EFFECT OF SUBPRIME CRISIS & EURO ZONE CRISIS ON WORLD ECONOMY

Name: Nilesh Saha Section: B

Impact Of Global Financial Crisis

Impact on Stock Markets Globally

Losses to Investors

Freeze in Inter Bank Credit

Increasing Unemployment

Decline in Businesses Globally

Bailouts

INTRODUCTION

“Subprime" refers to loans that do not meet Fannie Mae or Freddie Mac guidelines

This is generally due to one or a combination of factors, including credit status of the borrower, income and job history, and income to mortgage payment ratio

The crisis represents the other side of a phase when a low rate of interest, rising home prices and mortgage securitization brought huge gains

Some termed it as the beginning of “the second great depression” because of the enormous dislocation

Borrowers are considered as subprime because of poor credit history & limited income and Lenders considered as subprime because of greater risks & high returns

CAUSES OF SUBPRIME CRISIS

Beginning in the mid-1990s, government regulations began to erode the conventional lending standards.

Fannie Mae and Freddie Mac hold a huge share of American mortgages

The Fed’s manipulation of interest rates during 2002-2006

An SEC Rule change adopted in April 2004 led to highly leverage lending practices by investment banks and their quick demise when default rates increased.

Doubling of the Debt/Income Ratio of Households since the mid-1980s

PROCESS OF SUBPRIME CREDIT CRISIS

Economic Environment Low interest rates

Property bubble Deterioration of

financing standards Sluggish regulation

Financial innovation

Lack of transparency

Burst of property bubble

Reaction of financial institutions

Excessive financing – search for yield

Spreading risks via

securitization where the

original risk can not be

seenTightening credit conditions

Problems in fulfilling subprime mortgage obligations

SUBPRIME CRISIS & ITS SPREADING IN THE GLOBAL FINANCIAL SYSTEM

Financing possibilities have

narrowed

Cost of financing has increased

Problems in fulfilling subprime mortgage obligations

Losses of financial intermediaries and investors

Reassessing risks, and risk-taking (banks, funds, investors)

Increase in counter-party risk, losses of confidence

Impact on financial markets and real economy

Impact Of SUBPRIME CRISIS

Stock Market

Capital Market & Asset Market

Financial Institutions

Home Owners

Rate of Unemployment

Minorities

Liquidity & solvency Crisis

INTRODUCTION

The term indicates the financial woes caused due to overspending by come European countries

This is also known as Euro Zone sovereign debt crisis

When a nation lives beyond its means by borrowing heavily and spending freely, there comes a point when it cannot manage its financial situation

The euro's value has decreased over the past few years due to the European Debt Crisis.

The Euro Debt Crisis began in 2008 with the crash of Iceland’s banking system, which spread to Greece

Spain, Portugal, and the other nations later followed Greece

COUNTRIES

STATISTICS

France Debt/G.D.P: 81.7%Unemployment. Oct 2011: 9.8%S&P Rating: AAA

Germany Debt/G.D.P: 83.2%Unemployment. Oct 2011: 5.5%S&P Rating: AAA

Greece Debt/G.D.P: 142.8%Unemployment. July 2011: 18.3%S&P Rating: CC

Italy Debt/G.D.P: 119%Unemployment. Oct 2011: 8.5%S&P Rating: A

Portugal Debt/G.D.P: 93%Unemployment. Oct 2011: 12.9%S&P Rating: BBB-

Spain Debt/G.D.P: 60.1%Unemployment. Oct 2011: 22.8%S&P Rating: AA

CAUSES OF EURO ZONE CRISIS

Slow economic growth of the euro zone countries

Stress on banks around the world led to shrinking credit availability

Increase in Government spending & Declined in tax revenues

Falling in Demand lead to decrease in Imports & Exports

Housing bubbles burst in UK , Ireland, Spain as well as US

Austerity has become part of the problem instead of the solution

Impact of EUROZONE CRISIS

Interest Rate Policy

Fiscal Policy

Rate of Unemployment

Financial Market

Credit Policy & Debt Crisis

GDP Growth

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