Iceland’s GDP fell by 15% from its top point to the bottom reached during the crisis.
  26. 26.  Portugal’s weaknesses have been a large public debt and a high budget deficit.  Rapid economic growth before joining the euro in 1999, but afterwards it has been impacted by a steady loss of competitiveness in wages.  The 1990s have been a “lost decade for the economy” and as a result, it became difficult to manage the country’s public  Portugal had to refinance EUR 9.5bn of public debt then. The yield of 6.7% paid by Portugal for the ten year bonds sold in January 2011 is very close to 7%, which some Portughese officials
  27. 27.  Brexit is an abbreviation of "British exit", which refers to the June 23, 2016 referendum by British voters to exit the European Union. The referendum roiled global markets, including currencies, causing the British pound to fall to its lowest level in decades. Prime Minister David Cameron, who supported the UK remaining in the EU announced he would step down in October.  May
  28. 28.  After leaving the EU, the UK would lose unrestricted access to the Single Market, and preferential access to 53 non-EU markets.  UK trade would then initially be governed by World Trade  Organisation rules, leading to higher tariffs for goods and to other barriers in accessing the Single Market, notably for financial services. Bilateral UK-EU trade would contract.  Concluding a Free Trade Agreement with the EU, similar to the one between the EU and Canada, would provide a partial offset for UK trade by 2023.
  29. 29.  The UK would also continue to face additional barriers on third-country markets to which preferential access was lost as a result of EU exit.  Immigration accounts for one-half of UK GDP growth since 2005, with more than 2 million jobs created.  Curbs to the free movement of labour from the EU and, more importantly, a weaker UK economy after exit, would gradually reduce the incentives for economic migration to the UK and would be a cost to the economy.  Brexit would generate a financial shock beyond the UK, magnified by the appreciation of other currencies against sterling
  30. 30.  member of the European Union (EU) in 1973, GDP per capita in the United  Kingdom (UK) has doubled, outpacing other affluent non-EU English-speaking countries Heightened economic uncertainty would reduce confidence, holding back spending decisions, and tighten financial conditions by lifting risk premia, thus increasing the cost of finance and reducing its availability.  A danger is that large capital outflows, or a break in inflows, might threaten the financing of the record-high current account deficit of 7% of GDP.
  31. 31.  The UK labour and product markets are amongst the most flexible in the OECD, which suggests that EU regulations are not an important barrier.  further regulatory liberalisation, although this would be challenging since regulations are comparatively low and the gains would be limited.  Fiscal savings from stopping net transfers to the EU budget are likely to be 0.3-0.4% of GDP per year, which is a relatively small amount. Lower GDP growth would weigh on the fiscal position significantly, limiting the scope to use the net EU budget savings to relax fiscal policy.  By 2030, in a central scenario, UK GDP would be over 5% smaller than if the UK had remained a member of the EU. The costs would then be equivalent to GBP 3200 per household (in today’s  prices). In a more pessimistic scenario these would be even higher, at GBP 5000 per household.  In the longer term, the impact on the remaining EU countries would be small given the relatively low UK share in global trade and the scope for other policies to offset the shock.
  32. 32.  :Brexit would continue to generate substantial structural changes in the economy, reflecting the new relationship with the EU and new policies over 2024-30.  Access to the Single Market is important for foreign direct investment (FDI). Brexit would cut FDI inflows, notably from the EU, resulting in lower UK business investment and a decline in the capital  Trade and investment are important drivers of long-term GDP growth. Brexit would result in lower openness and innovation, weakening technical progress and productivity in the UK.  Long-term GDP growth would be further reduced through a smaller pool of skills, stemming from lower immigration and reduced FDI, reducing managerial quality.
  33. 33. Economy  The economic pros and cons of Brexit have been hotly debated. According to an OECD analysis of Britain’s economic prospects outside the EU, even the best- case scenario will see every home losing £2,200 by 2020 after Brexit. That verdict is backed up by the CBI, which has warned that leaving the EU would cost £100 billion to GDP by 2020 and lead to the loss of 950,000 jobs.  The Bank of England’s Monetary Policy Committee, meanwhile, claims that Brexit is likely to lead to a weak pound– good for UK exporters, bad for UK tourists and the price of imported goods. The Leave campaign has countered that pulling out the EU will allow Britain to retain the money it currently pays in (although Leave’s favored figure has been thoroughly discredited). Security  Should Britain stay in the EU to enhance its security? The Remain campaign highlights the benefits of international cooperation in implementing sanctions, sharing intelligence and enforcing arrest warrants.  Leave has a very different account of the pros and cons of Brexit. According to Leave, the EU “stops us controlling who comes into our country, on what terms, and who can be removed.”

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