Global Financial Crisis Seems To Have Come To An: Recovery Is Underway…

GLOBAL FINANCIAL CRISIS SEEMS TO HAVE COME TO AN END

RECOVERY IS UNDERWAY…

WE DISCUSS:  ORIGIN OF CRISIS 

 EFFECTS OF CRISIS 

 CURRENT SCENARIO 

 THE ROAD AHEAD

ORIGIN OF CRISIS

JO H N PA U L B E S T

ORIGIN OF CRISIS Real estate boom Bursting of housing bubble in America ARM ( adjustable rate mortgages ) Increase in loan incentives Investment made by financial institutions  Downfall of shadow banking     



CASE OF HOUSING BUBBLE  During 1997 – 2006 prices of a typical

US home went up to 124 % of its value  People started investing in real estate taking huge amounts as loans  By 2008 the prices started declining sharply  People who were in heavy debts sold off their property for cheap prices and the rest began to default

EASY CREDIT CONDITIONS  Federal reserve’s lowering of interest

rates from 6.5% to 1 % during the year 2002  Then increased the federal funds significantly between the period of 2004 july and 2006 july  This led to an increase in 1 year and 5 year ARM rates  Deficit finance

SUBPRIME LENDING  Subprime refers to credit quality of

particular borrowers who happened to have weakened credit histories and a greater risk of loan default than prime borrowers  Proximate event to increase subprime mortgages was the April 2004 decision by the US securities and exchange commission(SEC) to relax the net capital rule  This encouraged many investment banks to dramatically increase their

CREDIT DEFAULT SWAPS (CDS)  A

type of insurance contract (a financial derivative) that lenders purchase against the possibility of credit event associated with debt, a borrowing institution, or other referenced entity.  As long as the credit events (defaults) never occurred, issuers of CDSs could earn huge amounts in fees relative to their capital base.  Since CDSs were technically not

COLLAPSE OF SHADOW BANKING  Paul Krugman described shadow

banking as the “core of what happened” to cause the crisis  It is also known as parallel banking  Borrow short term in liquid markets to purchase long term illiquid and risky assets  Directly effected by any change in credit markets 

S I L S I A R B C O L G F . O S T C C E I F EF NOM O C E P R IYA N K A R . P

EFFECTS OF FINANCIAL CRISIS GLOBALLY  Entire world is reeling under a

financial crisis.  Mainly due to,  subprime lending  falling prices of the houses  crisis of confidence and consequent

flight of creditors thereby leading to collapse of mortgage finance.





 Collapse of Financial Institutions in several

parts of the world  Lehman Brothers; AIG, Freddie Mac and Fannie Mae etc.  Central Banks in vulnerable countries such as Iceland become Bankrupt  Investors across the globe lost huge amount of their investments  Severe Credit squeeze and Liquidity crunch for the industry  Housing, Automobiles, Retail, Services etc. 

 Crisis of confidence leads consumer

aversion to spending  Fall in housing and real estate prices  Fall in demand for goods and services  Resorting to Trade Distorting Protectionism  Leads to drop in international trade in commodities and services  Gets into a Vicious Cycle  Job cuts and serious unemployment problem followed 

EFFECTS ON USA  Financial system in US has crumbled.  Markets failed.  Unemployment rate reported to be

9.7%.  Over 34 million people use of Food

Stamps.  US bound transactions has decreased.

EFFECTS ON UK  2.4 million workless households in UK

during April-June according to government reports.

 At least one in six homes in the UK have

not got one person employed.  Six million people are out of work in UK, and claiming benefits according to research made public this week. The six million figure is nearly triple the official 2.4 million rate of unemployment. 

EFFECTS ON RUSSIA  Russian economy’s GDP have fallen

to 23.2% which is falling 9.5% on year on year basis.  Downturn has heavy attribution to the falling oil prices.  Almost two million Russians lost their jobs.  Falling living standards and financial problems.

EFFECTS ON AFRICA  Many infrastructure projects were

delayed and even cancelled which was very important for their economic development.  Average growth rate fell to 3% comparing to average growth rate of 6% during 2004-2008.

EFFECTS ON UAE  In UAE, $582 billion worth projects in

construction field is now on hold while a further $698 billion remains in operation.  In real estate sector also projects are

deferred.

 Real estate projects continue to account for

a huge 84% of the $1.28 trillion total budget; compared with only 8% each for the infrastructure and leisure and entertainment sectors.

EFFECTS ON CHINA  Less affected by the crisis due to the

closed financial system.  China’s growth rate was 9% in 2008-’09 which was very less comparing to past five years.  There was consecutive drop in housing prices and also it affected many industrial sectors like IT, electrical, textiles and non-ferrous industries.

EFFECTS ON INDIA  Less affected by the crisis due to:  Closed financial system  Domestic savings and corporate earnings  Low export dependence  High employment  Large consumption base  High government expenditure

 India’s growth rate decreased to 6.5%

which was around 9% for past three years. 

 Due to the impact of global economic

recession, Indian stock market crashed from the high of 20000 to a low of around 8000 points.  Employment was worst affected and

109,513 people lost their jobs between August and October 2008. 

CURRENT SCENARIO

M E N D A V IK A S

CURRENT SCENARIO  United Nations economist’s have

said there is no signs of early recovery from this crisis.   Suggestion : Create a new world

reserve system using several currencies rather than just dollar and call for tough controls on the cross –border financial flow.

CONTD…  This is not recovery, it is just an

attempt to recover from the current crisis which is on a right track, its just a fiction not yet here.   It will be dangerous if governments

across the world think that the recovery is happening and withdraw the stimulus packages and policies. 

SITUATION IN INDIA  GDP of many countries is rapidly

going down, while india has decreased considerably less.   9.5% to 6.5%   India has shown a strong degree of

resilience across all the sectors except the exports.

CONTD…  Revival is seen in sectors like auto

sales, relative high-growth in infrastructure and easing of intrest rates.   This all has led to induction of

consumption demand.

CONTD…  Domestically by FY10 situation is

expected to improve.   While for the global economic

situation and external inflow the government is still skeptic.

CONTD…  The Indian IT sector is expecting to

recover by the mid of 2010.   Various other sectors are optimistic

about the recovery, the most optimistic is education, entertainment, aviation.

WHAT DOES THE WORLD BANK SAY?   Recovery is on the right track for

most of the developing economies.   But for the poor countries the

struggle is much more severe, as they don’t have finance to increase the consumption.

WHAT DOES US GOVT SAY?  The recovery is underway and they

are planning to reduce the stimulus packages they provided.   But the economist have a different

view.

CONTD…  US GDP:  2009: -2.8  2010: 0.8

 Unemployment Rate:  2004: 5.5%  2009:9.3%  2010:10.1%

INDIAN CONSUMER  The indian consumer has reduced

the consumption because of the effect on their salaries.  The current situation has boosted up their savings nature.  The main target of the govt is to boost up the consumer consumption.

INDIAN INFRASTRUCTURE INDUSTRY   The infrastructure industry currently

contributes 26.7% to industrial output of the nation.   So it is an important tool to boost up

the Indian economy.

CONTD…  Due to this the Indian infrastructure

firms have thrived inspite of the adversity.   The consumer confidence is more in

investing in the infrastructure funds.

CONTD…  The govt is planning to invite tenders

for 3 mega infrastructure road projects by the end of this year.   But there are problems in managing

these projects.

CONTD…  Though the govt. has the money to

spend on infrastructure projects but there is lack of management and political uncertainty.   As far as private sector in

infrastructure is concerned it is growing well.

NEED FOR SOLUTION TO IMPROVE.   So overall we can say that the current

situation is still not better and the Global Economic structure is Under construction.   We need to plan for the future actions

to recover as soon as possible.

THE ROAD AHEAD

PA V E N R A J

WHAT CAN BE DONE?

FISCAL POLICIES 1] Tax cuts for businesses or for individuals 2] More Spending by Govt. to create jobs 3] Automatic fiscal policy; Unemployment Insurance

Government influences the economy by changing how it (Government) spends and collects money More money available for spending

Individuals get salary and spend money Some income to unemployed people to spend

Demand picks up; Market can recover;

MONETARY POLICIES Central Bank manipulates the available supply of money in the country 1] Reduce reserve ratio

More money available for bank to give loans

2] Lower the interest rates

Individuals take more loan

3] Use its own reserved money to buy Govt. bonds

It becomes an income to Govt. to inject money into the market

Demand picks up; Market can recover;

MAJOR STEPS TAKEN  STEPS TO PREVENT COLLAPSE OF

FINANCIAL SYSTEM (SPENDING ON HEALTH INSURANCE) 

 RESCUE OF FINANCIAL INSTITUTIONS-

BAILOUT PACKAGES 

 GOVERNMENT TAKEOVERS 

KEYNESIAN PATH TO RECOVERY  INCREASE LIQUIDITY 

 RESTART CREDIT FLOW 

 FUNDING FROM IMF AND WORLD

BANK AND CAPITAL SURPLUS COUNTRIES



 STIMULATE INVESTMENT AND

DEMAND FOR GOODS AND SERVICES

MISSION NOT ACCOMPLISHED..!!  Projections by congressional budget office

imply that over the period from 2010-2013the output gap, will be more than $2 trillion.



 To increase long term prospects, immediate

short term spending should be encouraged

  More stimulus needed.

PAUL KRUGMAN ARTICLES, OCTOBER 1ST 2009

G-20 SUMMIT AT PITTSBURGH  Tighter regulation over financial

institutions, complex financial instruments  The United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit.  Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending

ROBERT ZOELLICK COMMENTS

 Many emerging economies will

   

become the major drivers of world growth Countries less reliant on US will grow more. More loans are to be given to the developing countries World bank running dry of funds Massive spending by world economies will come to an end by TH

NEW YORK TIMES- 27

SEPTEMBER 2009

JOB LOSSES  Casting a long shadow over global

recovery  Will continue for many more months  10.1% in US by 2010 and 12% in euro zone in 2011  Early pull back in Govt. spending could harm the recovery

IMF- SEMI ANNUAL WORLD OUTLOOK - 1ST OCTOBER 2009

ISSUES TO PONDER  WILL EURO REPLACE DOLLAR AS THE

GLOBAL CURRENCY? 

 BABY BOOMERS ISSUE 

 TRIFFIN DILEMMA AND

ESTABLISHMENTOF SDR.

EURO REPLACING DOLLAR  Not long after the introduction of the

Euro as a cash currency in 2002, the dollar began to depreciate steadily in value  An interest rate reduction by the Federal Reserve on September 18, 2007, raised the Euro's value significantly and caused the dollar to fall below €0.70 one month later, to new record lows.  China, the biggest foreign owner of U.S. Treasury securities, together with India and Russia are backing away from the

BABY BOOMERS ISSUE  Social security for baby boomers  Huge working force retiring  Health concerns

TRIFFIN’S DILEMMA  There was a solution to the Triffin dilemma for the U.S.:

reduce the number of dollars in circulation by cutting the deficit and raising interest rates to attract dollars back into the country. Both these tactics, however, would drag the U.S. economy into recession



 On March 23, 2009, in a speech named "Reform the

International Monetary System", Zhou Xiaochuan, explicitly named the Triffin Dilemma as the root cause of the economic disorder, and proposed strengthening existing global currency controls, through the IMF, as a solution. This would involve a gradual move away from the US dollar as a reserve currency, and towards the use of SDRs (IMF Special Drawing Rights) as a global reserve currency.

CONCLUSION 

 

You have to buy, I have to buy, somebody has to sell.

THE

QUESTION IS

WHEN…??

Economic activity will take place in a scale larger than ever

 



Increasing activity will lead to RECOVERY