Global Financial Crisis-Impact & Lessons

8/12/2019 Global Financial Crisis-Impact & Lessons

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Introduction

Story behind the Global Financial Crisis

Began in July, 2007

By 2008, crisis got worsened.


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It started in one relatively small segment of the USreal estate and mortgage market.

It ended up as a world financial crisis affecting

all international financial markets and allcapitalist countries in the world


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Meaning of 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


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Causes

Mortgage derivative products

Widespread selling of Mortgages across the

world.

Blame game on Government


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Lehman Brothers Collapse

September, 2008.

Heavy Mortgages

Its Impact:

Recognition of Financial Crisis

Banks stopped lending each other

Corporate Sector stopped borrowing..


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Sub Prime Crisis

Sub prime mortgages

Sales pressure on lenders

High ratings

Lack of regulations in financial system


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The housing bubble

Bubble driven by rising house prices.

House prices driven by increasing demand

Increasing demand driven by the permanentexpansion of mortgage finance

Stagnant labour incomes explosive growth ofprivate debt, but also growth of pirvate wealth


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The bubble bursts

Credit defaults happen

Rising interest rates

More and more subprime mortgage loans get foul

Declining house prices make refinance ever more

difficult


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The first banks fall the case

of Northern Rock The fifth largest mortgage financier in the UK

One of the major actors in the British housing

bubble

Credit defaults falling price of NR shares

The reaction: A classical run on the bank in

october 2007


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The big credit crunch a crisis of themoney market

Interbank lending the central part of the money

market

From september 2007 onwards: banks restrict or refuse

interbank lending (sharp rise of interbank interest rates

like the LIBOR and/or credit rationing)

There is no liquidity crisis - banks are not lacking

liquidity but hoarding it because they dont trust each

otherssolvency in the longer run

There is an insolvency crisis hidden bankruptcies

because of the losses still undisclosed


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DEVELOPING COUNTRIES HIT BYCRISES

Crises led to job losses and fall in consumers spending

The two main ways in which the developing countries

were affected were through the routes of finance and

trade.

There has been a big drop in funds flowing to developing

countries

Their exports to the US and Europe have dropped

sharply, as consumers cut their spending.


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Global Financial Crisis (2)

Current Account Balance (per cent to GDP)

Country 1990-94 1995-99 2000-04 2005 2006 2007 2008China 1.4 1.9 2.4 7.2 9.5 11.0 10.0

India -1.3 -1.3 0.5 -1.3 -1.1 -1.0 -2.8

Russia 0.9 3.5 11.2 11.0 9.5 5.9 6.1

Saudi Arabia -11.7 -2.4 10.6 28.7 27.9 25.1 28.9United Arab

Emirates 8.3 4.6 9.9 18.0 22.6 16.1 15.8

United States -1.0 -2.1 -4.5 -5.9 -6.0 -5.3 -4.7

Memo:Euro area n.a. 0.9 0.4 0.4 0.3 0.2 -0.7

Middle East -5.1 1.0 8.4 19.7 21.0 18.2 18.8

Source: World Economic Outlook Database, April 2009, International Monetary Fund.

Note: (-) indicates deficit.


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Impact on India (1)Trends in Capital Flows

Component Period 2007-08 2008-09

Foreign Direct Investment to India April-February 27.6 31.7

FIIs (net) April-March 20.3 -15.0

External Commercial Borrowings (net)April- December 17.5 6.0

Short-term Trade Credits (net) April- December 10.7 0.5

Total capital flows (net) April- December 82.0 15.3

Memo:

Current Account Balance April- December -15.5 -36.5

Valuation Gains (+)/Losses (-) on

Foreign Exchange Reserves April- December 9.0 -33.4

Foreign Exchange Reserves

(variation)April-December 76.1 -53.8

April-March 110.5 -57.7


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AustraliasResponse

Stimulus Strategy

Inflation in the local economy

Government Deposits

The automotive industry given a helping hand


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Impact on India

Information Technology

Exchange Rate

Foreign Exchange Outflow

Investment

Real Estate

Stock Market

Exports

Increase in Unemployment


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Emerging and developing

economies drive globaleconomic growth


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Lessons

Financial markets have a tendency to go completely

away.

The drive to become more competitive regardless of the

cost will only aggravate the crisis.

We need to break the vicious circle in which rising

inequality means that demand has to be propped up to

deal with it, with both inequality and demand fuellingspeculative bubbles


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Global Financial Crisis-Impact & Lessons

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