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Global Financial Crisis

Submitted by:Sumit Jha

Avishek KumarPrabhat Kumar

Mukesh Kr.PGDM-Exe 13-14

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PRESENTATION OUTLINE Meaning of Global Finance CrisisOver view of Global Finance crisis Underline Factors.Consequences

- U.S.A

- UKIndian perspective:Consequences,Measures to curb, Lesson Learnt.

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GLOBAL FINANCIAL CRISISThe 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

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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 bubblesAnd biggest organizations

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Underline FactorsCombination of complex factorsEasy credit conditions during the 02–08 . encouraged

high-risk lending and borrowing practices without assessing default risk

International trade imbalancesReal-estate bubbles  that have since burstFiscal policy choices related to government revenues and

expensesApproaches used by nations to bail out troubled banking

industries and private bondholders

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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

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Sep-08 Sep-08

September 7, 2008: Fed-eral takeover of Fannie Mae

and Freddie Mac

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 16, 2008: Moody's and Standard and

Poor's downgrade ratings on AIG's credit on concerns over

continuing losses to mort-gage-backed securities,

sending the company into fears of insolvency.

September 17, 2008: The US Federal Reserve loans $85 billion to American In-ternational Group (AIG) to

avoid bankruptcy.

September 19, 2008: Paulson financial rescue

plan unveiled after a volatile week in stock and debt

markets.

September 25, 2008: Washington Mutual was

seized by the Federal De-posit Insurance Corporation, and its banking assets were sold to JP Morgan Chase for

$1.9bn.

September 29, 2008: The House rejected bail-out bill,

DJIA down 7%October 3,2008: The House

pass the bail out bill

GLOBAL FINANCE CRISIS- "Red September"

Created by Robin Thieu, 2008 Fall

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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, 2008Lehman Brothers files for bankruptcy.Sale of Merrill Lynch to Bank of America September 16, 2008AIG faces severe liquidity crunchFinancial institutions lost a large part of their value

incoming days and weeks

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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 %.

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IMMEDİATE EFFECTS OF CURRENT CRİSISIN THE “USA’’

Slowdown in GDPCurrent 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)

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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.

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India: Vibrant Capital Market

India is among the major destinations across the globe for inflow of US Dollar

Sensex has risen 20 times in the period 1990-2007

Sensex – The Bombay Stock Exchange index rise 20 times from 1990s to reach 20,000 mark in November 2007.

FIIs have infused large investments

into the Indian stock market

Encouraging industry

performance

Increased local investors’ confidence

Emergence of industry and confidence of local investors along with the FIIs has led to upsurge of the Sensex

0

5000

10000

15000

20000

2500011 December 2007 Crossed 20,000 mark

07 February 2006Crossed 10,000 mark30 December 1999

Crossed 5,000 mark

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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

Source: Times of India, RBI, DIPP, Indian Budget, Rediff* Annualized data used to show comparison with 1990

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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.

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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

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Slump in demand for exports (US, ME, EU in downturn)

Fall in outsourced services demand as overseas firms face restructuring and downsizing

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Response to the CrisisCrisis 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

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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

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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.

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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.

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IN INDIAN……………………………………………..??

STOCK MARKET DOWNINDIAN CURRENCY VALUE 1$=49.89IT PROJECTSINFLATION RATE [HIGHEST IS 12.6%]GDP TOWARDS DOWN

INCREASING FUEL, METAL AND FMCG GOODS

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INDIAN ECONOMY INDICATORSBANK RATE 6.0%REPO RATE 6.5%REVERSE REPO RATE 5.0%CASH RESERVE RATIO 5.5%STATUTORY LIQUIDITY RATIO[SLR] 24%PRIME LENDING RATE 12.5%SAVINGS BANK RATE 3.5%

AND GDP 7.5% INFLATION 6.4%

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The Key PointersFall 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.

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The Key PointersImpact 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

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The Key PointersFDI InflowGlobal meltdown - Slow down FDI inflows.

Job LossAcross all sectors — manufacturing, retail, realty, IT and BPO, banking and financial services

Economic GrowthSlow down has begun and growth will drop to about 7 percent, for the first time in 3 years

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The Key PointersImpact on various industriesSteel manufacturers, Textile Sector, Hosiery,Sports Goods, IT, ITeS, BPO, KPO,Diamond Exports,Real Estate, and many others have started feeling the heat

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Action by Govt.SEBI eases Participatory-Note norms,

Lifts 40 percent cap on overseas

derivative instrumentsRBI 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

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Action by Govt.Rs 25,000 crore against farm debt

waiverA 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.

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Government SpeakPrime 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

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Lessons LearntoWeaknesses of structured

products and derivatives oImportance of Financial

supervision oInter-agency coordination

requiredoWe can not remain

insulated

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Thank You