1. Global Financial Crisis

2. 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 bubbles
And biggest organizations

3. How Did All This Happen?
 From 1820 to 1970, every decade U.S. workers
experienced a rising level of wages
In the 1970s this came to an end; real wages stopped
rising and they have never resumed since
U.S. workers became more productive, but got paid
the same; wages began to stagnate and decline
The gap between labor and capital grew bigger

4. Contd…
The large corporations made huge profits and had
much money at their disposal
They bought other corporations (mergers and
acquisitions) and they put their money into banks
The banks loaned that money (with interest) to
workers who didn’t have money to consume
This was done to raise their purchasing power
because their wages weren’t enough to buy things

5. Then What ?
Since employers no longer raised workers’ wages, the
workers had to go into debt to survive
Debt went up and up and things got out of control
The banks continued to loan money through new loans
(secondary mortgages) at high interest rates, and this
was a profit bonanza for the banks
As corporations increasingly began to invest abroad
(outsourcing production and services), U.S. workers
lost their jobs, and this led to greater unemployment
and underemployment

6. Summing up
Proximate causes
Sub-prime lending
Originate and distribute model
Financial engineering, derivatives
Credit rating agencies
Lax regulation
Large global imbalances
 Fundamental cause
Excessively accommodative monetary policy in the US
and other advanced economies (2002-04)

7. Timeline
• Fed ignores pleas for investigating sub-prime lending
– 2001 to 2004
• HSBC's Mortgage chief resigns after losses hit $10.5
Billion – Feb. 2007
• Bernanke says the housing sector "is a concern, but
at this point we don't see it as being a broad financial
concern or a major factor in assessing the course of
the economy." - Feb. 2007

8. Timeline
• UBS shuts sub-prime lending unit and GMAC
announces huge mortgage related losses – May 2007
• Countrywide Financial (largest US mortgage lender)
avoids bankruptcy by taking $11.5 Billion loan
• Freddie Mac posts $2 Billion Loss – Nov. 2007

9. 2008
Banks face losses of $900 Billion
• Jobs lost across the board across many industries
Collapse of major Wall Street firms begins with Bear
Stearns and continues thru to Leyman Brothers.
Others?
Global liquidity issues know no boundaries
Oil and commodities go thru the roof and then crater

11. Current scenario of USA
 GDP
2011- 1.8%
2012- 2.3%
2013- 2% (P)
 US housing market remained in depression
From 6.5% of GDP
To 1.9% of GDP
 President Obama declared Cut in Government spending by $85
billion
 Cutback in defense spending by 13%
 Cutback in non defense programs by 9%
 Fall in durable goods orders by 5.8%
 The US government has created over 100,000 jobs but still well
below required 200,000

12. Cash flow and interest
High oil prices are presenting a significant headwind
to US economy
While the federal reserve continues to try to
stimulate it with durable near zero interest rates
Overall GDP growth , income , consumption all are
in positive but are growing at below trend rates
President Obama recently presented his fiscal
budget which would likely to increase deficit

13. The republicans encountered the budget to cut
spending and reform entitlements
The payroll and bush tax cuts are set to expire just as
reduction in jobless benefits
The debt ceiling may need to be lifted again
 the growth impulse contribution from foreign trade
was positive for a while in year 2011
While trade and current account balances risks
remaining in strong under combination of US
demands for imports and rising oil prices

14. Impact on 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 %.

15. Problems in Euro Zone
Started in-Oct 2009 in Greece
Its immediate causes lie with the US crisis of 2007-09
Greek GDP had its worst decline with -6.9% in 2011
The result in euro zone was sovereign debt crisis
PIIGS->Portugal ,Italy ,Ireland ,Greece ,Spain
Interest rate surged on government bonds

16. In July 2011 European leaders agreed to cut rate of
interest which Ireland was paying on its EU/IMF
bailout loan from 6% to 3.5%
In Feb. 2012 ECB & IMF agreed to provide a second
bailout package of €130 billion
Euro group on 9 June 2012 grants Spain a financial
support package of up to €100 billion
Lower tax returns and higher budget deficit
On July 26 Ireland returns to financial market by
selling €5 billion in long-term government bonds

18. Measures
Austerity measures like higher taxes and lower
expenses
 Bailout packages from ECB & IMF for stabilizing
their economies
Paying less than 4% on new debt which is incurring
Private sector rescheduling and restructuring

19. Other measures
Government responded swiftly and decisively to save
the system
Central banks stepped in and provided liquidity to
the banking system to keep it functioning
Expanded the money supply
Government provided bailout for major financial
institutions to avert their collapse
Government also cut taxes and raised spending to
prevent economy from falling into recession

20. Impact on India
•$16 Billion outflow from India in 2008
•Inflation at 12%
•$291 Billion – Indian FX reserves as of 03 Oct.
•Indian Oil Corp costs to rise 70% to $45 Billion
•Industrial growth plummets to 1.3% in August
•Sensex down ~50% in 2008
•Sensex up ~50% from 2004
 Indian Rupee depreciated 1$=55

21. What not happened here
• No subprime
• No toxic derivatives
• No bank losses threatening capital
• No bank credit crunch
• No mistrust between banks

22. Our Problemsflows
 Reduction in Capital
Pressure on BoP
Stock markets
Monetary and liquidity impact
Temporary impact on MFs/NBFCs (Sept-Oct)
Reduction in flow from non-banks
Perceptions of credit crunch
Contd.

23. Impact on Developing Nations
Trade And Trade Prices:
Growth in China and India has increased imports
and pushed up the demand for copper, oil and other
natural resources, which has led to greater exports
and higher prices
Remittances:
Remittances to developing countries will decline.
There will be fewer economic migrants coming to
developed countries
Contd.

24. Foreign Direct Investment (FDI) And Equity
Investment : while 2007 was a record year for FDI to
developing countries
Commercial Lending:Banks under pressure in
developed countries may not be able to lend as much
as they have done in the past.

25. Summing up
Weaker export revenue
Further pressures on current accounts and balance
of payment
Lower investment and growth rates
Lost employment
There could also be social effects
Lower growth translating into higher poverty

26. Current Scenario Across the Globe
The world is trying to recover from aftermath of
great recession with India and China leading
The world bank projects global GDP to expand
between 3.3 and 3.7% in 2012
Developing economies are expected to grow between
6.7 and 6.2%
High income countries expected to grow at 2.4% and
3%

27. Measures taken by RBI
Expanding rupee liquidity
Reduction in CRR (400 bps) & SLR (100 bps)
Special Repo window under LAF for banks on-lending to
NBFCs, HFCs & MFS
Special Refinance to banks without collateral
Unwinding of MSS – buyback
OMOs – pre-announced calendar
Cut in repo (425 bps) and reverse repo (275
bps) rates.
Existing instruments – enough flexibility
Contd.

28. Managing Forex liquidity
NRE and FCNR(B) deposits: interest rate
ceilings raised
ECB norms relaxed
Allowing corporates to buy back FCCBs
Rupee-dollar swap facility for banks with
overseas branches
Encouraging Flow of credit

29. Lessons From Crisis
 Avoid high volatility in monetary policy
 Appropriate response of monetary policy to asset
prices
 Manage capital flow volatility
 Look for signs of over leveraging
 Active dynamic financial regulation
− Capital buffers, dynamic provisioning
− Look for regulatory arbitrage incentives/ possibilities

31. (Re)Sources
Business Week, What will the crisis mean for venture
capital?, Sarah Lacy, 09 Oct. 2008 http://bit.ly/3A43xX
Yahoo Finance Charts and Historical data
Meltdown 2008, TerranceDC, Oct. 2008,
http://bit.ly/4gRiwh
Sequoia Capital Presentation to Portfolio Companies -
http://bit.ly/16F8WK
Google
RBI Website
Teknatus Blog http://www.teknatus.com/blog/pjain
www.imf.com