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
10.
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
17.
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
30.
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
