Global Financial Crisis


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  • Let’s begin with review what happened during the past months.We knew that:March 16, 2008: Bear Stearns gets acquired for $2 a share by JPMorgan Chase in a fire sale avoiding bankruptcy. The deal is backed by Federal Reserve providing up to $30B to cover possible Bear Stearns losses.After that event, market and investors stayed calm with believe that the crisis was in the end.But, suddenly, things got worst and turn up-side-down, and we recognized that we’re just in the end of the beginning of the more serious crisis. That was “Red September”.
  • Global Financial Crisis

    1. 1. Submitted by: Sumit Jha Avishek Kumar Prabhat Kumar Mukesh Kr. PGDM-Exe 13-14 1
    2. 2. PRESENTATION OUTLINE  Meaning of Global Finance Crisis  Over view of Global Finance crisis  Underline Factors.  Consequences - U.S.A - UK  Indian perspective:  Consequences,Measures to curb, Lesson Learnt. 2
    3. 3. GLOBAL FINANCIAL CRISIS  The global financial crisis of 2008 is the worst of its kind since the Great Depression  Began with failures of large financial institutions in the United States Morgan Stanley, Goldman Sachs, Merrill Lynch Deutsche Bank ,Barclays.  Rapidly evolved into a global crisis resulting in a number of European bank failures 3
    4. 4. 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 4
    5. 5. Underline Factors  Combination of complex factors  Easy credit conditions during the 02–08 . encouraged     high-risk lending and borrowing practices without assessing default risk International trade imbalances Real-estate bubbles that have since burst Fiscal policy choices related to government revenues and expenses Approaches used by nations to bail out troubled banking industries and private bondholders 5
    6. 6. U.S. Financial Crisis Inquiry Commission Report  The findings in January 2011.  It concluded that "the crisis was avoidable and was caused by:  Widespread failures in financial regulation, including the     Federal Reserve’s failure to stem the tide of toxic mortgages Dramatic breakdowns in corporate governance including too many financial firms acting recklessly and taking on too much risk An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial system on a collision course with crisis Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they oversaw Systemic breaches in accountability and ethics at all levels 6
    7. 7. GLOBAL FINANCE CRISIS- "Red September" September 14, 2008: Merrill Lynch sold to Bank of America amidst fears of a liquidity crisis and Lehman Brothers collapse September 15, 2008: Lehman Brothers files for bankruptcy protection September 19, 2008: Paulson financial rescue plan unveiled after a volatile week in stock and debt markets. Sep-08 Sep-08 September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac September 16, 2008: Moody's and Standard and Poor's downgrade ratings on AIG's credit on concerns over continuing losses to mortgage-backed securities, sending the company into fears of insolvency. Sep-08 Sep-08 September 17, 2008: The US Federal Reserve loans $85 billion to American International Group (AIG) to avoid bankruptcy. Created by Robin Thieu, 2008 Fall September 25, 2008: Washington Mutual was seized by the Federal Deposit Insurance Corporation, and its banking assets were sold to JP Morgan Chase for $1.9bn. Sep-08 September 29, 2008: The House rejected bailout bill, DJIA down 7% Oct-08 October 3,2008: The House pass the bail out bill 7
    8. 8. Banking Panics (and recessions)  Commercial banks suffer a sudden rush of with drywalls by depositors, this is called a bank run September 7, 2008:  Two United States Government sponsored enterprises (GSEs), Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), into conservator ship run by FHFA September 14, 2008  Lehman Brothers files for bankruptcy.  Sale of Merrill Lynch to Bank of America September 16, 2008  AIG faces severe liquidity crunch  Financial institutions lost a large part of their value incoming days and weeks 8
    9. 9. IMMEDIATE EFFECTS OF CURRENT CRISIS IN 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 %. 9
    10. 10. IMMEDİATE EFFECTS OF CURRENT CRİSIS IN THE “USA’’  Slowdown in GDP  Current 2008 projection 1.6 % (down from 2.8 % projection in April 2007)  2009 projection: 0.06 %  Consumer confidence lowest since 1978  October 2008 consumer sentiment index: 57.5 from 70.3 in September  Construction activity much worse: Q208 new constructions starts are 40 % less than post 9/11 (Q401) 10
    11. 11. Indian Perspective  The Indian banking system had had no direct exposure to the sub-prime mortgage assets or to the failed institutions.  It has very limited off-balance sheet activities or securitized assets.  India's recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandize exports, accounts for less than 15 per cent of our GDP. 11
    12. 12. India: Vibrant Capital Market Sensex – The Bombay Stock Exchange index rise 20 times from 1990s to reach 20,000 mark in November 2007. India is among the major destinations across the globe for inflow of US Dollar 25000 11 December 2007 Crossed 20,000 mark 20000 Sensex has risen 20 times in the period 1990-2007 1 5000 30 December 1999 Crossed 5,000 mark 07 February 2006 Crossed 10,000 mark 1 0000 5000 0 1Ju 1- l -97 Ja n 1- -98 Ju 1- l -9 Ja 8 n1- 99 Ju 1- l -99 Ja n 1- -00 Ju 1- l -0 Ja 0 n 1- -01 Ju 1- l -01 Ja n 1- -02 Ju 1- l -02 Ja n 1- -03 Ju 1- l -03 Ja n 1- -04 Ju 1- l -04 Ja n1- 05 Ju 1- l -05 Ja n 1- -06 Ju 1- l -06 Ja n1- 07 Ju 1- l -07 Ja n08 Emergence of industry and confidence of local investors along with the FIIs has led to upsurge of the Sensex FIIs have infused large investments into the Indian stock market Encouraging industry performance Increased local investors’ confidence 12 12
    13. 13. India: Fastest Growing Free Market Democracy GDP Growth Forex FII Flow FDI Per Capita Inflation 1990 4.9 % < USD 1 billion USD 1 million (1993) USD 97 million USD 390 9% 2008* 8.7 % USD 309 billion as on Mar 28, 2008 USD 16.1 billion in 2007-08 USD 12.7 billion in 2007-08 till December (USD 16 billion in 2006-07) USD 740 6.4 %as on JAN 15, 2009 * Annualized data used to show comparison with 1990 13 Source: Times of India, RBI, DIPP, Indian Budget, Rediff 13
    14. 14. So the question is, why were we effected?  Increased globalization. India's two-way trade (merchandize exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7 per cent in 2007-08.  Increased financial integration. Ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08.  Increased reliance of corporate sector on external financing In 2007-08, India received capital inflows amounting to over 9 per cent of GDP as against a current account deficit in the balance of payments of just 1.5 per cent of GDP, which shows the importance of external financing. 14
    15. 15. How India Was Hit.  Overseas financing dried up.  Corporate demand shifted to domestic banking sector.  Corporates withdrew investment from NBFCs and MFs, putting redemption pressure  Capital flows reversed, corporates converted domestically raised money to foreign currency to meet foreign obligations  Rupee depreciated 15
    16. 16.  Slump in demand for exports (US, ME, EU in downturn)  Fall in outsourced services demand as overseas firms face restructuring and downsizing 16
    17. 17. Response to the Crisis Crisis Management:  Monetary measures  Lower interest rates, CRR, SLR, repo and reverse repo rates  Expansion of refinance facilities for export credit  Relaxation of ECB rules for corporates, NBFCs and HFCs 17
    18. 18. Crisis Management  Fiscal Stimulus packages of Dec ‘08 and Jan ‘09  Additional public capital expenditure  Government guaranteed funds for infrastructure spending  Cuts in indirect taxes  Expanded guarantee cover for credit to MSEs  Additional support to exporters 18
    19. 19. Recovery Management  Strong rebound in investment demand  Domestic private demand remained dampened  Inflation started increasing due to high liquidity and money supply  Monetary measures withdrawn; SLR, export credit refinance limit, etc., restored to pre-crisis levels. 19
    20. 20. Inflation Management  Sustained increase in food prices and manufactured goods  CRR raised to contain excess liquidity  Repo and reverse repo rates were increased  Risks from sluggish global economy, rebound in global commodity prices, volatile capital flows and high domestic food prices remaing significant. 20
    23. 23. Fall in Share Prices After gradual fall in the previous weeks, the sensex fell to 8510, on 27.10.08, the lowest in 5 years Fall in Rupee On 21.11.08, Rupee hits record low of 50.20, against the greenback. 23
    24. 24. Impact on Exports Exports slided by 20 per cent of its target of $200 billion in 2008-09 Fall in Forex Reserves Forex reserves dropped by nearly $8 billion in early October, to $284 billion 24
    25. 25. FDI Inflow Global meltdown - Slow down FDI inflows. Job Loss Across all sectors — manufacturing, retail, realty, IT and BPO, banking and financial services Economic Growth Slow down has begun and growth will drop to about 7 percent, for the first time in 3 years 25
    26. 26. Impact on various industries Steel manufacturers, Textile Sector, Hosiery, Sports Goods, IT, ITeS, BPO, KPO, Diamond Exports, Real Estate, and many others have started feeling the heat 26
    27. 27. SEBI eases Participatory-Note norms, Lifts 40 percent cap on overseas derivative instruments RBI injects 20,000 crore for Mutual Funds The CRR, the amount banks are required to keep with the apex bank, has been cut from 9 per cent earlier to 5.5 per cent in three tranches. Short-term lending (repo) rate also reduced 27
    28. 28. Rs 25,000 crore against farm debt waiver A temporary 1 per cent reduction in SLR announced last month would be made permanent. High-level panel to address industry’s woes Market regulator SEBI is keeping vigilant eye on short-selling and on the settlement mechanism. 28
    29. 29. Prime Minister Growth Rate 7.5 to 8 percent Country not immune to what happens in the world Finance Minister – P. Chidambaram Adequate liquidity in the banking system Advised banks to lend aggressively Asked investors not to sell stocks in panic Commerce and Industry Minister - Kamal Nath Financial crisis may slow down FDI inflows. Planning Commission Dy. Chairperson - Montek Singh Ahluwalia Global meltdown to hit growth 29
    30. 30. oWeaknesses of structured products and derivatives oImportance of Financial supervision oInter-agency coordination required oWe can not remain insulated 30
    31. 31. 31