The Bailouts

The Bailouts

Like dynamites, the intensions behind the innovation of the derivatives were good like mitigating the risks of economic loss arising from changes in the value of the underlying instruments which is called hedging in financial parlance. But look how it brought catastrophes to the world economies. For the last few months we must have been tracking news regarding bailouts being announced by several governments across the globe. One must be wondering how much all these bailouts are going to cost? There are people who estimate that the US bailouts alone will cross $5 trillion while some put it at around $8.5 trillion. They have their own methods of calculation. However, eschewing the subject whether it’s morally and ethically improper to utilize taxpayers’ money to rescue institutions for their dubious malpractices, we, in this report, have tried to figure out the sum that will cost this financial tornado.

Government bailouts so far Country

Particulars

Amount in $ billion

US

Total cost of US bailouts

$3,500

EU

Package for 27 states

$3,900

China

$586

Japan

$275

Russia

$210

Pakistan

$7.60

India

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Deepak Tiwari Research Analyst [email protected] T: + 91 22 4063 3032

Nov 6, 2008

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The US bailouts The US bailout plans are full of concealment. They don’t believe in giving the details. Bloomberg recently reported that the Federal Reserve has made its $2 trillion in emergency loans under 11 different programs, 8 of which were created in the past 15 months. It recently filed a lawsuit seeking information on the collateral that a group of banks pledged for some $2 trillion in emergency loans from the Federal Reserve after the latter denied its request for the information under the Freedom of Information Act. It’s difficult to tell if the veil will ever be lifted. It’s also difficult to ascertain how many such bailouts will be necessitated as every day the situation gets worse. The biggest beneficiary of this bailout plan is AIG. In addition to $110 billion, it would get $ 40 billion out of $700 billion bailout package recently announced. After $25 billion package announced in September they are demanding one more such package for the auto industry. Auto majors like General Motors, it seems, is at the brink of extinction. We don’t know how many firms or the industries will demand such packages in future? An estimate by bailoutsleuth.com put the cost of the US bailouts at $3.5 trillion. It’s likely that this figure will go up further.

Government bailouts so far Country

Particulars

US

Bear Stearns

Amount in $ billion 30

Fannie Mae and Freddie Mac

200

American International Group

110

Auto Industry

25

Troubled Asset Relief Program

700

Tax breaks for banks

140

HOPE for Homeowners program

300

Emergency loans under 11 different programs #

2,000

Source: bailoutsleuth.com, # Bloomberg report

The European Union bailouts The European plans followed close on the heels of US bailouts. The European governments have embarked on their biggest financial gamble as they pledged to buy up tottering banks, underwrite their lending, and flood the markets with liquidity in a package that could run to a staggering €2 trillion or $3.9 trillion in total across the European Union.

Government bailouts so far Region

Countries

EU

UK

Amount in $ billion 85.0

Germany

623.0

Hungary

8.3

Iceland

6.0

Spain

41.0

France

345.0

Dutch

261.0

Sweden

197.0

Portugal

26.0

Source: www.chinaview.cn

Nov 6, 2008

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The Other bailouts 

Japan

The world’s second largest economy, Japan announced a $275 billion bailout plan to shore up its economy and has also offered $100 billion for IMF bailout fund. The move is aimed at helping stabilize the world's financial system and boosting its international clout. The stimulus package includes credits and loans to help small businesses, a reduction in highway tolls and a cash payback to households. In addition, there will be more subsidies for farmers and a cut in payroll deductions for employment insurance. 

China

China followed suit and announce a stimulus package of $586 billion over the next two years in order to boost the economic growth. This fiscal stimulus plan, which represents about 15% of the GDP, includes spending on infrastructure, tax rebates for exporters, and increased aid for the rural economy. 

Pakistan

Pakistan has taken loan from IMF amounting to $7.6 billion. Further, its President recently went around the China) knocking on doors, begging bowl in hand. Pakistan is almost out of money. It only has $ 3 to 4 billion in foreign currency, enough to last it till the end of this month. It needs another $ 5 billion to last it till June 2009. It is already in $ 44.5 billion of debt. If it doesn’t get any money, it will have a currency crisis and will be unable to buy oil or food. Inflation is 25 per cent. The Pakistani rupee is already more than 80 per dollar. And to make things worse, it’s facing public backlash over the IMF loan.



Russia

On the lines of developed nations, Russia has announced bailout plans worth $210 billion. Out of this $13.5 billion meant for buying up battered stocks, $36 billion for long term loans for banks and $50 billion for re-financing purposes to companies and banks that may require them. The Premier, Putin also announced that bank deposit guarantees would be extended to 100% of the first 700,000 roubles ($26,760), which is equivalent to approx 40 months wages in Russia. 

Brazil

The largest economy of Latin America, Brazil, is expected to announce an aggressive fiscal stimulus plan in next year in order to inject a measure of stability into its equity and currency markets. Such plan could include tax deductions, subsidies, and more spending on social programs in addition to already announced liquidity-boosting measures. Latin American neighbours Chile and Mexico have already announced more than $6 billion in extra spending designed to shore up their economies. 

India

After fellow countries amongst BRIC, it’s now India’s turn to come up with bail out plans. There are concerns and demands to take specific measures to bail out companies in civil aviation, real estate, automobile, textiles and gems & jewellery sectors and help them tide over the slower consumer demand and rising costs. But instead of announcing a stimulus plan to shore up economic growth, India government has issued statements only. Albeit, monetary measures have been taken by the central bank to infuse liquidity into the system but there are no plans on anvil hitherto like other above mentioned countries have announced. But we expect such package soon.

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